Unit 1

DEFINITIONS, BASIS OF CHARGE AND EXCLUSIONS FROM TOTAL INCOME

1.1           INTRODUCTION

Taxation is the most important source of revenue for the Government. It is therefore important to note that those who fall within the ambit of the taxable slabs have to compulsorily file their tax returns on their income to the government to meet various public expenditure. There are two types of taxes

(i)                 Direct taxes and

(ii)               Indirect taxes.

Income tax and wealth tax are the direct taxes, whereas goods & service tax, excise, custom duty are the indirect taxes. Taxes are levied at progressive rates. Tax is one of the important and major source of revenue to the government. It is a contribution by individuals as well as organizations to the government to undertake various public activities. Tax payers cannot refuse to pay taxes as refusing to pay tax is a criminal offence. Tax helps in mobilization of resources. Its aim is to achieve economic growth and economic development of a nation. Maximization of economic growth is the ultimate objective of economic, fiscal or monetary policy of the government. While stimulating the growth in desired directions it is equally necessary to see that the development is brood based, balanced and the benefits of development percolate into all sections of the society. Hence, government requires the resources.

Taxation Structure in India

Direct Tax Tax on Persons/Organizations Income Tax

Indirect Tax Tax on Consumption Goods & Service Tax, Customs Duty

Direct Taxes

Direct Taxes, which are normally levied on persons, are assessed or determined on the basis of their income or property. This tax is directly paid by persons to the Government treasury, thus directly contributing to the national exchequer.

Income Tax

Income Tax is levied on the income of different categories of persons as per the provisions of the Income Tax Act, 1961, after computing the income the rates of Income Tax applicable of that assessment year is applied to find out the tax liability. The collection of Income Tax is mainly through personal Income Tax and corporate Income Tax, the share of corporate tax being the largest one. In other words Income Tax is one of the major source of revenue for the Government. The responsibility for collection of Income Tax vests with central Government.

The act of 1922 remained in force till 1961, meanwhile in 1956 the government had referred the Act to the law commission in order to recast it on logical lines and to make it simple without changing the basic tax structure. Based on the law commissions report, the income tax bill giving effect to its recommendations was submitted in the Lok Sabha in April 1961. The bill received the assent of the president on 13th Sep. 1961. The present income tax Act is the Act 1961. According to section 1 of the income tax Act 1961, extends to the whole of India including the state of Jammu Kashmir, it came into force on 1st April 1962. The liability of tax is determined by total income in the previous year, limits of taxation, rates, status of assessee (e.g. Individuals, HUF, firm, company etc.) residential status and various heads of income (salary, house property, business, capital gains and other sources). The income tax scheme also provides for detection of offences and penalization also justice to aggrieved assesses.

1.2           DEFINITIONS

Exhaustive - These are the definitions which are definite, specific, complete and fall. These definitions are comprehensive. There is no scope for interpretation other than what is expressively given in the definition e.g. Definition of ‘Assessment Year’.

Inclusive - Inclusive definitions are those definitions which take into consideration the general and natural meaning of the term and in addition to that include several other things as specified by law. These definitions are not exact. They provide scope for interpretation e.g. Definition of ‘Income’ is inclusive. It is to be understood in wider sense.

In this Act, unless the context otherwise requires,—

(1) "agricultural income" means—

(a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such;

(b) any income derived from such land by—

(i) agriculture; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause;

(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on:

Provided that the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building;

(7) "assessee" means a person by whom income-tax or super-tax or any other sum of money is payable under this Act, and includes—

(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;

(b) every person who is deemed to be an assessee under any provision of this Act;

(c) every person who is deemed to be an assessee in default under any provision of this Act;

(8) "assessment" includes re-assessment;

(9) "assessment year" means the period of twelve months commencing on the 1st day of April every year;

Assessment Year means the period of 12 months commencing on the 1st of April immediately after the previous year[P.Y].

