Module 3: Definitions

Section 1 Short title, extent and commencement.

1. (1) This Act may be called the Income-tax Act, 1961.
(2) It extends to the whole of India.
(3) Save as otherwise provided in this Act, it shall come into force on the 1st day of
April, 1962.
Section 2 Section 2 of the Income Tax Act is the dictionary of the Act. It defines key terms used
throughout the law. Without understanding these definitions, one cannot interpret
the provisions of the Act correctly.
It Covers the following:
Who is taxable: Assessee, Person
What is taxed: Income, Agricultural Income, Capital Asset Dividend ,Transfer
Period: Assessment Year, Previous Year
Nature of Activities : Business, Profession, Charitable Purpose

Section 3 Previous Year

Section 4 Charge of Income Tax

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• Income-tax is the most significant direct tax. The Constitution of India has given the power to the
Parliament to make laws on taxes on income other than agricultural income.

COMPONENTS OF INCOME TAX LAW

Circulars/ Legal Decisions Of

Income Tax Act Annual Finance Act Income Tax Rules
Notifications Courts

*OFU*

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Income-tax Act, 1961:
The levy of income-tax in India is governed by The Income-tax Act, 1961
• It extends to the whole of India.
• It came into force on 1st April, 1962.
• It contains sections 1 to 298 and schedules I to XIV.

A section may have sub-sections or clauses and sub-clauses.

Clause: When each part of the section is independent of each other and one is not related with other, such parts are
called a (eg Clauses of section 2. (1A) defines “agricultural income”, clause (1B) defines “amalgamation”)
Sub section: refers to such parts of a section where each part is related with other and all sub sections taken together
completes the concept propounded in that section.
(Section 5 defining the scope of total income has two sub- sections (1) and (2). Sub-section (1) defines the scope of
total income of a resident and sub-section (2) defines the scope of total income of a non-resident)

A section may also have Provisos and Explanations.

Proviso: Means an exception or condition. It spells out the cases where the provision contained in the respective
section/sub-section/clause would not apply or where the provision would apply with certain modification.

Explanation: gives a clarification relating to the provision contained in the respective section/sub-section/clause.

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 The Finance Act
Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s Budget
Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the President,
it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and other tax laws by
the Finance Act.

The First Schedule to the Finance Act contains four parts which specify the rates of tax – *OFU*
➢ Part I of the First Schedule :Background ie Last year’s tax rates AY 24-25/PY 23-24
➢ Part II of the First Schedule: TDS rates for PY 24-25/AY 25-26 ie for Current year
➢ Part III of the First Schedule: TDS rates for salary PY 24-25/AY 25-26 and computing advance tax ie Tax rates for PY 24-
25/AY 25-26
➢ Part IV of the First Schedule: Giving rules for computing Agriculture Income

Circulars – issued by CBDT to clarify the meaning and scope of certain provisions of the Act.
Notifications – issued by CG to give effect to the provisions of the Act/ make or amend Rules
Court decisions – interprets the various provisions of income-tax law.
Income-tax Rules, 1962
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
The CBDT is empowered to make rules for carrying out the purposes of the Act.
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 Key Questions to understand:
✓ Who is liable to Pay Tax? Person/Assessee
✓ On what amount tax has to be paid? Total Income
✓ When Tax liability is computed and has to be paid? In the Assesment Year
✓ Which year’s total income to be calculated? Previous year
✓ How is it calculated or Computed? By way of Assessment of income

Levy of Income-tax [Section 4]

➢ Income-tax is a tax levied
➢ on the total income
➢ of the previous year
➢ of every person
➢ at the rates prescribed in the Annual Finance Act to the relevant assessment year.
Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions
contained in the Income-tax Act, 1961.

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 Total Income As Per Income Tax Act (1/2)

COMPUTATION OF TOTAL INCOME

Determine The Residential Status

Classify Income Under Five Heads

Profits And Gains

Income From House Income From Other
Salaries From Business Or Capital Gains
Property Sources
Profession
Compute income under each head applying the charging & deeming provisions and providing for permissible deductions/exemptions
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Apply Clubbing Provisions

Apply Set-off/Carry Forward And Set-off Of Losses As Per The Provisions Of The Act TOTAL
Compute Gross Total Income
INCOME

Less: Deductions From GTI

Total Income As Per Income Tax Act (2/2)
After Calculation of total Income, we apply:

Various rates of tax on total Income

Surcharge or Rebate under Section 87A

Health and education cess

Advance Tax and Tax deducted at source

Tax Payable / Tax Refundable

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Procedure for computation of total income of an individual for the purpose of levy of
income-tax –

Step 1 – Determination of residential status

Step 2 – Classification of income under different heads

Step 3– Computation of income under each head

Step 4 – Clubbing of income of spouse, minor child etc.

