UNIT 1: INCOME TAX CONCEPT:

What is Tax?

Let us being by understanding the meaning of tax. Tax is considered to be the

‘cost of living in the society’ Tax is levied by the government to meet the
common welfare expenditure of the society.

Tax is a compulsory contribution to state revenue, levied by the

government on income and business profits or added to the cost of goods
and services and transactions.

Everyone who earning in India has to income tax. The income could be
pension, salary or could be earning from a saving account. Income tax is a tax
you pay directly to the government basis your income or profit. There are two
types of taxes direct taxes and indirect taxes.

Direct Tax is levied directly on the income of the person. Income Tax,
corporate tax, gift tax and Wealth Tax are the part of Direct Tax.

Indirect taxes are levied on the production or consumption of goods and

services or on transactions, including imports and exports.

Before 2017 the Indirect Tax comprises of various taxes and duties like Service
Tax, Sales Tax, Value Added Tax, Customs Duty, Excise Duty and etc. From
July 1st, 2017 all such Indirect Taxes are submerged in one tax law which was
named as ‘The Goods and Services Tax Act, 2017”.

The present law of income tax is contained in the income tax act 1961. The
income tax act contains the provisions for determination of taxable income,
determination of tax liability, procedure for assessment, appeal, penalties and
prosecutions. It is also lays down the power and duties of various income tax
authorities.

The law of Income Tax in India governed by the Income Tax Act of 1961 and the
gaps are being filled by the Income Tax Rules, Notifications, Circulars and
judicial pronouncement including rulings by the Tribunal (a court of justice).

The Income Tax law in India consists of the following components:

1. Income Tax Act, 1961: The Act contains the major provisions related
to Income Tax in India. It come into force on 1 st April 1962. It contains
section 1 to 298.
 2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the
body which looks after the administration of Direct Tax. The CBDT is
empowered to make rules for carrying out the purpose of this Act.
3. Finance Act: Every year Finance Minister of Government of India
presents the budget to the parliament. Once the finance bill is
approved by the parliament and get the clearance from President of
India, it became the Finance Act. Amendment is made every year to
the income tax and other tax law by finance act.
4. Circulars and Notifications: Sometimes the provisions of an act may
need clarification and that clarification usually in a form of circulars
and notifications which has been issued by the CBDT from time to
time. It includes clarifying the doubts regarding the scope and
meaning of the provisions.

Income Tax concept:

The concept of income tax include Assessee, person, assessment year, previous
year, income (including agriculture income), gross total income, total income,
residential status and their incidence of tax, income do not part of total
income, tax evasion, tax avoidance.

(A) Assessee (Section 2(7))

An Assessee is a person or entity who is entitled to pay the taxes. It could be

an individual, an HUF or Hindu Undivided Family, partnership firm, company,
Body of Individuals or AOP (association of persons).

(B) Assessment Year (Section 2(9)):

“Assessment Year” means the year in which income of the previous year of an
Assessee is taxed. The timed lap of assessment year is of twelve months
beginning from the 1st April every year. The period starts from 1st April of one
year and ending on 31st March of next year. Broadly, assessment year is
defined under section 2 (9) of the Act
 (C) Income (Section 2(24))

Starting with income tax basics, the most important term to understand is
what is defined as income. Income, as per the Income Tax Act is set in five
categories that anyone who has a source of earning is liable to pay.

1 Income from Salary

This head essentially includes any remuneration, which is received by an

individual on terms of services provided by him based on a contract of
employment. This amount qualifies to be considered for income tax only if
there is an employer-employee relationship between the payer and the payee
respectively. Salary also includes the basic wages, advance salary, pension,
commission, gratuity, perquisites as well as annual bonus.

The important point to note here is that salary is taxable on due basis or
received basis whichever is earlier. Let me explain this with the help of an
example. If you receive salary for the month of march 2020 in April 2021, it will
still be taxable in previous year 2019-20. This is because it was due in march.
Similarly if your employer has given you salary of April and May in advance in
the month of March, then it will be taxable again in the month of march itself.

Therefore, salary income will be taxable on due basis or received basis

whichever is earlier.

2 Income from House Property

 According to the Income Tax Act 1961, Sections 22 to 27 is dedicated to the
provisions for the income tax computation of the total standard income of a
person from the house property or land that he or she owns.

In simple terms, this head includes rental income received from the properties. 
For tax computation purposes, the property in which you are staying and not
earning any rental income can give you benefit. This benefit is in the form of
deductions of interest paid on home loan.

