CHAPTER:- 1 Definitions u/s – 2 , Basis of Charge and Exclusions from

Total Income
Definitions u/s – 2 :

1. Assessee[Section2(7)]:-
Assessee” means a person by whom any tax or any other sum of money is payable
under this Act. In addition, it includes –

Every person in respect of whom any proceeding under this Act has been taken for the
assessment of -

 his income; or
 the income of any other person in respect of which he is assessable; or
 the loss sustained by him or by such other person; or
 the amount of refund due to him or to such other person.
 Every person who is deemed to be an assessee under any provision of this Act;
 Every person who is deemed to be an assessee-in-default under any provision of this
Act.

2. Assessment [Section 2(8)]:-

This is the procedure by which the income of an assessee is determined by the Assessing
Officer.

It may be by way of a normal assessment or by way of reassessment of an income previously

assessed.

3. Person [Section 2(31)]:-

Individua
The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is closely
Artificia
connected l HUF
juridica
with the latter. The term ‘person’ is important from another point of view also viz., the
charge of
Person
income-tax is on everyLocal
‘person’. Compan
Author
The term “person” includes:
AOPs Firm
/
 4. Assessment year [Section 2(9)]:-

The term has been defined under section 2(9). This means a period of 12 months commencing
on 1st April every year. The year in which income is earned is the previous year and such
income is taxable in the immediately following year which is the assessment year. Income
earned in the previous year 2019-20 is taxable in the assessment year 2020-21. Assessment
Year 2020-21

5. Previous year [Section 3]:-

The term has been defined under section 3. It means the financial year immediately
preceding the assessment year. As mentioned earlier, the income earned during the
previous year is taxable in the assessment year.

6. Annual value [Section 2(2)]:-

The Gross Annual Value (GAV), also called just the Annual Value, of a property is used in
calculating the tax or rent which should be applied to the property. Annual value is
determined to compute income under the head Income from House Property.

7. Business [Section 2(2)]:-

“Business” simply means any economic activity carried on for earning profits. Sec.
2(3) has defined the term as “ any trade, commerce, manufacturing activity or any
adventure or concern in the nature of trade, commerce and manufacture”.

8. Capital Asset [Section 2(14)]:-

As per S. 2(14) of the Income Tax Act, 1961, unless the context otherwise requires, the
term ‘capital asset’ means:

(a) property of any kind held by an assessee, whether or not connected with his
business or profession;
 (b) 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 (15 of 1992),

9. Income [Section2(24)]:-

Income includes :

1. Profits and gains

2. Dividend
3. Voluntary Contributions received by a trust. Voluntary contributions received by a
trust are included in the definition of income.
4. As such contributions received by following types of trusts, funds, associations, bodies
etc. are included in the income of such bodies.
i. Contributions received by a trust created wholly or partly for charitable or
religious purposes.
ii. Contributions received by a scientific research association.
iii. Contributions received by a fund or institution set up for charitable purposes
and notified u/s 10(23c)(iv)(v).
iv. Contribution received by any university or other educational institution,
hospital referred in section 10(23c).

10. Transfer {Section2(47)]:-

As per Section 2(47) of Income Tax Act, 1961, unless the context otherwise
requires, the term “transfer”, in relation to a capital asset, includes-

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law;

BASIS OF CHARGE :

11. RESIDENTIAL STATUS [Section 6]:-

A.
An individual is said to be resident in India if he satisfies any one of the following two
conditions:

He is in India for a period or

periods amounting in all to 182 days or more
in the relevant previous year;

OR

He is in India for 60 days or more during

the relevant previous year and has been in
India for 365 days or more during 4 previous
years immediately preceding the relevant
previous year.
  Exceptions : There are two exceptions to the above rule:

1. In case of an individual, who is a citizen of India and who leaves India in any previous
year for the purposes of employment outside India, the condition No. 2 supra
(mentioned above) shall not be applicable for the relevant previous year in which he
leaves India. In other words, for that particular previous year in which he leaves India
for the purposes of employment outside India he shall be called resident only when he
satisfies the condition No. 1 mentioned above. Similarly in case of an individual who is
a citizen of India and who leaves India in any previous year as a member of the crew
of an Indian ship, the condition No. 2 supra shall not be applicable.

2. In case of an individual, who is a citizen of India, or is a person of Indian origin, who,

being outside India, comes on a visit to India in any previous year, the condition No. 2
mentioned above in his case also shall not be applicable. In other words, he shall not
be a resident in India unless his stay in India is atleast 182 days during the relevant
previous year in which he visits India.