Step 5 – Set-off or carry forward and set-off of losses

Step 6 – Computation of Gross Total Income

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Procedure for computation of total income of an individual for the purpose of levy of
income-tax –

Step 7 – Deductions from Gross Total Income

Step 8 – Total income

Step 9 – Application of the rates of tax on the total income

Step 10 - Surcharge / Rebate under section 87A

Step 11 – Health and education cess on income-tax

Step 12 – Advance tax and tax deducted at source

Step 13: Tax Payable/Tax Refundable

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IMPORTANT DEFINITIONS:
India [Section 2(25A)]
The term 'India' means –
➢ the territory of India as per Article 1 of the
Constitution,
➢ its territorial waters, seabed and subsoil
underlying such waters,
➢ continental shelf,
➢ exclusive economic zone or
➢ any other specified maritime zone and the air
space above its territory and territorial waters.
Specified maritime zone means the maritime zone
as referred to in the Territorial Waters, Continental
Shelf, Exclusive Economic Zone and other Maritime
Zones Act, 1976

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➢ Assessee [Section 2(7)]:
“Assessee” means a person by whom any tax or any other sum of money is payable under this Act. In addition, it includes:
➢ Every person in respect of whom any proceeding under this Act has been taken for the assessment of
• his income; or
• the income of any other person in respect of which he is assessable; or
• the loss sustained by him or by such other person; or
• the amount of refund due to him or to such other person.
➢ Every person who is deemed to be an assessee under any provision of this Act;
➢ Every person who is deemed to be an assessee-in-default under any provision of this Act.

➢ Assessment:
This is the procedure by which the income of an assessee is determined. It may be by way of a normal assessment or
by way of reassessment of an income previously assessed.

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• PREVIOUS YEAR AND ASSESSMENT YEAR

Previous Year Assessment Year

2024-25 2025-26

Assessment year [Section 2(9)]

The term has been defined under section 2(9). This means a period of 12 months commencing on 1st April every year. The year in which income
is earned is the previous year and such income is taxable in the immediately following year which is the assessment year. Income earned in the
previous year 2024-25 is taxable in the assessment year 2025-26.
Assessment year always starts from 1st April and it is always a period of 12 months.
Previous year [Section 3]
The term has been defined under section 3. It means the financial year immediately preceding the assessment year. As mentioned earlier,
the income earned during the previous year is taxable in the assessment year.
Business or profession newly set up during the financial year - In such a case, the previous year shall be the period beginning
on the date of setting up of the business or profession and ending with 31st March of the said financial year.
If a source of income comes into existence in the said financial year, then, the previous year will commence from the date on which the source of
income newly comes into existence and will end with 31st March of the financial year.

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Q A is running a business from 1993 onwards. Determine the previous year for the assessment year 2025-26.
Ans. The previous year will be 1.4.2024 to 31.3.2025

Q A chartered accountant sets up his profession on 1st July, 2024. Determine the previous year for the assessment
year 2025-26.
Ans. The previous year will be from 1.7.2024 to 31.3.2025.

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Income: [Sec. 2(24)]
Income = - Positive (Profits/Gains) as well Negative Income (Loss)
- Legal as well Illegal Income
- Continuous (Daily, Monthly etc) as well one Time receipt
- Can be in Cash as well Kind (Non-Monetary Gifts, Perquisites, allowances)
- Can be accrued or received
- Examples: PGBP, Salary, Dividend, Capital Gains, HP Income, Other sources etc

The definition of ‘Income’ given under section 2(24) is inclusive and not exhaustive and therefore it may be possible that
certain items may be considered as income under this Act according to its general and natural meaning, even if it is not
included under section 2(24). The term ‘Income’ includes the following:

• Profits and gains;

