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PROF CA S P DESAI IMPORTANT DEFINITIONS

Section 2 of the Income-tax Act gives definitions of the various terms and expressions used in the Act.

Assessee [Section 2(7)]


Assessee means a person by whom any tax or any other sum of money is payable under this Act and includes. (a) (i) Every person in respect of whom any proceedings under this Act have been taken for the assessment of his income or of the income of any other person in respect of which he is assessable or loss sustained by him or by such other person or of the amount of refund due to him such person. (ii) Every person in respect of whom any proceeding under the Act has been taken for assessment of Fringe benefits. (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. Thus the above definition includes the following assessee: (a) Ordinary assessee it includes (i) any person against whom some proceedings under this Act are going on. (ii) Any person who has sustained loss and has filed return or loss u/s 139(3). (iii) Any person by whom some amount of interest, tax or penalty is payable under this Act, or (iv) Any person who is entitled to refund of tax under this Act. (b) Representative assessee or deemed assessee: A person may not only be liable for his own income or loss but also on the income or loss of other persons e.g.: guardian of minor or lunatic, agent of a nonresident etc. (c) Assessee-in default: A person is deemed to be an assessee-in default if he fails to fulfill his obligations under the Act. E.g. employer paying salary fails to deduct tax at source or deducts tax but does not deposit it in the treasury.

Assessment [Section 2(8)]


Under the Income-tax law, assessment means computation of taxable income and levy of tax there on for a particular assessment year. There is no separate definition of the work assessment in the Act except an inclusive definition under section 2(8) which says that assessment includes re-assessment.

Assessment year [Section 2(9)]


Assessment year means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act. For instance, 2005-06 which will commence on April, 2005 will end on March 31, 2006.

PROF CA S P DESAI
Previous Year [Section 3]
Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year. From the assessment year 1989-90 onwards, all assesses are required to follow financial year 9i.e. April 1 to March 31) as previous year. This uniform previous year has to be followed for all sources of income. In case of newly set up business or profession or a source of income newly coming into existence, the first previous year will be the period commencing from the date of setting up of business / profession or as the case may be, the date on which the source of income newly comes into existence and ending on the immediately falling March 31. Thus, where Mr. A sets up a business on 10.10.2004, his previous year will be the period commencing on 10.10.2004 and ending on 31.3.2005 and assessment year will be 2005-06. There are however, several exception to the rule which are as follows:(a) Income of non-resident shipping companies where they do not have any representative in India [Sec.172] (b) Income of persons leaving India either permanently or for a long period [Sec.174] (c) Income of association of persons or body of individuals or artificial juridical person formed for a particular event or purpose [Sec.174A] (d) Income of person trying to alienate his assets with a view to avoid tax [Sec.175] and (e) Income of discontinued business [Sec.176] In the above cases, income of previous year may be taxed in that previous year itself, at the rates applicable to that previous year.

Person [Sec. 2(31)]


Income-tax is charged in respect of the total income of the previous year of every person, The term person includes (i) An Individual: a natural human being, i.e., male, female, minor or a person of sound or unsound mind. (ii) A Hindu undivided family: it consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. (iii) A Company: (a) any Indian company, or (b) any body corporate incorporated by or under the laws of a country outside India, or (c) any institution, association or body whether Indian or non-Indian, which is declared by general or social order of the Board to be a company, or (d) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income- tax Act, 1992 or which is or was assessable or was assessed under this Act (Income-tax Act, 1961) as a company on or before the 1st day of April,1970. (iv) A Firm : it is a partnership firm. 2

(v) An Association of Persons or a Body of Individuals whether incorporated or not: The difference between Association of person and body of individuals is that where as association implies a voluntary getting together for a definite purpose a body of individuals would be just a body without an intention to get-together. Moreover, the members of body of individuals can be individuals only whereas the members of an association of persons can be two or more firms or Hindu undivided families etc.

PROF CA S P DESAI
(vi) A Local Authority: it means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the Government with the control and management of a Municipal or local fund. (vii) Every Artificial Juridical Person, not falling within any of the above categories: This is a residuary clause. If the assessee does not fall in any of the first six categories, he is assessed under this clause .Generally, a statutory corporation, deity or charitable institution or an endowment for charitable or religious purposes falls under artificial juridical person. There are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive, and not exclusive. Therefore, any person, not falling in the above mentioned categories, may still fall in the four corners of the term person and accordingly may be liable to tax under Sec. 4

