Income Tax

administration of Direct Taxes is vested with Central Board of Direct Taxes (CBDT). It
eOIS as apart of the Finance Ministry ofthe Goernment of India. It pertorms Various
statutory functions. It has the power to assign jurisdiction to the authorities below and to
SSUe orders, instructions anddirections tothem for the
administration of the tax lavS.
oo oOys certain powers of delegated legislation and is competent to make ruies Tor
carrying out the implementation
of the direct tax laws.
Components of the Income Tax
Law
The present income tax law
includes
1) The Income Tax Act
2) The
1961(amended up to date)
Finance Act passed every year.
O) Tne income Tax Rules 1962. t is framed and amended by Central Board of Direct
Taxes (CBDT) from time to time.
4) Judgments of the Court of
law.
O) CirCulars, orders, notifications and executive instructions issued by Income Tax
department from time to time.
DEFINTIONS

The various terms and phrases used in this Act have been defined in section 2 of Income
Tax Act 1961. Some of the important terms defined in this Act are given below.
1. Income [Section 2 (24))

Income tax is charged on total income of an assessee. Therefore it is highly essential to

understand the term income' clearly. Broadly speaking income means money or money's
worth received from any definite source with certain amount of regularity. It may be a
periodical receipt from one's business, land, work, investment etc. The Act does not
define income. It simply lists some of the items that can be included in the income. Thus.
Income includes:
1. Profits or gains of business or profession.
2. Dividend.

3. Voluntary Contribution received by a Charitable / Religious Trust or University /

Education Institution or Hospital.
4. Value of perquisite or profit in lieuof salary.
5. 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 benefit or perquisIte to arepresentative assessee like atrustee
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appointed under a trust;
7. Capital Gains.
 Income Tax

cooperative society
8 Profits and gains from the business of banking carried on by a
with its members.
including horse races, card
9 Winnings from lotteries, crosSWord puUzzles, races
games, gambling or betting.
10. Deemed income.
employees as contributions to any
11. Any sum received by the assessee from his Employees' State
provident fundor superannuation fund or any fund set up under
employee:
Insurance Act, 1948 or any fund for the welfare of such
insurance policy including the sum
12. Any amount received under the Keyman
allocated by way of bonus;
immovable properties received without
13. Any sumof money or specified movable or
consideration or inadequate consideration as provided
by aDirector or a person holding
14. Benefit or perquisite received from a Company,
substantial interest or a relative of the Director or such person.
as exceeds the fair market value of
15. Any consideration received for issuing shares
the shares.

2. Agricultural Income [Section 2 (1A)]

10(1) of the
Agricultural income earned by ataxpayer in India is exempt under Section
Income Tax Act, 1961. As per section 2(1A), agricultural income generally means:
India and is used for
(a) Any rent or revenue derived from land which is situated in
agricultural purposes.
(b) Any income derived from such land by agriculture operations including processing
of agricultural produce so as to render it fit for the marketor sale of such produce.
(c) Any income from a farm house subject to satisfaction of certain conditions.
Any income derived from saplings or seedlings grown in anursery shallbe deemed to be
agricultural income.

3. Person [Section 2 (31)]

Person includes the following:

1.Individual: Itrefers to a natural human being whether male or female, minor or major.
2. 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!.
3. Company: It is an artificial person registered under Indian Companies Act 2013 or any
other law.

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 Income Tax

4. Firm: It is an entity which comes into existence as a result of partnership

agreement
Oeweenpersons to share profits ofthe business carried on by all orany one of them.
3. Association of persons or body of individuals: Association of persons (AOP) are
Tormed with acommon purpose, and common action to achieve common purpose i.e. to
earn income. An AOP can have firnms, companies, associations and individuals as its
members.
Abody of individuals (BOI) cannot have non-individuals as its members. Only natural
human beings can be members of a body of individuals.
6. Local authority: Municipality, Panchayat, Cantonment Board, Port Trust etc. are
called local authorities.

7. Artificial Judicial 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.
Allthe above categories are taxed under the Act and will be assessed. Their tax liability
will be determined according to their residential status, which is discussed later in this
chapter.
llustration-1

Determine the legal status of the following

1.Ajoint family of Mr. Krishna, his wife and two sons.
Ans. Association of Persons
2.Kerala University
Ans. Artificial Judicial Person
3. Canara Bank

Ans. Company
4. Thalassery Municipality
Ans. Local Authority
5. Mr. Roy,. an employee
Ans. Individual