• Dividend;
• Voluntary contributions received by a trust which is created wholly or partly for charitable or religious purposes;
or by educational institutions, hospitals or electoral trust;
• The value of any perquisite or profit in lieu of salary taxable u/s 17;
• Any special allowance granted to the assessee to meet expenses wholly, necessarily and exclusively for the
performance of office or employment duties;
• The value of any benefit or perquisite, whether converted into money or not, obtained from a company either

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by a director or by a person who has substantial interest in the company or by a relative of the director or such person, and
any sum paid by any such company in respect of any obligation which, otherwise, would have been payable by the director or
other person aforesaid;
• The value of benefit or perquisite to a representative assessee like a trustee appointed under a trust;
• Any sum chargeable to income-tax under clauses (ii) and (iii) of sec. 28 or sec. 41 or sec. 59;
• Any sum chargeable to income-tax under clauses (iiia), (iiib), (iiic), (iv), (v), (va) and (via) of sec. 28;
• Any capital gains chargeable u/s 45;

The profits and gains of any insurance business carried on by a mutual insurance company or by a co-operative society,
computed in accordance with section 44 or any surplus taken to be such profit and gains by virtue of provisions contained in
the First Schedule;
The profits and gains of any of banking business (including providing credit facilities) carried on by a co-operative society with
its members;
Winnings from lottery, crossword puzzles, races (including horse races), card games or other games of any sort or from
gambling or betting;
Any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any
fund set up under Employees’ State Insurance Act, 1948 or any fund for the welfare of such employee; [Sec. 2(24)(x)]
Any amount received under the Keyman insurance policy including the sum allocated by way of bonus; [Sec.
2(24)(xi)]
Any sum chargeable to income-tax u/s 56(2)(v), (vi);
Any sum of money or specified movable or immovable properties received without consideration or inadequate
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Any consideration received for issue of shares as exceeds the FMV of shares referred to in section 56(2)(viib);

Any sum of money received as advance in the course of negotiation for transfer of a capital asset, if such sum is forfeited as the
negotiation do not resulted in transfer of the asset 56(2)(ix);

Any sum chargeable to income-tax u/s 56(2)(x);

Any compensation or other payment referred to in Sec. 56(2)(xi);

Income shall include assistance received in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) from the Central Government or a State

Government or any other authority or body or agency in cash or kind to the assessee other than:
(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of
the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43,
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by
the Central Government or the State Government, as the case may be

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Person includes
1) Individual:
‘Individual’ means only a natural person, i.e. human being.
It includes both males and females.
It also includes a minor or a person of unsound mind. In such a case assessment is made on the guardian or the
manager of the minor or the lunatic person.
2) HUF:
Under the income-tax Act, 1961, a Hindu undivided family (HUF) is treated as a separate entity.
Therefore, income-tax is payable by a HUF.
HUF has not been defined under the Income-tax Act.
It means a family, which consist of all males lineally descended from a common ancestor and includes their wives and
daughter.
Some members of the HUF are called co-parceners.
Earlier, only male descendents were considered as coparceners. With effect from 6th September, 2005, daughters
have also been accorded coparcenary status. It may be noted that only the coparceners have a right to partition.
Under the Income-tax Act, 1961, Jain undivided families and Sikh undivided families would also be assessed as a HUF
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 SCHOOLS OF HINDU LAW

Dayabaga school Mitakshara school

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The basic difference between the two schools of Hindu law with regard to succession
is as follows:
Dayabaga school of Hindu law Mitakshara school of Hindu law
Prevalent in West Bengal and Assam Prevalent in rest of India
Nobody acquires the right, share in the property by birth as One acquires the right to the family property by his
long as the head of family is living. birth and not by succession irrespective of the fact
that his elders areliving.

Thus, the children do not acquire any right, share in the Thus, every child born in the family acquires a
family property, as long as his father is alive and only on right/share in the family property.
death of the father, the children will acquire right/share in
the property. Mitakshara: Born with rights

Dayabaga: Wait for your turn!

Hence, the father and his brothers would be the
coparceners of the HUF.