INCOME-[SEC.2 (24)]
The definition of the term income in Sec. 2(24) is inclusive and not exclusive. The term income not only indicates those thing which are included in Sec. 2(24), but also includes such thing which the term signifies according to its general and natural meaning. The definition of income in Sec. 2(24) of the Income-tax Act includes (1) Profits and gains: (2) Dividend; (3) Voluntary contributions received by religious or charitable trust or institution; (4) Perquisite or profit in lieu of salary taxable under Sec. 17(2) and (3); (5) Special allowance or benefit, other than perquisite specially granted to as in assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit; (6) Allowance granted to assessee to meet his personal expenses at the place where the duties of his office or employment of profit are or ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living; (7) The value of any benefit or perquisite obtained from the company by a director or by a person having substantial interest in the company or by a relative of the Director of such person; (8) Any sum paid by a company in respect of any obligation which, but such payment would have been payable by the director or the person having substantial interest; (9) Value of any benefit or perquisite obtained by a representative assessee mentioned in Sec. 160(1) (iii) or (iv) or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee and any sum for such payment, would have been payable by the beneficiary; (10)Any compensation or other sum due to or received by any person referred to in Sec. 28 (ii) or income derived by a trade, professional or similar association from specific services performed for its members as referred to in sec. 28(iii) or any amount obtained by way of remission or cessation of liability previously allowed as deduction 3

or balancing charge or the excess of the amount of deduction in respect of expenditure on scientific research or amount of bad debt subsequently recovered. (11) Business income includes (i) Compensation money [Sec.289ii)] (ii) Income derived by a trade, professional or similar association for specific services performed for its members [Sec. 28(iii)] (iii) Export incentives [Sec. 28(iiia), (iiib), (iiic)]

PROF CA S P DESAI
(iv) Value of any benefit or perquisite arising from business or the exercising profession [Sec. 28(iv)] (v) Any interest, salary, bonus, commission or remuneration received by a partner of a firm from such firm [Sec. 28(v)] (vi) Deemed business income [Sec 41] and deemed income chargeable under the head other sources [Sec. 59] (12) Any capital gains chargeable u/s. 45; (13) Profits and gains of any insurance carried on by a mutual insurance company or be a co-operative society; (14) Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort; (15) Sum received by the assessee from his employees as contributions to any provident fund or superannuation fund set up under the provisions of the Employees state Insurance Act, 1948 or any other fund for the welfare of such employees; and (16) Any sum received under a key-men Insurance policy including the sum allocation by way of bonus on such policy. The above list given in Sec. 2 (24) of the income-tax Act in inclusive and not exhaustive.

REVENUE AND CAPITAL RECEIPTS


Income tax act no where specifically defines the terms Revenue and Capital receipts. Based on the common understanding and decided cases, an attempt to define Revenue and Capital Receipts is made as follows: (1) Type of capital: A receipt on account of fixed capital is a capital receipt, whereas a receipt on account of circulating capital is a revenue receipt. (2) Nature of receipt in the hands of recipient: Amount received as capital in nature is a capital receipt in the hands of recipient even though it is a revenue payment for the payer. Whereas amount received as income is a revenue receipt for the recipient even though it is a capital payment for the payer. (3) Receipt in lieu of source of income: A receipt in lieu (instead) of source of income which no more continues in future is a capital receipt. Ex: Compensation for retrenchment. Whereas a receipt in lieu of income which discontinues for a temporary period and continues later is a revenue receipt. Ex: Compensation received for temporary disablement. (4) Insurance receipt: A receipt under a general insurance policy relating to a capital asset is a capital receipt whereas a receipt relating to a circulating asset is a revenue receipt. (5) Exchange rate fluctuations: Gain arising from exchange rate fluctuation is a capital receipt if foreign currency is held as investment or else in the normal course of business it is treated as revenue receipt. (6) Subsidy: Subsidy received to start or setup a business is a capital receipt whereas subsidy received to develop or carryout the business activity in a better manner is a revenue receipt. 4

Notes: 1.The size of payment, lump sum or part payment, nature of receipt for company law purpose etc are irrelevant to determine whether a receipt is a capital or revenue receipt. 2. The distinction between capital and revenue receipt is very important because capital receipts are exempt from tax unless they are expressly taxable and revenue receipts are taxable unless they are expressly exempt.

REVENUE AND CAPITAL EXPENDITURE


Same as Revenue and Capital receipts, the act doesnt define the terms Revenue and Capital expenditure.

PROF CA S P DESAI
Based on the common understanding and decided cases, revenue and capital expenditure may be defined as follows: Type of asset acquisition: Acquisition extension or improvement of fixed asset is a capital expenditure whereas expenditure incurred during the normal course of business is revenue expenditure. (1) Regularity of expenditure: Non recurring expenditure is a capital expenditure whereas recurring expenditure is revenue expenditure. (2) Source of income: Expenditure incurred for the purpose of acquiring a source of income is a capital expenditure where as expenditure incurred for the purpose of generating an income is a revenue receipt. (3) Normal profits vs Super Profits: Expenditure incurred to earn normal profits or to maintain the current level of profits is revenue expenditure, whereas expenditure incurred to earn super profits by extending the current level of operation is a capital expenditure. (4) Period of consumption: The benefit of a capital expenditure is for several years, whereas the benefit of revenue expenditure is generally consumed within 1 previous year. It is very vital to distinguish EXPENDITURE as Revenue and capital expenditure since revenue EXPENDITURE ARE generally allowed unless expressly disallowed and capital expenditures are generally disallowed unless expressly allowed by the act.