B. An individual who is resident in India, shall be resident and ordinarily resident in India
if he satisfies both the following conditions—

He has been 'Resident in India' for at least 2 out of 10 previous

years immediately preceding the relevant previous year.

This means that he must have satisfied any one of the conditions,
with exceptions/concession (given above) for being a resident for at
least 2 out of 10 previous years immediately preceding the relevant
previous year.

AND

He has been in India for 730 days or more, during 7 previous

years immediately preceding the relevant previous year.
 C. When an individual is said to be 'Resident but Not Ordinarily Resident' in India ?
[Section 6(6)(a)]
An individual who is resident in India is said to be "Not Ordinarily Resident in India" if he
does NOT Satisfy any or both of the conditions mentioned ABOVE i.e. case of Resident and
Ordinary Resident..
D. When an individual is said to be 'Non-Resident' in India [Section 2(30)]
An individual is said to be a 'Non-Resident', if he is NOT a 'Resident' in India i.e. none of the
conditions (with exception/concession) mentioned in ABOVE para is satisfied.

12. Scope of total income [Section 5]:-

Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of of
person who is a resident, in the case of a person not ordinarily resident in India
and person who is a non-resident which includes. Income can be Income from any
source which (a) is received or is deemed to be received in India in such year by or
on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to
him in India during such year ; or (c) accrues or arises to him outside India during
such year .

Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Sr. Particulars Resident Resident Non

No Ordinary Not Resident
Resident Ordinary (NR)– 5(2)
(ROR) Resident
(RNOR) –
5(1)

1 Income received in India Taxed Taxed Taxed

2 Income Deemed to be receive in India Taxed Taxed Taxed

3 Income accrues or arises in India Taxed Taxed Taxed

4 Income deemed to accrues or arises in India Taxed Taxed Taxed

5 Income accrues or arises outside India Taxed NO NO

6 Income accrues or arises outside India from Taxed Taxed NO

business/profession controlled/set up in
India

7 Income Other than Above (No Relation In Taxed NO NO

India)
Note-
1. Residential status is as per section 6 of Income Tax Act, 1961.
2. Deemed income is not actually accrued but is supposed to be accrued notionally.
3. The income accrued is when the assessee obtains the rights to receive it.
4. Previous year means the financial year immediately preceding the assessment year.

13. Deemed Income:-

Deemed Income means Income which is actually not earned or received by
Asseessee but Income Tax Act consider such as Income deemed to be received in
India.
Exclusions from Total Income :

The various items of income referred to in the different clauses of section 10 are excluded
from the total income of an assessee. These incomes are known as exempted incomes.
Consequently, such income shall not enter into the computation of taxable income.

Moreover, there are certain other incomes which are included in total income but are wholly
or partly allowed as deductions in computation of total income under Chapter VI-A.
Students should note a very important difference between exemption under section 10 and
the deduction under Chapter VI-A.

LIST OF EXEMPTIONS BEING DISCUSSED IN SECTION 10

1. AGRICULTURAL INCOME

Section 10(1) provides that agricultural income is not to be included in

the total income of the assessee. The reason for totally exempting
agricultural income from the scope of central income- tax is that
under the Constitution, the Central Government has no power to levy
a tax on agricultural income.

Definition of agricultural income [Section 2(1A)]

This definition is very wide and covers the income of not only the cultivators but also the
land holders who might have rented out the lands. Agricultural income may be received in
cash or in kind.

Agricultural income may arise in any one of the following three ways:-

• It may be rent or revenue derived from land situated in India and used
for agricultural purposes.
• It may be income derived from such land by agriculture or the
performance of a process ordinarily employed by a cultivator or
receiver of rent in kind to render the produce fit to be taken to the
market or the sale of such agricultural produce in the market.
• Lastly, agricultural income may be derived from any farm building
required for agricultural operations.

Now let us take a critical look at the following aspects:

Rent or revenue derived from land situated in India and used for agricultural purposes:
 The following three conditions have to be satisfied for income to be treated as agricultural
income:

• Rent or revenue should be derived from land;

• Land has to be situated in India (If agricultural land is situated in a foreign country,
the entire income would be taxable); and
• land should be used for agricultural purposes.
• The amount received in money or in kind, by one person from another for right to use
land

2. SUMS RECEIVED FROM HUF BY MEMBER

HUF is a ‘person’ and hence, a unit of assessment under the Act. Income
earned by the HUF is assessable in its own hands.
In order to prevent double taxation of one and the same income, once in the
hands of the HUF which earns it and again in the hands of a member when it
is paid out to him, section 10(2) provides that members of a HUF do not have
to pay tax in respect of any amounts received by them from the family.
The exemption applies only in respect of a payment made by the HUF to its member
(a) out of the income of the family or
(b) out of the income of the impartible estate belonging to the family.