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Company (Definition)
1. Company means, any Indian company as defined in section 2(26);

2. Anybody corporate incorporated by or under the laws of country outside India, i.e., any Foreign company; or

3. Any institution, association or body, whether incorporated or not and whether Indian or non- Indian; which is declared
by a general or special order of the CBDT to be a company for such assessment years as may be specified in the CBDT’s
order.
Classes of Companies and their Definition
Domestic Company Indian company or any company which has made arrangements for payments of
dividends
Domestic-company" means an Indian company, or any other company which, in respect
of its income liable to tax under this Act, has made the prescribed arrangements for the
declaration and payment, within India, of the dividends (including dividends on
preference shares) payable out of such income.
Indian Company A company registered under Indian Companies Act and having the registered office
in India

Foreign company It means a company which is not a domestic company

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Rule 27 of Income Tax Rules – What Are the Prescribed Arrangements? (Only For Understanding Purpose)
✓ Maintain shareholder records in India
The list of shareholders should be kept at the company’s main office in India, starting from April 1 of that financial year.
✓ Hold the annual general meeting (AGM) in India
The meeting to approve financial statements and declare dividends must be conducted in India.
✓ Pay dividends only in India
All declared dividends must be paid within India to all shareholders (even if some are living outside India).
Firm:
A firm means a firm as defined in the Indian Partnership Act 1932 and also includes LLP.

Association of Persons (AOP):

• When persons combine together for promotion of joint enterprise they are assessable as an AOP, if they do
not in law constitute a partnership.

• In order to constitute an association, persons must join for a common purpose or action and their object
must be to produce income; it is not enough that the persons receive the income jointly.

• Co-heirs, co-legatees or co-donees joining together for a common purpose or action would be chargeable as
an AOP.

• For e.g., Mr. Yash, AB & Co. (Firm) and X (P) Ltd. join together to carry on construction activity otherwise than
as a partnership firm, such an association will be recognized as an association of persons.

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Body of Individuals (BOI): (Formed by operation of law)
• It denotes the status of persons like executors or trustees who merely receive the income jointly and who may
be assessable in like manner and to the same extent as the beneficiaries individually.

• Thus, co-executors or co-trustees are assessable as a BOI as their title and interest are indivisible.

• Income-tax shall not be payable by an assessee in respect of the receipt of share of income by him from BOI
and on which the tax has already been paid by such BOI. For e.g., mutual trade associations, members club,
etc.
Difference between AOP and BOI:
In case of a BOI, only individuals can be the members, In case of an AOP, members voluntarily come together
whereas in case of AOP, any person can be its member with a common will for a common intention or
i.e. entities like company, firm etc. can be the member purpose, whereas in case of BOI, such common will
of AOP but not of BOI may or may not be present
Examples of BOIs include clubs, housing societies, and charitable trusts. In a club, the members come
together to enjoy certain facilities, such as sports facilities, and the income generated from the
facilities is used to maintain them. In a housing society, the members collectively own the land and
buildings and share the expenses and profits arising from them.

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❖ Local Authority
The term means a municipal committee, district board, body of port commissioners or other authority legally entitled
to or entrusted by the Government with the control or management of a municipal or local fund

❖ Artificial Juridical Persons

Artificial Juridical Persons are the entities which are not natural persons but are separate entities in the eyes of law.
This is a residual category could cover all artificial persons with a juristic personality not falling under any other
category of persons. Deities, Bar Council, Universities are some important examples of Artificial Juridical Persons

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Concept of Income under the Income-tax Act, 1961:
➢ Regular receipt vis-a-vis casual receipt
➢ Net receipt vis-a-vis Gross receipt
➢ Due basis vis-a-vis receipt basis

Regular Income/Casual Receipt

Regular Income Casual Income

1) It is a periodic monetary return 1) It does not arise regularly

2) It accrues regularly from definite Sources 2) It has no definite source

3) It is treated as Income for tax purpose 3) It is also treated as income for tax Purpose

E.g. Salary Income E.g. Winning from lotteries

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 Concept of revenue and capital receipts:
Revenue Receipts Capital Receipts
Revenue receipts are always taxable unless they are Capital receipts are exempt from tax unless they are
expressly exempt u/s 10. specifically taxable. (Taxable under the head CG)

Circulating Capital is revenue receipt. The circulating Fixed capital is capital receipt.
capital is one which is turned over and yields income Tangible and intangible assets which the owner keeps
or loss in the process. in his possession for making profits.

It is recurring receipt It is one time receipt.