Assessment is the year in which the income of the previous year is assessed to tax. The Income earned during a particular year is assessed to tax in the following year. The following year in which the tax of previous year is assessed known as Assessment Year. For example:              Previous Year                                          Assessment Year

1 2012-13   2013-14

2 2015-16   2016-17

3 2018-19   2019-20

(13) "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;

(16) "Commissioner" means a person appointed to be a Commissioner of Income-tax under sub-section (1) of section 117;

(24) "income" includes—

(i) profits and gains;

(ii) dividend;

(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;

(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a 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, but for such payment, would have been payable by the director or other person aforesaid;

(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;

(vi) any capital gains chargeable under section 45;

(vii) the profits and gains of any business of insurance 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 profits and gains by virtue of provisions contained in the First Schedule;

(25) "Income-tax Officer" means a person appointed to be an Income-tax Officer under section 117;

(30) "non-resident" means a person who is not a "resident", and for the purposes of sections 92, 93, 113 and 168, includes a person who is not ordinarily resident within the meaning of sub-section (6) of section 6;

(31) "person" includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses;

(34) "previous year" means the previous year as defined in section 3;

Previous Year for the purpose of Income Tax Act, 1961 is financial year In which the income is earned. This year is known year as ‘taxed year or Financial Year”. The Previous Year starts from 1st April and concludes on 31st March, It is compulsory to follow the Financial Year as the uniform Previous Year for all the Assessee and for all sources of income. The Previous Year is for period of 12 months. According the section 3 of the Income Tax Act, 1961 Previous Year means the Financial Year immediately preceding the Assessment Year. But in some cases Previous Year may not be of 12 months period as in the case of business or profession, newly setup or source of income newly coming into existence. The Previous Year shall be the year beginning the date of setting up of the business of quotation or the date on which the new source of income comes into existence.

(42) "resident" means a person who is resident in India with in the meaning of section 6;

(43) "tax" means income-tax and super-tax chargeable under the provisions of this Act;

1.3 CLASSIFICATION OF ASSESSEE/RESIDENTIAL STATUS

The Indian Income Tax is a tax on a person in relation to his income. Assessee i.e., persons by whom the tax is payable, are classified as : individual, Hindu Undivided family; companies; Local Authorities; Firms and Other Association of Person. They are further divided in to three categories with reference to their residence viz.

(i)                 Residents and Ordinarily Residents;

(ii)               Residents but not Ordinarily Residents; and

(iii)            Non-residents in India.

The incidence of taxation varies with the residential status of an Assessee, while the classification according to the legal status of assessee is necessary for the following reasons:

1. There are different rates of income tax for assesses of different legal status.
2. There are different maximum exemption limits in the case of different classes of assesses, e.g. Individuals. Hindu undivided families, finns, companies, co-operative societies etc. There are different provisions for allowances and investment.

There are different tests for residence.

Basic conditions determining an individual is Resident: u/s 6(1) an individual is said to be resident in India in any Previous Year, if he satisfies at least one of the following basic conditions:

i)                    he is in India in the Previous Year for a period of 182 days or more OR

Ii)                 he is in India for a period of 60 days or more during the Previous Year AND

Iii)               365 days or more during 4 years immediately preceding the Previous Year.

Basic conditions to test as to when a Resident *

Individual is ordinarily resident in India [Additional Conditions) [R-O-R] u/s 6(6), a resident individual is treated as “Resident and ordinarily resident” in India if he satisfies both the following 2 additional conditions :

i)                    he has been resident in India in at least 2 out of 10 Previous Year [according to basic conditions noted above] immediately preceding the relevant Previous Year; and

Ii)                 he has been in India for a period of 730 days or more during 7 years immediately preceding the relevant Previous Year.

Resident but not ordinarily resident [Section 6(1); (6)(a)] [R-NOR]: An individual becomes resident but not ordinarily resident in India in any of the following circumstances : i) If he satisfies at least one of the basic conditions but none of the additional conditions;

Ii) If he satisfies at least one of the basic conditions and one of the two additional conditions.

Non-Resident [NR]:

An individual is a Non Resident in India if he satisfies none of the basic conditions. Additional conditions are not applicable in this case.