REVENUE AND CAPITAL LOSSES


Loss is the excess of allowable expenses over Gross income. (1) Type of asset: Loss relating to a capital asset is a capital loss whereas loss relating to the operations of the normal business is a revenue loss. (2) Loss by theft or embezzlement: To be treated as loss in the normal course of business and hence it is a revenue loss. (3) Loss of security deposit or initial deposit: To be treated as capital loss.

INCIDENCE OF TAX (U/S 5)


Incidence of tax for a person depends upon his residential status and place of accrual and receipt of income.

Types of Income
(a) Indian Income (i) Income accrued (earned) or deemed to have accrued in India and received or deemed to have received in India. 5

(ii) Income accrued (earned) or deemed to have accrued in India but received or deemed to have received outside India (iii) Income accrued (earned) or deemed to have accrued outside India but received or deemed to have received in India. In short an Income is said to be an Indian Income if either accrued or received or both is in India. (b) Foreign Income An Income which is not an Indian income is a foreign income i.e. an income accrued or deemed to have accrued outside India and received or deemed to have received outside India is a foreign income.

PROF CA S P DESAI
Incidence of tax for different residential status: Types of Income Ordinary Resident Resident (NOR) (OR) 1. Indian Income Tax 2. Foreign Income (a) From business or profession wholly or partly Tax controlled from outside India. (c) From business or profession wholly controlled from (d) outside India. Tax (e) (c) From any other source other than business (f) or profession, (includes salary House property, (g) Capital gains and other source)where place of Tax (h) control doesnt matter. (i) 3. Past untaxed profits brought into IndiaTax No during (j) previous year. (k) (l) 4. Gift received from a relative(No maximum No Tax (m) limit) (n) (o) 5. Gift received from a non relative Tax (p) (q) (r) (s) (t) (u) (v) exceeding Rs. 50,000 (The whole of the sum (w) shall be taxed and not the difference) (x) (7) Not Ordinary Resident (NR) Tax Tax No Tax No Tax No Tax No Tax Tax Non Tax No Tax No Tax No Tax No Tax No Tax Tax

Notes: 1. The words received and remitted are not same. To classify an income as Indian or foreign income, accrued and received are considered and not the word remitted. 6

2. Agricultural income is exempt from tax U/S 10(1) if it is from a land situated in India. 3. Dividend received from a domestic co including Indian co is exempt from tax U/S 10(34). However dividends received from Non-domestic co are taxable (foreign co). 4. If the place of accrual is given as India and if the place of receipt is not given, it is assumed to be the same as place of accrual i.e. India.

PROF CA S P DESAI EXEMPTED INCOMES (U/S 10)


(Applicable to Individual assessee only)
Exempted incomes are those incomes on which income tax shall not be chargeable. (1) Agricultural income is exempt from tax U/S 10(1). The above income shall be from agricultural purpose and the land shall be situated in India (2) Any sum of money received by an individual as a member of Hindu Undivided Family (HUF) shall be exempt from tax U/S 10(2) since HUF is a separate taxable entity. (3) Share of profits received by a partner from a partnership firm is exempt U/S 10(2A) since partnership firm is a separate taxable entity. (4) Any income of a non resident by way of interest on notified government securities or interest on NRI external account in India notified by FERA, or interest on notified savings certificates is exempt U/S 10(4). (5) Remuneration received from foreign state under co-operative technical assistance program is fully exempt U/S 10(8). (6) Remuneration as consultant out of funds made available to international agencies under technical assistance program approved by government is fully exempt U/S 10(8A). (7) Income from notified bonds/deposits and securities is fully exempt U/S 10(15) (8) Scholarship received to meet cost of education is fully exempt U/S 10(16) (9) Daily allowance, constituency allowance and other allowance to MLAs and MPs is fully exempt U/S 10(17). However the above allowances shall not exceed Rs. 2000 pm. (10) Reward or award either in cash or in kind instituted and approved by government in public interest is fully exempt U/S 10(17A). (11) Family pension received by the widow or children of member of armed force is completely exempt from tax U/S 10(19). However death of such person shall had occurred while on duty. (12) Annual value of any one palace of an Ex-Ruler of Indian States shall be fully exempt U/S 10(19A). However no part of the palace shall be letout. (13) Income of a SC/ST by way of interest or dividend on specified securities is fully exempt U/S 10(26). `Subsidy received by an assessee engaged in growing and manufacturing of tea by the tea board for the purpose of replacement is fully exempt U/S 10(30). (14) Subsidy received by an assessee engaged in growing and manufacturing of Rubber, Coffee, Cardamom or other notified commodities by the relevant board is fully exempt U/S 10(31).