Eg Business income, Sale of SIT Eg sale of a capital asset (Building,Plant and

M/C,Furniture etc)*

*What is Revenue or capital depends on case to case basis (Refer to the examples discussed in class). The above
eg are just illustrative. The same can be Revenue or capital in nature depending on the case/situation
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 Concept of revenue and capital receipts: Imp Points:
1. Transaction entered into the course of business.
➢ Transactions which are entered into in the course of the business regularly carried on by the assessee,
or are incidental to, or associated with the business of the assessee would be revenue receipts. ( Eg If
Business is to sell House prop or Plant and M/C then income derived will be revenue).Type of capital
whether Fixed or circulating will depend on the nature of business.

2. Profit arising from sale of shares and securities:

➢ In the case of profit arising from the sale of shares and securities, the nature of the profit has to be
ascertained from the motive, intention or purpose with which they were bought.
➢ If the shares were acquired as an investor or with a view to acquiring a controlling interest or for
obtaining a managing or selling agency or a directorship, the profit or loss on their sale would be of a
capital nature.
➢ If the shares were acquired in the ordinary course of business as a dealer in shares, it would
constitute his stock-in-trade.

3. Liquidated damages:
➢ Directly and intimately linked with the procurement of a capital asset, which lead to delay in coming
into existence of the profit-making apparatus, is a capital receipt.
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4. Compensation on termination of agency:
➢ Compensation on termination of the agency business being the only source of income, the receipt is of capital nature,
but taxable under section 28(ii)(c).
➢ Where the assessee has a number of agencies and one of them is terminated and compensation is received therefor, the
receipt would be of a revenue nature since taking up an agency and exploiting the same for earning income is in the
ordinary course of business.

5. A single transaction - Can it constitute business?

➢ Even a single transaction may constitute a business or an adventure in the nature of trade even if it is outside the normal
course of the assessee’s business.

6. Gifts:
➢ Normally, gifts constitute a capital receipt in the hands of the recipient. However, certain gifts are brought within the
purview of income-tax, for example, receipt of property without consideration is brought to tax under section 56(2)(x)
(We will cover this in IOS)

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Net Receipt/Gross Receipt

Net Receipt Gross Receipt

1) Income means Net Receipt and not Gross Receipt 1) Gross receipt cannot be treated as Income.

2) Net receipts are arrived at after deducting 2) Gross receipt are the total receipts without
expenditure incurred. deducting expenses

Due basis vis-a-vis receipt basis:

Income is taxable either on due basis or receipt basis. For computing income under the heads "Profits and
gains of business or profession" and "Income from other sources", the method of accounting regularly
employed by the assessee should be considered, which can be either cash system or mercantile system.
Some receipts are taxable only on receipt basis, like, income by way of interest received on compensation or
enhanced compensation (will be better understood during Income From Salaries/PGBP/IFOS)

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Application of Income or diversion by overriding title:

Application of Income Diversion of Income Overriding Title

Application of income means to discharge an obligation Where by virtue of an obligation by overriding title,
(which is gratuitous or self- imposed) after such income income is diverted before it reaches the assessee, it is
reaches the assessee. known as diversion of income
The income would be taxable in the hands of the person It is not taxable (i.e., even if the assessee were to collect
who applies it. the income he does so on behalf of the person to whom it
is payable)

Application of Income under Taxation law means spending Diversion of Income is the process of diversion of income
of income after it has been earned by the assessee (the before the assessee (taxpayer) earns it.
taxpayer) from whatever sources legal or illegal.
This is taxable as part of his total income during the Such amounts are excluded from the total income of the
assessment as it is merely an application of earned assessee during income tax computation as the income
income. In other words, applied income shall be taxable in gets diverted to someone else before being earned by the
the hands of the assessee. assessee.

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 In such cases, there is an overriding title of a third party on the
income of the assessee under which the income reaches the
third party before the remaining amount goes to the assessee.
If a title or charge is created at the sources itself, it is called
diversion of income by overriding of title and hence not
taxable from the total income of the assessee.
Example: M/s Happy is a partnership firm in which Tom and his two sons Spike &
Mr. Harry is liable to pay Rs. 5,000/- per month to Ms. Laura (his ex-wife) as Jerry are partners. The partnership deed provides that after the death of
an alimony sum. Mr. Harry being an employee of Mr. Garry, instructs him to Mr. Tom, Jerry & Spike shall continue the business of the firm subject to a
pay Rs. 5,000/- per month out of his salary and disburse the remaining condition that 15% of profit of the firm shall be given to Mrs. Toms.
salary to him. Whether this amount of Rs. 5,000/- per month be included in After the death of Mr. Tom, whether this 15% amount of profit be included
the Total Income of Mr. Harry or is it a case of diversion of income of Mr. in the Total Income of Firm M/s Happy or is a case of diversion of income of
Harry and not taxable in his hands? M/s Happy and not taxable in its hands?