Exception to basic conditions:

By virtue of explanation (a) to Section 6(1), the period of “60 days” referred to in basic condition No. Ii, has been extended to “182 days”.

In following two conditions the above exception is applicable.:

1. An Indian citizen who leaves Indian during the previous year for the purpose of employment outside Indian or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship.
2. Indian citizen or a person of Indian origin who comes on a visit to India during the previous year.

Indian Origin : A person is of Indian Origin, if he, or either of his parents or any of his grandparents was born in undivided India. [Grand parent include both maternal as well as paternal grand-parents.]

Scope Of Income Liable To Tax : (Section 5)

Persons who are resident and ordinarily resident are chargeable to tax on all income:

1. Which is received or is deemed to be received in India
2. Which accrues or arises or is deemed to accrue or arise in India and
3. Which accrues or arises outside India.

The liability of the persons who are resident but not ordinarily resident is the same as in the case of persons who are resident and ordinarily resident except that the income which accrues or arises outside India is not includible in their total income unless it is derived from a business controlled in or a profession set up in India. Non-residents are liable in respect of income received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. They are not at all liable in respect of income accruing or arising outside India even if it is remitted to India.

Meaning of Indian Income:

Any of the following three is an Indian income.

1. If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year.
2. If income is received in India (or deemed to be received)in India during the previous year but it accrues (or arise) outside India during the previous year.
3. If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year.

Foreign Income:

If the following two conditions are satisfied then such income is “foreign income”.

-          Income is not received (or nor deemed to be received) in India and Income does not accrue or arise (or does not deemed to accrue or arise) in India.

-          Remittances out of foreign income received in India are entirely exempt from income-tax in the case of ‘resident’ as well as ‘non-resident’ assesses. However, the foreign income, even though not remitted to India is liable to be charged to tax on accrual basis in the case of every ordinarily resident assessee, but in the case of not ordinarily resident assesses such foreign income is chargeable on accrual basis it is arises from a business controlled in or a profession set up in India.

1.4 Exclusions from Total Income (Exempt Incomes)

Following are the exclusions from total income or exempt income as per Section 10:

