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 non-resident 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.

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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.
(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

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 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
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

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 (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.

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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 doesn’t 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.

RESIDENTIAL STATUS [SEC. 6]

The test of Basic conditions and additional determine the residential status of an
Individual.
BASIC CONDITIONS [U/S 6(1)]
(a) One should be in India during the relevant previous year for a period of 182 days or
more.

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 (b) One should be in India for a period of 60 days or more during the relevant previous
year AND 365 days or more during 4 years immediately preceding the relevant
previous year.

Note: The word “AND” in basic condition (b) Signifies that assessee has to satisfy both
parts i.e. 60 days or more during the relevant previous year and 365 days or more during
4 years immediately preceding the relevant previous year.

ADDITIONAL CONITIONS [U/S 6(6)]

(i) A person should be a resident in India for atleast 2 years out of 10 years
immediately preceding the relevant previous year.

Note: A person is said to be a resident in India if he satisfies atleast any one of the above
mentioned basic conditions U/S 6(1)
(ii) He should have stayed in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
Different Residential Status
(i) Resident: An individual is said to be a resident in India if he satisfies atleast
any one of the above mentioned two basic conditions U/S 6(1)
(a) Ordinary Resident: A Resident is said to be an “ordinary Resident” if he satisfies
both the additional conditions given above U/S 6(6)
(b) Not Ordinary Resident: A Resident is said to be a “Not Ordinary Resident” if he
satisfies one or none of the additional conditions given above U/S 6(6)
(ii) Non- Resident: An Individual is said to be a non-resident if he satisfies none of
the basic conditions and additional conditions being irrelevant.

EXCEPTIONS TO THE RULE OF RESIDENTIAL STATUS:

The period of 60 days mentioned in basic condition (b) U/S 6(1) shall be extended
to 182 days in the following situations:
(i) An Indian citizen who leaves India during the previous year for the purpose
of employment outside India.
(ii) An Indian citizen who leaves India during the previous year as a member of
crew of Indian ship.
(iii) An Indian citizen or a person of Indian origin who comes to India on a visit
during the previous year.

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

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 (i) Income accrued (earned) or deemed to have accrued in India and received or deemed to have received in
India.
(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 Not Ordinary Non

Resident (NOR) Resident (NR)
(OR)
1. Indian Income Tax Tax Tax
2. Foreign Income
(a) From business or profession wholly or partly Tax Tax No Tax
controlled from outside India.
(c) From business or profession wholly controlled from
(d) outside India. Tax No Tax No Tax
(e) (c) From any other source other than business
(f) or profession, (includes salary House property,
(g) Capital gains and other source)whereTax
place of No Tax No Tax
(h) control doesn’t matter.
(i) 3. Past untaxed profits brought into India
No during
Tax No Tax No Tax
(j) previous year.
(k)
(l) 4. Gift received from a relative(No maximum
No Tax No Tax No Tax
(m) limit)
(n)
(o) 5. Gift received from a non relative inTax
India Tax 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)

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 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.

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.

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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 MP’s 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).

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