However, if the property is utilized for letting out the normal course of
business, then the income from the rent will be considered.

3 Income from Profits of Business

 The income tax computation of the total income will be attributed from
the income earned from the profits of business or profession. The difference
between the expenses and revenue earned will be chargeable. Here is a list of
the income chargeable under the head:

 Profits earned by the assessee during the assessment year

 Profits on income by an organisation
 Profits on sale of a certain license
 Cash received by an individual on export under a government scheme
 Profit, salary or bonus received as a result of a partnership in a firm
 Benefits received in a business

4 Income from Capital Gains

Capital Gains are the profits or gains earned by an assessee by selling or

transferring a capital asset, which was held as an investment.

Capital asset can be real estate, stocks, Mutual funds, Bonds, Gold etc.

So whenever you sell a capital asset and earn gains. This is considered as your
income which will be taxable under the head Capital Gain.

Just to clarify, please note that rental income from property is taxed under
“Income from house Property” but if you sell the property and experience gain,
it will be taxed under “capital gain”.

5 Income from Other Sources

This is the last head of income. Any other form of income, which is not
categorized in the above mentioned 4 heads, can be sorted in this category.

Some of the examples can be interest income from bank deposits, lottery
awards, card games, gambling or other sports awards are included in this
category.

These incomes are attributed in the Section 56(2) of the Income Tax Act and
are chargeable for income tax.

(D)Person (section 2 (31)):

The income tax is charged in respect of total income of the previous year
of every person. Here persons include:

1. an Individual;
2. a Hindu Undivided Family (HUF) ;
3. a Company;
4. a Firm
5. an association of persons or a body of individuals, whether incorporated
or not;
6. a local authority; and
7. Every artificial juridical person not falling within any of the preceding
sub-clauses.
8. Association of Persons (AOP) or Body of Individuals or a Local authority
or Artificial Juridical Persons shall be deemed to be a person whether or
not, such persons are formed or established or incorporated with the
object of deriving profits or gains or income.

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. It include domestic company and foreign company

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

1. A firm which fulfils the conditions prescribed u/s 184.

2. A firm which does not fulfill the conditions prescribed u/s 184.

It is important to note that for Income Tax purposes, any firm under the
partnership act 1932 and a limited liability partnership (LLP) constituted under
the LLP Act, 2008 is also treated as a firm.

Association of Persons or Body of Individuals.

Association of Persons (AOP) means a group of people who comes together to

achieve a common objective with same mind sets. Members in the AOP can be
natural (Human beings) or artificial (Artificial Persons-e.g. company, LLP, etc.)
Person includes any company or association or body of individuals, whether
incorporated or not.

Body of Individuals (BOI) means a group of INDIVIDUALS (Human Beings) who

come together to achieve a common objective. Body of individual denote like
executors and trustees.

Body of Individuals only contains individuals, while an Association of Persons

could contain legal entities.

Local Authority. Municipality, Panchayat, district Board, body of Port

commissioners etc. are called local authorities.
Artificial Juridical Person. 

A juridical person is a non-human legal entity, in other words any organization

that is not a single natural person but is authorized by law with duties and
rights and is recognized as a legal person and as having a distinct identity.

Artificial Judicial Person means:

♦ An entity other than a natural person (human being)
♦ Created by law.
♦ and recognized as a legal entity.
♦ Having distinct identity, rights and duties.

Universities are an important example of this category.

(E) Previous Year (Section 3)

Income earned during the year is taxable in the next year. The definition of
“Previous Year” is given under section 3 of the Act. Previous Year is the year in
which income is earned. Previous year is the financial year immediately
proceeding the relevant assessment year? From 1989-90 onwards, every
taxpayer is obliged to follow financial year (i.e., April 1st of one year to March
31st of next year) as the previous year.

For a newly set up business or profession, the first previous year will start from
the day from which that business or profession has commenced, but the period
of ending will remains same (i.e., 31st March).

Illustration 1: X set up business on July 20, 2016. What is the previous year
for the assessment year 2017-18?

Solution: Previous year for the assessment year 2017-18 is the period

commencing from the date of setting up of business/ profession (i.e., July 20,
2016) and ending on March 31, 2017.