6.Kathiroor Traders, a sole trader

Ans. Individual

4. Assessee (Section 2(7))

The terrm "assessee" means aperson by whom any tax or anyother sumof money s
payable under this Act, and includes:
Income Tax
taken
respect of whom any prOceeding under this Act has been
(a) every person in person in respect of 6. Ass
assessment of his income Or income of any other
for the
assessable or
which he is Assessme
taken
respect of wnom any proceeding under this Act has been
(b) everyperson in by him or by such other
SUstained
person, or of every yea
for the assessment of the loss takes pla
refund due to him or assesSe
the amount of
assessee or
every person who is deemed to be an The curro
(c)
of
who is deemed to be an assessee in default under any provision with 31st
(d) everv person year of th
this Act.
include the following:
The term 'assessee' also
suppOsed to pay
assesSsee: The term 'aSsessee' is considered as one who is
(a) Normal
features stated in the above definition.
tax under the Income Tax Act with the
to pay
Representative assessee: There may be a case in which a person is liable
(b)
third party. Such a person is known as
taxes for the income or losses incurred by a 7. Pr
picture when the person liable
representative assessee. Representatives come into the
Such people will not be able to file taxes by
for taxes is a non-resident, minor, or lunatic. The ter
guardian.
themselves.The people representing them can either be an agent or income
However, he receives
Forexample, Mr X. He has been residingabroad for the past 7 years. year im
relative, Mr Y, to file taxes
rent for his two house properties in India. He takes the help of a year or
in India. In this case, Mr Y acts as a representative assessee.
HowevE
(c) Deemed Assessee: An individual might be assigned the responsibility of paying taxes the pre
by the legal authorities and such individuals are called deemed assessees. For example,
The eldest son or a legal heir of a deceased person who has expired without writing a wilI or profe
asseSS
or the executor or a legal heir of the property of adeceased person who has passed on
his property to theexecutor in a writing shallbe treated as deemed assessees for income 2022 tc

tax purposes. Illustr

(d) Assessee-in-default: Assessee-in-default is aperson who has failed to fulfil his statutory State t
obligations as per the income tax act such as not paid taxes to the government or not file year 20
his income tax return. For example, an employer is supposed to deduct taxes from the
1.
salary of his employees before disbursing the salary. He is, then, required to pay the
deducted taxes to the government by the specified due date. If the employer fails to 2.
deposit the tax deducted, he willbe considered as an assessee-in-default. 3

5. Assessment [Section 2 (8)] Soluti

1
Assessment is the process of computation of total income of an assessee in the previous
2
year and the determination of the tax liability.
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 Income Tax

6. Assessment Year (Section 2 (9))

Assessment year means the period of twelve months commencing on the 1st day of April
every year and endingon 31st March of next year. It is during this period that assessment
takes place.In other words,the financial year in which the income of the previous year is
assessed is called assessment year.

The current assessment year is 2023-24,commencing from 1st April 2023 and ending
with 31st March 2024. It is also known as the financial year, fiscal year or the accounting
year of the central government.
Duration: Period of 12 months starting from 1st April.
Relation with Previous Year: It falls immediately after the Previous Year.
Purpose: Income of a previous year is assessed and taxable in the immediately
followingAssessment Year

7. Previous Year [Section 3]

The term previous year is very important because income tax is charged on the total
income earned by assessee during the previous year. "Previous year" means the financial
year immediately preceding the assessment year. Thus, previous year is the financial
year or aperiod of 12 months immediately preceding the assessment year.
However, in the case of abusiness or profession newly set up in the said financial year,
the previous year shall be the period beginning with the date of setting up of the business
or profession and ending on the 31st March of that financial year. For example, if an
assessee commences his business on 1S July 2022, his previous year will be 1st July
2022 to 31st March 2023.
Illustration- 2
State the period of previous year in the case of following assessees for the assessment
year 2023-24
1. Mr. Kanakraj has newly set up business on 1-9-2022.
2. Mr. Sundarraj has newly set up business on 31-12-2022.
3. Mr. Palanimuthu has newly set up business on 1-2-2023.
Solution

1.Previous year: 1-9-2022 to 31-3-2023.

2.Previous year: 31-12-2022 to 31-3-2023.
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 8. Gross Total Income [Section 80 B(5)]

Gross total income means the total income computed in accordance with the provisions
of thisAct, before making any deduction under section 80C to 80U. In other words it is the
aggregate of income under all the five heads of income after adjusting the set-off& carry
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 Income Tax

Torward of losses. Then, deductions are made under chapter VI Afrom Gross Total Income.
to arrive at Total income or taxable income.

Chapter VIAincludesdeductions under sections 80C to 80Ufor certain payments made

by the assessee and for certain income received by him.

9. Total Income Section 2 (45)]

Total income means the amount left after making the deductions under Sections 80C to
800from the gross total income. Income taxX will be calculated onthis total income. So
this income is also called taxable income.

10. Maximum Marginal Rate of Tax [Section 2 (29C)]

The Income Tax Act, 1961 defines "Maximum Marginal Rate" to mean the rate of income
tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of
income in the case of an individual. AOP or BOI, as the case may be, as specified in the
Finance Act of the relevant previous year.
Maximum marginal rate is the highest rate of tax at any income level in the case of an
individual, association of persons, or the body of individuals. This means for those with
incomes between Rs 2 crore and Rs 5 crore,39% willbe the highest applicable tax rate,
and for those with incomes above Rs 5 crore, it will be 42.74%.

11. Average Rate of Income Tax [Section 2(10)]

Average rate of income tax means the rate arrived at by dividing the amount of income tax
calculated on the total income, by such total income.

Total tax
Average Rate -x100
Total income

12. Casual Income

A non recurring income or income received casually is called causal income. It is an

unexpected income. Winning from lottery, inCome from card games, crossword puzzles
and other games or gamblingor betting in any form are casual incomes.

RESIDENTIAL STATUS

It is important for the Income Tax Department to determine the residential status of a tax
paying individual or company. Residential status of an assessee determines the scope of
chargeability of his income. The taxability of an individual in India depends upon his
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