1. Agriculture Income [Section 10(1)]
2. Amount received out of family income, Hindu Undivided Family (H.U.F.) [Section 10(2)]
3. Share of profit, [Section 10(2A)]
4. Interest paid to Non-Resident [Section 10(4)(i)]
5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)]
6. Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)]
7. Leave Travel Concession or Assistance [Section 10(5)]
8. Remuneration or Salary received by an individual who is not a citizen of India [Section 10(6)] a. Remuneration [U/s 10(6)(ii)] b. Remuneration received as an employee of foreign enterprise [U/s 10(6)(vi)] c. Employment on a foreign ship [U/s 10(6)(viii)] d. Remuneration received by an employee of foreign government [U/s 10(6)(xi)]
9. Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B), (6BB) and (6C)]
10. Perquisites/Allowances paid by Government to its Employees serving outside India [Section 10(7)]
11. Employees of Foreign Countries working in India under Cooperative Technical Assistance Programme [Section 10(8)]
12. Income of a Consultant [Section 10(8A)]
13. Income of Employees of Consultant [Section 10(8B)]
14. Income of any member of the family of individuals working in India under cooperative technical assistance programmes [Section 10(9)]
15. Gratuity [Section 10(10)] a. Gratuity received by Government servants [Section 10(10)(i)] b. Gratuity Received by a Non-Government Employee covered by Payment of Gratuity Act, 1972 [Section 10(10)(ii)]
16. Commuted value of Pension Received [Section 10(10A)]
17. Amount received as Leave Encashment on Retirement [Section 10(10AA)]
18. Retrenchment Compensation received by Workmen [Section 10(10B)]
19. Payment received under Bhopal Gas Leak Disaster (Processing of Claims) Act 1985 [Section 10 (10BB)]
20. Compensation received in case of any disaster [Section 10(10BC) ]
21. Retirement Compensation from a Public Sector Company or any other Company [Section 10(10C)]
22. Tax on Non-monetary Perquisites paid by Employer [Section 10(10CC)]
23. Amount received under a Life Insurance Policy [Section 10(10D)]
24. Statutory Provident Fund [Section 10(11)]
25. Recognized Provident Fund [Section 10(12)]
26. Superannuation Fund [Section 10(13)]
27. House Rent Allowance-HRA [Section 10(13A)]
28. Business Expenditure Allowance [Section 10(14)]
29. Interest Incomes [Section 10(15)]
30. Scholarship [Section 10(16)]
31. Allowance of M.P./M.L.A.I or M.L.C. [Section 10(17)]
32. Awards Instituted by Government [Section 10(17A)]
33. Pension received by certain winners of gallantry awards [Section 10(18)]
34. Family pension received by family members of armed forces including para military forces [Section 10(19)]
35. Income of a Local Authority [Section 10(20)]
36. Income of Scientific Research Association [Section 10(21)]
37. Income of a News Agency [Section 10(22B)]
38. Income of some Professional Institutions [Section 10(23A)]
39. Exemption of Income Received by Regimental Fund [Section 23AA] a. Income of a Fund set-up for the welfare of employees or their dependents [Section 10(23AAA)] b. Income of a pension fund set up by LIC or other insurer [Section 10(23AAB)]
40. Income of State Level Khadi and Village Industries Board [Section 10(23BB)] a. Income of certain Authorities set up to manage Religious and Charitable Institutions [Section 10(23BBA)] b. Income of European Economic Community [Section 10(23BBB)] c. Income of a SAARC Fund for regional projects [Section 10(23BBC)] d. Any income of Insurance Regulatory and Development Authority [Section 10(23BBE)] e. Income of Prasar Bharti [Section 10(23BBH)] [Inserted by the Finance Act 2012, w.e.f. 2013-14]
41. Any income received by a person on behalf of following Funds [Section 10(23C)]
42. Income of Mutual Fund [Section 10(23D)]
43. Exemption of income of a securitization trust [Section 10(23DA)j [w.e.f. A.Y. 2014-15]
44. Income of Investor Protection Fund [Section 10(23EA)]
45. Exemption of income of investor protection fund of depository [Section 10(23ED)] [w.e.f. A.Y. 2014-15]
46. Exemption for Certain Incomes of a Venture Capital Company or Venture Capital Fund from Certain Specified Business or Industries [Section 10 (23FB)]
47. Income of Registered Trade Unions [Section 10(24)]
48. Income of Provident and Superannuation Funds [Section 10(25)]
49. Income of Employee’s State Insurance Fund [Section 10 (25A)]
50. Income of Schedule Tribe Members [Section 10(26) and 10(26A)]
51. Income of Sikkimese individual [Section 10(26AAN] (With retrospective effect from 1-4-1990)
52. Regulating the marketing of agricultural produce [Section 10[26AAB]
53. Income of a corporation set-up for promoting the interests of Scheduled Castes, Scheduled Tribes or Backward Classes [Section 10(26B)]
54. Income of a corporation set-up to protect the interests of Minorities [Section 10(26BB)]
55. Any income of a Corporation established for Ex-Servicemen [Section 10(26BBB)]
56. Income of cooperative society looking after the interests of Scheduled Castes or Scheduled Tribes or Both [Section 10(27)]
57. Any income accruing or arising to Commodity Boards etc. [Section 10(29A)]
58. Amount received as subsidy from or through the Tea Board [Section 10(30)]
59. Amount received as subsidy from or through the concerned Board [Section 10(31)]
60. Income of Child Clubbed U/s 64 (IA) [Section 10(32)]
61. Income by way of dividend from Indian company [Section 10(34)]
62. Exemption of income to a shareholder on buyback of shares of unlisted company [Section 10 (34A) [w.e.f. A.Y. 2014-15]
63. Exemption of income from Units [Section 10(35)]
64. Exemption of income from Securitization Trust [Section 10(35A)] [w.e.f A.Y. 2014-15]