This is a case of Application of Income by Mr. Harry and not diversion of This is a case if Diversion of Income and the said 15% amount shall not be
Income and hence it will be included in the Total Income of Mr. Harry This included in the Total Income of M/s Happy, i.e., it is deductible from its
is because this amount of Rs. 5,000/- per month is an obligation of Mr. Total Income. This is because the clause mentioned in partnership deed has
Harry to pay to Ms. Laura out of his income and not an income in which given an overriding title of 15% profit to Mrs. Tom and such income is a
Ms. Laura had over riding entitlement from Mr. Garry before being earned precondition for the firm to continue its business.
by Mr. Harry. In other words, this 15% profit reaches Mrs. Tom before it becomes income
In other words, this is an Income of Mr. Harry, which is applied by him to of the firm and hence it is a case of diversion of Income.
fulfill an obligation and hence included in his Total Income and a mere
arrangement to make Mr. Garry make such payments directly to Ms. Laura
won’t make it a case of Diversion of Income.

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In the case of Commissioner of Income Tax, Bombay v. Sitaldas Tirathdas, the Understanding the concept of application of income requires considering the
taxpayer sought to claim deductions of Rs. 1,350 in the first assessment year concept of diversion of income by overriding title. The following case laws
and Rs. 18,000 in the second assessment year. These deductions were based on illustrate this distinction:
a decree that obligated him to provide maintenance to his wife and children. In Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax, Bengal, the Raja
Initially disallowed by the Income Tax Officer, the dispute eventually reached and his stepmother entered into a compromise decree where she was entitled to
the Supreme Court for resolution. receive Rs. 1,100 per month for her maintenance. This amount was decreed as a
The Supreme Court distinguished between two scenarios regarding income and charge upon the properties in the hands of the Raja by the Court.
obligations: The Raja sought to deduct this amount from his assessable income. This was
✓ Diversion of Income: Income diverted before it reaches the assessee is disallowed by the High Court of Calcutta. He went on appeal to the Judicial
deductible. Committee.
✓ Application of Income: Income received by the assessee, later applied to
discharge an obligation, is not deductible. The Judicial Committee held that the amount which the Raja paid to his step-
✓ Income not reaching the assessee due to diversion under an obligation is mother did not constitute his income.
exempt under the Income Tax Act. This was a case of diversion of income by overriding title, as the Court had
✓ Conversely, when income reaches the assessee and is subsequently used to created a charge on the whole resources of the Raja with a specific payment to
meet obligations, it's considered an application of income and not his step-mother.
deductible. To that extent it was not his income. Further it was observed that it is not a case
✓ The first scenario involves income that never becomes part of the where the appellant is applying his income in a particular way rather it is the
assessee's income but is received and directed to another person. allocation of a sum out of his revenue before it becomes income in his hands.
In the above case
It is submitted that given the facts and circumstances of the case it was correctly
The wife and children received their share only after the assessee had held that the case was of diversion of income by overriding title.
received the income as his own, indicating no diversion of income by an
overriding charge was present. The assessee never received the sum of Rs. 1, 100 in his hands. Even if he
received it was not for himself. He was acting as a mere collector of that income
which was to be paid to his step-mother.

Thus, he was like a conduit pipe between his step-mother and the resources
which generated the income.
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❖CHARGE OF INCOME TAX
Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
(i) Tax shall be charged at the rates prescribed for the year by the Annual Finance Act or the
Income-tax Act, 1961 or both.
(ii) The charge is on every person specified under section 2(31);
(iii) Tax is chargeable on the total income earned during the previous year and not the assessment
year. (There are certain exceptions provided by sections 172, 174, 174A, 175 and 176);
(iv) Tax shall be levied in accordance with and subject to the various provisions contained in the Act.
This section is the back bone of the law of income-tax in so far as it serves as the most operative
provision of the Act. The tax liability of a person springs from this section.

CA Rajalakshmi B