3. SHARE OF PROFIT FROM FIRM [SECTION10(2A)]

This clause exempts from tax a partner’s share in the total income of
the firm. In other words, the partner’s share in the total income of the
firm determined in accordance with the profit-sharing ratio will be
exempt from tax.

4. SCHOLARSHIPS [Section 10(16)]

The value of scholarship granted to meet the cost of education would be exempt from tax in
the hands of the recipient irrespective of the amount or source of scholarship
 5. CASUAL &NON-RECURRING RECEIPTS [SECTION 10(3)]

Any receipts which are of a casual and non- recurring nature, to the extent such
receipts do not exceed five thousand rupees in the aggregate Provided that where
such receipts relate to winnings from races including horse races, the provisions of this
clause shall have effect as if for the words" five thousand rupees", the words" two
thousand five hundred rupees" had been substituted: Provided further that this clause
shall not apply to-

(i) capital gains chargeable under the provisions of section 45;

(ii) receipts arising from business or the exercise of a profession or occupation; or

(iii) receipts by way of addition to the remuneration of an employee;

6. PAYMENTS TO MPs & MLAs [SECTION 10(17)]

The following incomes of Members of Parliament or State Legislatures will be

exempt:
(i) Daily Allowance - Daily allowance received by any
Member of Parliament or of State Legislatures or any
Committee thereof.
(ii) Constituency Allowance of MPs - In the case of a Member
of Parliament or of any Committee thereof, any
allowance received under Members of Parliament
(Constituency Allowance) Rules, 1986; and
(iii) Constituency allowance of MLAs - Any constituency
allowance received by any person by reason of his
membership of any State Legislature under any Act or
rules made by that State Legislature.
 7. INCOME OF MINOR CHILD [SECTION10()]

Exemption in respect of clubbed income of minor [Section 10(32)] : In case the income of an
individual (i.e. the parent) includes the income of his minor child in terms of section 64(1A),
such parent shall be entitled to exemption of Rs 1,500 in respect of each minor child.
However, if income of any minor so includible is less than ` 1,500 .it is fully exempted.

LIST OF EXEMPTIONS BEING DISCUSSED IN RESPECTIVE CHAPTERS

SALARIES

Leave travel concession [section 10(5)]

Allowance payable outside India by the Government to a citizen of India [Section 10(7)]

Gratuity [Section 10(10)]

Payment in commutation of pension [Section 10(10A)]

Leave Encashment [Section 10(10AA)]

Retrenchment Compensation [Section 10(10B)]

Voluntary Retirement Receipts [Section 10(10C)]

Income-tax paid by employer [Section 10(10CC)]

Payment from Provident Fund [Section 10(11)]

Accumulated balance due or payable from recognised provident fund [Section 10(12)]

Payment from Superannuation Fund [Section 10(13)]

House Rent Allowance [Section 10(13A)]

Special Allowance or benefit to meet expenses relating to duties or personal expenses

[Section 10(14)]
Specified allowances and perquisites paid to chairman or a retired chairman or any other
member or retired member of UPSC [Section 10(45)]

CAPITAL GAINS

• Income received on buy-back of unlisted shares of domestic company

[Section 10(34A)]
• Capital gain on compulsory acquisition of agricultural land within
specified urban limits [Section 10(37)]
• Transfer of specified capital asset under Land Pooling Scheme [Section
10(37A)]
• Income received in transaction of reverse mortgage [Section 10(43)]

OTHER SOURCES

• Family pension received by widow/ children/ nominated heirs of

armed forces members [Section 10(19)]
• Dividends referred to in section 115-O [Section 10(34)]
• Income of other Persons Included in Assessee's Total Income
• Exemption in respect of minor's income included in the hands of parent
[Section 10(32)]

DEDUCTIONS FROM GROSS TOTAL INCOME

• Receipts from LIC [Section 10(10D)]

• Payment from NPS Trust to an assessee on closure of his account or on
his opting out of the pension scheme [Section 10(12A)]
• Payment from NPS Trust to an employee on partial withdrawal
[Section 10(12B)]