UNIT 1
BASIC TERMS

1.1     ASSESSEE

"Assessee" means a person by whom any 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.

1.2     ASSESSMENT

Every taxpayer has to furnish the details of his income to the Income-tax Department. These details are to be furnished by filing up his return of income. Once the return of income is filed up by the taxpayer, the next step is the processing of the return of income by the Income Tax Department. The Income Tax Department examines the return of income for its correctness. The process of examining the return of income by the Income- Tax department is called as “Assessment”. Assessment also includes re-assessment and best judgment assessment under section 144.

Under the Income-tax Law, there are four major assessments given below:

a)  Assessment under section 143(1), i.e., Summary assessment without calling the assessee.

b) Assessment under section 143(3), i.e., Scrutiny assessment.

c)  Assessment under section 144, i.e., Best judgment assessment.

d)  Assessment under section 147, i.e., Income escaping assessment.

1.3     ASSESSMENT YEAR

Assessment Year is the year in which one file income tax returns of the year prior to it (i.e. Financial Year). It is the year in which the income that one has earned in the financial year that is just ended is evaluated.

E.g. For Financial Year 2019-20 the Assessment Year will be 2020-21.

1.4     ANNUAL VALUE

The annual value of a property is the sum for which a property is reasonably expected to be let from year to year. Hence, the annual value of a property is the amount of notional rent which could have been derived, had the property been let. The annual value of a property plays an important role in Income Tax return filing. In this article, we mention the procedure for calculating the annual value of a property.

Factors Determining Annual Value of Property

The following four factors play an important role in determining the annual value of a property:

Actual Rent Received

Actual rent received or receivable is an important factor in determining the annual value of a property. The actual rent received could be dependent on various considerations. If the owner of the property agrees to bear certain obligations like water or electricity bill, the rent will be calculated by reducing the rent received by the amount spent by the owner on meeting such obligatory expenses. On the other hand, if the obligatory expenses to be borne by the owner is met by the tenant, then the rent will be computed by increasing the rent paid by the amount spent by the tenant on meeting the obligations of the owner.

Municipal Value

Municipal value is determined by the municipal authorities for levying municipal taxes on house property. Municipal authorities normally charge house tax/municipal taxes on the basis of annual letting value of such house property, which is determined by it based upon many considerations.

Fair Rent

Fair rent is the rent which is a similar property can fetch in the same or similar locality if it is let for a year. Fair rent can be easily ascertained for apartments based on prevailing rentals.

Standard Rent

Standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than the standard rent fixed under the Rent Control Act. Therefore, standard rent plays an important factor in determining the annual value of the property.

1.5     BUSINESS

Business [Sec. 2(13)]

Business includes –

Generally, business means recurring economic activity, but for income tax purpose an isolated activity may be termed as business depending upon facts and circumstances. Following elements shall be considered to judge a transaction as business transaction:

1.6     CAPITAL ASSETS

Capital asset means –

Note: Capital asset may be movable or immovable or tangible(furniture, jewellery, etc.) or intangible(goodwill, tenancy right, copy right, etc

- but does not include the following:

Stock in trade, consumable stores or raw materials held for business or profession.

However, any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 shall not be treated as stock-in-trade

Treatment of profit on sale of stock

Such profit shall be taxable under the head “Profits & gains of business or profession”

2.  Personal effect

Personal effect means any movable property held for personal use of the assessee or for any dependent member of his family but excludes the following:

Taxpoint:

**Jewellery includes –

Treatment of profit on sale of personal effect

Any income on transfer of personal effect shall not be treated as capital gain. Such income is in the nature of capital receipt and hence shall not be taxed under any head.

3.  Agricultural land in rural area

Agricultural land in India is not a capital asset except the following –

Notes:

Summary

4.  Gold Bonds

Following gold bonds issued by the Central Government are not capital asset:

● 6.5% Gold Bond, 1977 ● 7% Gold Bonds, 1980; and ● National Defence Gold Bond, 1980.

5.  Special Bearer Bond

Special Bearer Bond, 1991 issued by the Central Government are not capital asset.

Note: It is not necessary that the assessee should be the initial subscriber.

6.  Gold Deposit Bonds

Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government are not capital asset.

Note: Interest on aforesaid bonds or deposits are exempt [Sec. 10(15)].

1.7     INCOME

Income concept

While the Income Tax Act does not define the term income, Section 2 (24) of the Act describes the various receipts contained under the income range.

Section 4 of the Income Tax Act, 1961, is the charging section of the law. Therefore, in this section:

Head of income

Income falls under 5 major heads under Section 14 of the act

1.8     PERSON

Person [Section 2(31)] : Definition under I.Tax

Person includes :

The word person is a very wide term and embraces in itself the following :

Individual: It refers to a natural human being whether male or female, minor or major.

Hindu Undivided Family: It is a relationship created due to operation of Hindu Law. The manager of HUF is called “Karta” and its members are called ‘Coparceners’.