PERQUISITES
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1. Perquisite is a casual benefit in additional to normal revenue: The term perquisite indicates some extra benefit in addition to the amount that may be legally due by way of contract for services rendered. In (8) modern times, the salary package of an employee normally includes monetary salary and perquisite like housing, car etc. Perquisite may be provided in cash or in kind. (i) Definition : Under the Act, the term perquisite is defined by Section 17(2) to include the following : (a) the value of rent free accommodation provided to the assessee by his employer Section 17(2)(i) (b) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employee-Section 17(2)(ii)

PROF CA S P DESAI
(c) The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases : (i) by a company to an employee in which he is a director (ii) by a company to an employee being a person who has substantial interest in the company. (iii) By any employer (including a company) to an employee to whom the provisions of (i) & (ii) do not apply and whose income under the head salaries exclusive of the value of all benefits or amenities not provided for by way of monetary benefits exceeds Rs. 50,000 section 17(2) (iii) (d) Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee Section 17(2)(iv) (e) Any sum payable by the employer whether directly or through a fund other than a recognized provident fund or approved superannuation fund or deposit linked insurance fund to effect an assurance on the life of the assessee or to effect a contract for an annuity Section 17(2)(v) (f) Value of any other fringe benefit or amenity as may be prescribed excluding fringe benefit subject to fringe benefit tax. It can be noted that the aforesaid definition of perquisite is an inclusive one, more terms can be added in. (ii) Types of Perquisites : Perquisites may be divided into three broad categories: 1. Perquisites taxable in the case of all employees 2. Perquisites exempt from tax in the case of all employees 3. Perquisites taxable only in the hands of specified employees.

Perquisites taxable in the case of all employees


The following perquisites are chargeable to tax in all cases. I. Value of rent-free accommodation provided to the assessee by his employer-Section 17(2)(i) II. Value of concession in rent in respect of accommodation provided to the assessee by his employer-Section 17(2)(ii) III. The Value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases. (a) by a company to an employee in which he is a director (b) by a company to an employee being a person who had substantial interest in the company (c) by any employer (including a company) to an employee to whom the provisions of (a) and (b) do not apply and whose income under the head salaries exclusive of the value of all benefits or amenities not provided for by way of monetary benefits exceed Rs. 50,000 Section 17(2) (iii) 8

IV. amount paid by an employer in respect of any obligation which otherwise would have been payable by the employee Section 17(2) (iv) V. Amount payable by an employer directly or indirectly to effect an assurance the life of the assessee or to effect a contract for an annuity. VI. The value of any other fringe benefit or amenity as may be prescribed.

(9) Perquisites exempt from tax in all cases


The following perquisites are exempt from tax in all cases: (1) Telephone provided by an employer to an employee at his residence. (2) Goods sold by an employer to his employees at concessional rates.

PROF CA S P DESAI
(3) Transport facility provided by an employer engaged in the business of carrying of passengers or goods to his employees either free of charge or at concessional rate. (4) Privilege passes and privilege ticket orders granted by Indian Railways to the employees. (5) Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India. (6) Sum payable by an employer to a recognized provident fund or an approved superannuation fund or deposit-linked insurance fund established under the Cost Mines Provident Fund or the employees Provident Fund Act. (7) Employers contribution to staff group insurance scheme (8) Leave travel concession (9) Payment of annual premium by employer on personal accident policy effected by him on the life of the employee (10) Refreshment pro (11) vided to all employees during working hours in office premises (12) Subsidised lunch or dinner provided to an employee (13) Recreational facilities extended to employees in general i.e., not restricted to a few select employees (14) Amount spent by the employer on training of employees or amount paid for refresher management course including expenses on boarding and loading (15) Rent-free official residence provided to a Judge of a High Court or the Supreme Court (16) Rent-free furnished residence including maintenance provided to an Officer of Parliament, Union minister and a Leader of Opposition in Parliament. Perquisites taxable only in the hands of specified employees (Section 17(2) (iii): All other perquisites which have not been included in above will be taxable in the hands of specified employees.

Specified employees
(i) Director employee: An employee of a company who is also a director is a specified employee. (ii) An Employee who has substantial interest in the company: An employee of a company who has substantial interest in that company is a specified employee. A person has a substantial interest in a company if he is a beneficial owner of equity shares carrying 20% or more of the voting power in the company. (iii) Employee drawing the excess of Rs. 50,000: An employee other than an employee described in (i) & (ii) above whose income chargeable under the head salaries exceeds Rs. 50,000 is a specified employee. 9

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