Illustration 2: Mr X joins an Indian company on January 21, 2016. Prior to

joining this company, Mr X was not in employment anywhere nor does he have
any other source of earning. Determine the previous year of Mr X for the
assessment year 2016-17 and 2017-18?
Solution: Previous year for the assessment year 2016-17 and 2017-18 are as
follows:

Previous Year Assessment Year

Jan. 20, 2016 to March 31, 2016 2016-17

April 1, 2016, to March 31, 2017 2017-18

Agriculture income (Section 2(1-A)):

Agriculture income earned by a taxpayer in India is exempt under Section 10(1)
of the Income Tax Act, 1961.
Agricultural income is defined under section 2(1A) of the Income-tax Act.
(A) Any rent or revenue derived from land which is situated in India and is
used for agricultural purposes.
The consideration that is received from the right to use land is rent. So,
any rent that is received through the use of such a land that is put to
agricultural use and is located in India will be counted as agricultural
income this is just one example.
There can be other possible uses of agricultural land which can become
probable sources of income. One such example is fees received for
renewing the grant of a piece of land on lease. However, if any
consideration has been received from the sale of the land will not be
counted as constituting agricultural income.

(B) Any income or revenue received from the land through agricultural
operations such as processing the agricultural produce to make it fit for sale in
the market.

(C) Revenue derived by renting or leasing buildings situated in and around is

identified with agricultural land. This is subject to a few conditions. Firstly,
the cultivator should have come to occupy this building courtesy rent or
revenue. Secondly, the building should be used as a residence, storeroom or
an outhouse. Lastly, the agricultural land or the land where the building in
question is located is under assessment for land revenue or is being
subjected to a local rate assessed.

The following are some of the examples of agricultural income:

  Income derived from sale of replanted trees.
 Income from sale of seeds.
 Rent received for agricultural land.
 Income from growing flowers and creepers (climbing plant).
 Profits received from a partner from a firm engaged in agricultural
produce or activities.
 Interest on capital that a partner from a firm, engaged in agricultural
operations, receives.
The following are some of the examples of non-agricultural income:
 Income from poultry farming.
 Income from bee hiving.
 Any dividend that an organization pays from its agriculture income.
 Income from the sale of spontaneously grown trees.
 Income from dairy farming.
 Income from salt produced after the land has flooded with sea water.
 Purchase of standing crop.
 Royalty income from mines.
 Income from butter and cheese making.
 Receipts from TV serial shooting in farm house.

Gross income:
Gross total income (GTI) is the sum of incomes computed under the five heads
of income i.e. salary, house property, business or profession, capital gain and
other sources after applying clubbing provisions and making adjustments of
set off and carry forward of losses.
GTI = Salary Income + House Property Income + Business or Profession
Income + Capital Gains + Other Sources Income + Clubbing of Income -
Set-off of Losses
Total Income:
According to Section 2(45), total income of an assessee is gross total income as
reduced by the amount deductible under Chapter VIA, i.e. Section.80C to 80U.

Computation of gross total income and Taxable Income

Particulars Amount
 Income from salary XXXXX

Income from house property XXXXX

Profits and gains of business or profession XXXXX

Capital gains XXXXX

Income from other sources XXXXX

Gross Total Income XXXXX

Less : Deductions under Chapter VI-A (i.e. under section 80C

(XXXXX)
to 80U)