Company: It is an artificial person registered under Indian Companies Act 1956 or any other law.

Firm: It is an entity which comes into existence as a result of partnership agreement between persons to share profits of the business carried on by all or any one of them. Though, a partnership firm does not have a separate legal entity, yet it has been regarded as a separate entity under Income Tax Act. Under Income Tax Act, 1961, a partnership firm can be of the following two types

Association of Persons or Body of Individuals, Co-operative societies, MARKFED, NAFED etc. are the examples of such persons. When persons combine togather to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an association of persons. Receiving income jointly is not the only feature of an association of persons. There must be common purpose, and common action to achieve common purpose i.e. to earn income. An AOP.can have firms, companies, associations and individuals as its members.

A body of individuals (BOl) cannot have non-individuals as its members. Only natural human beings can be members of a body of individuals. Whether a particular group is AOP or BOl is a question of fact to be decided in each case separately.

Local Authority, Municipality, Panchayat, Cantonment Board, Port Trust etc. are called local authorities.

 Artificial Juridical Person,  A public corporation established under special Act of legislature and a body having juristic personality of its own are known to be Artificial Juridical Persons. Universities are an important example of this category.

1.9     PREVIOUS YEAR

As per the Income Tax law the income earned in current year is taxable in the next year. The year in which income is earned is known as the previous year.

In layman language the current financial year is known as the previous year. The financial year starts from 1st April and end on 31st March of the next year.

For Instance, for the salary income earned from 1 April 2017 - 31st March 2018 .The previous year would be 2017-18.

All the assessee’s are required to follow the financial year( April 1 to March 31) as previous year for all types of incomes. In case, of a newly set-up business/profession or first job then your first previous year may be less than 12 months. Though from subsequent years your previous year will always be your financial year.

1.10  TRANSFER

Transfer in relation to a capital asset includes:

Taxpoint:

directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

Exchange

Exchange includes barter which means mutual transfer of ownership of one thing for the ownership of another.

Notes: In case of exchange though there is only one transaction the tax liability arises on both the parties. The sale consideration shall be taken as the fair market value of assets received.

Relinquishment of the asset

Relinquish literally means 'to withdraw from' or 'to abandon' or 'to give up any thing or any right' or 'to cease to hold' or 'to surrender'. Hence, relinquishment means act of surrendering. In other words, it means interest of a person in a property is either given up, abandoned, or surrendered but the property in which right is relinquished continues to exist.

Taxpoint:

Extinguishment of any right in an asset

Extinguishment literally means ‘to put a total end to’ or ‘total destruction’ or ‘blot out of existence’ or ‘annihilation’. Extinguishment does not mean extinguishment of asset itself but to extinguishment of holder’s right to the asset and such right cannot be held by someone else.

Incidences of extinguishments-

When there is a reduction of capital by a company and amounts are distributed to shareholder, such amount has two components –

c. Forfeiture of share: Forfeiture or surrender of shares indicates extinguishment or relinquishment of right of shareholder in such shares, which have been forfeited by the company. As in CIT vsVania Silk Mills Pvt. Ltd it was held that the term extinguishment includes all possible transactions which results in the destruction, annihilation, termination, cessation or cancellation of any right in an asset whether corporeal or incorporeal. Though there is no consideration in case of share forfeiture or surrender, still such transaction shall be treated as transfer and liable to capital gain.

Compulsory acquisition of an asset under any law

Normally, sale means a mutual will full agreement between two or more parties. But for the purpose of sec. 2(47), transfer includes compulsory acquisition of any property under any law in force.

Conversion of asset into stock in trade by the owner

Generally, a transfer requires two or more parties, but in Income tax Act even one party’s involvement may constitute transfer. As per sec. 2(47)(iv) where an asset is converted by the owner into or treated by him as ‘stock in trade’ of the business carried on by him, such conversion or treatment shall constitute transfer.

Any transaction of immovable property u/s 53A of the Transfer of Property Act

Any transaction of immovable property in which possession is allowed against part performance of the contract shall be treated as transfer [Sec. 53A of the Transfer of Property Act, 1882].

Any transaction which has enabled the enjoyment of any immovable property

Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner, is treated as transfer.

Property held by a member of a company, co-operative society or other association of persons to whom a building or a part thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed owner of that building or a part thereof.

Under the scheme of owning flats in co-operative housing societies, the legal ownership in the flats can be said to vest in the individual members themselves and not in the co-operative societies. Therefore for all purposes including attachment and recovery of tax, etc. the individual member should be regarded as the legal owner.

Taxpoint

References:

1)  Income Tax Act with Gist of Supreme Court Rulings Book (Bharat Law House.)

2)  Income Tax Law & Accounts For B.Com Vth Semester of Calicut University  (English, Paperback, Dr. H.C. Mehrotra, Dr. S.P. Goyal).