Total Income (i.e., taxable income) XXXXX

INCOME WHICH DOES NOT PART OF TOTAL INCOME UNDER INCOME

TAX ACT SECTION-10.
1. Agriculture Income:
We can still consider India is the country mostly depending upon the
agriculture and income generated from the activities of agriculture. Agriculture
income shall be excluded from the Assessee total income (section 10, (1))
however, it shall be taken for considering rate to tax non-agriculture income.
2. Share Of Profit From A Firm:
A partners share in the total income of the firm is totally exempted from the
total income of the hands of the partner because firm is separately assessed as
such. However, any salary interest commission paid or payable to the partner
which was deductible from the total income of the firm shall be included in the
income of the partners total income as his business.
3. Leave Travel Concession:
If an employee goes on travel (on leave) with his family and traveling cost is
reimbursed by the employer, then such reimbursement is fully exempted. But
some provisions for it was as bellow;
1) Journey may be performed during service or after retirement.
2) Employer may be present or former.
3) Journey must be performed to any place within India.
4) In case, journey was performed to various places together, then exemption is
limited to the extent of cost of journey from the place of origin to the farthest
point reached, by the shortest route.
5) Employee may or may not be a citizen of India.
6) Stay cost is not exempt.
4. Remuneration To Person Who Is Not A Citizen Of India In Certain Cases
[Sec. 10(6)]
Remuneration provide to an individual who is not a citizen of India shall be
exempt- Remuneration received by him as an official of an embassy, high
commission, legation, commission, consulate, or the trade representation of a
foreign state or as a staff of any of these officials provided corresponding Indian
officials in that foreign country enjoy similar exemptions in their country – Sec.
10(6)(ii).
Remuneration received as an employee of a foreign enterprise for services
rendered by him during his stay in India provided –
A. the foreign enterprise is not engaged in any business or profession in India;
B. his stay in India does not exceed 90 days in aggregate; and
such remuneration is not liable to be deducted from the income of the
employer under this Act – Sec.10 (6) (6).
Remuneration received as an employee of the Government of a foreign country
during his stay in India in connection with his training in any undertaking
owned by Government, Government company, subsidiary of a Government
company, corporation established by any Central, State or Provincial Act and
any society wholly financed by the Central or State Government – Sec. 10(6)(11)
5. Tax Paid By Government On Royalty Or Fees For Technical
Service [Sec. 10(6a)]
6. Tax Paid By Government On Income Of A Non-Resident Or A Foreign
Company [Sec. 10(6b)]
7. Tax Paid On Income From Leasing Of Aircraft [Sec. 10(6bb)]
Tax paid by an Indian company on income arising from leasing of aircraft, etc.
to the Government of a foreign state or foreign enterprise under an approved
agreement entered into with such Indian company engaged in the business of
operation of aircraft, provided such agreement was entered into between 1-4-
1997 and 31-3-1999 or after 31-3-2007.
8. Fees For Technical Services In Project Connected With Security Of
India [Sec. 10(6C)]:
Any income arising to notified foreign company by way of royalty or fees for
technical services received in pursuance of an agreement entered into with
Central Government for providing services in or outside India in projects
connected with security of India.
9. Income From Service Provided To National Technical Research
Organisation [Sec. 10(6D)]:
Any income arising to a non-resident or to a foreign company, by way of royalty
from, or fees for technical services rendered in or outside India to, the National
Technical Research Organisation
10. Allowance Or Perquisite Paid Outside India [Sec. 10(7)]:
Any allowance or perquisite paid outside India by the Government to a citizen
of India for Rendering Services Outside India.
11. Remuneration Received For Co-Operative Technical Assistance
Programmers With An Agreement Entered Into By The Central
Government In Certain Cases [Sec. 10(8)].
12. Remuneration Received By Non-Resident Consultant Or Employee Or
Family Member Of Such Consultant [Sec. 10(8a), (8b) & (9)].

13. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:

Gratuity is a retirement benefit given by the employer to the employee in
consideration of past services. Sec. 10(10) deals with the exemptions from
gratuity income. Such exemption can be claimed by a salaried assessee.
Gratuity received by an assessee other than employee shall not be eligible for
exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India is not
eligible for exemption u/s 10(10) as agents are not employees of LIC of India.
14. Compensation For Any Disaster [Sec. 10(10bc)]
Any amount received or receivable from the Central Government or a State
Government or a local authority by an individual or his legal heir by way of
compensation on account of any disaster, except the amount received or
receivable to the extent such individual or his legal heir has been allowed a
deduction under this Act on account of any loss or damage caused by such
disaster.
15. Sum Received Under A Life Insurance Policy [Sec. 10(10d)]:
Any sum received under a life insurance policy including bonus on such policy
is wholly exempt from tax. However, exemption is not available on – 1. any sum
received u/s 80DD(3) or u/s 80DDA(3); or 2. any sum received under a
Keyman insurance policy; or 3. any sum received under an insurance policy
issued on or after 1-4-20121 in respect of which the premium payable for any
of the years during the term of the policy exceeds 10%2 of the actual capital
sum assured.
16. Payment From National Pension Trust [Sec. 10(12a) & 10(12b)]:
Any payment from the National Pension System Trust to an assessee on
closure of his account or on his opting out of the pension scheme referred to in
sec. 80CCD, to the extent it does not exceed 60% of the total amount payable
to him at the time of such closure or his opting out of the scheme [Sec.
10(12A)] Any payment from the National Pension System Trust to an employee
under the pension scheme referred to in sec. 80CCD, on partial withdrawal
made out of his account in accordance with the terms and conditions, specified
under the Pension Fund Regulatory and Development Authority Act, 2013, to
the extent it does not exceed 25% of the amount of contributions made by him
[Sec. 10(12B)]

17. Payment From Approved Superannuation Fund [Sec. 10(13)]:

Any payment from an approved superannuation fund made – • on the death of
a beneficiary; or • to an employee in lieu of or in commutation of an annuity on
his retirement at or after a specified age or on his becoming incapacitated prior
to such retirement; or • by way of refund of contributions on the death of a
beneficiary; or • by way of refund of contributions to an employee on his
leaving the service (otherwise than by retirement at or after a specified age or
on his becoming incapacitated prior to such retirement) to the extent to which
such payment does not exceed the contributions made prior to 1-4-1962 and
any interest thereon. • by way of transfer to the account of the employee under
a pension scheme referred to in sec. 80CCD and notified by the Central
Government.
18. Income From Leasing Of Aircraft [Sec. 10(15A)].
Any payment made, by an Indian company engaged in the business of
operation of aircraft, to acquire an aircraft or an aircraft engine (other than a
payment for providing spares, facilities or services in connection with the
operation of leased aircraft) on lease from the foreign Government or a foreign
enterprise under an approved agreement. The agreement must not be entered
into-  between 1-4-1997 to 31-3-1999; and  on or after 1-4-2007.
19. Daily Allowance, Etc. To MP And MLA [Sec. 10(17)].
Any income by way of – a. Daily allowance received by any person by reason of
his membership of Parliament or of any State Legislature or of any Committee
thereof; b. Any allowance received by any person by reason of his membership
of Parliament; c. Constituency Allowance received by any person by reason of
his membership of State legislature.
20. Income Of Professional Institutions [Sec. 10(23A)].
Any income (other than income chargeable under the head “Income from house
property” or any income received for rendering any specific services or income
by way of interest or dividends derived from its investments) of professional
association shall be exempt provided – a. Such association or institution is
established in India having as its object the control, supervision, regulation or
encouragement of the profession of law, medicine, accountancy, engineering or
architecture or other specified profession; b. Such association or institution
applies its income, or accumulates it for application, solely to the objects for
which it is established; and c. The association or institution is approved by the
Central Government.
21. Income Of Mutual Fund [Sec. 10(23D)].
Any income of – a. A Mutual Fund registered under the Securities and
Exchange Board of India Act, 1992 or regulation made thereunder; b. A Mutual
Fund set up by a public sector bank or a public financial institution or
authorised by the Reserve Bank of India and subject to certain notified
conditions.
22. Income Of Business Trust [Sec 10(23FC)]:
Any income of a business trust by way of a) interest received or receivable from
a special purpose vehicle; or b) dividend referred to in sec. 115-O(7) Ø “Special
purpose vehicle” means an Indian company in which the business trust holds
controlling interest and any specific percentage of shareholding or interest, as
may be required by the regulations under which such trust is granted
registration.
23. Income Of Specified Boards [Sec. 10(29A)]:
Any income accruing or arising to The Coffee Board; The Rubber Board; The
Tea Board; The Tobacco Board; The Marine Products Export Development
Authority; The Coir Board; The Agricultural and Processed Food Products
Export Development Authority and The Spices Board.
24. Subsidy Received From Tea Board [Sec. 10(30)]:
Any subsidy received from or through the Tea Board under any scheme for
replantation or replacement of tea bushes or for rejuvenation or consolidation
of areas used for cultivation of tea as the Central Government may specify, is
exempt.
25. Awards And Rewards [Sec. 10(17A)].
Any payment made, whether in cash or in kind – a. in pursuance of any award
instituted in the public interest by the Central Government or any State
Government or by any other approved body; or b. as a reward by the Central
Government or any State Government for approved purposes.
26. Income Of Scientific Research Association [Sec. 10(21)]:
Any income of a scientific research association [being approved for the purpose
of Sec. 35(1)(ii)] or research association which has its object, undertaking
research in social science or statistical research [being approved and notified
for the purpose of Sec. 35(1)(iii)], is exempt provided such association— a.
applies its income, or accumulates it for application, wholly and exclusively to
the objects for which it is established; and b. invest or deposit its funds in
specified investments.
27. Income Of Professional Institutions [Sec. 10(23A)]:
Any income (other than income chargeable under the head “Income from
house property” or any income received for rendering any specific services or
income by way of interest or dividends derived from its investments) of
professional association shall be exempt provided- a. Such association or
institution is established in India having as its object the control, supervision,
regulation or encouragement of the profession of law, medicine, accountancy,
engineering or architecture or other specified profession; b. Such association or
institution applies its income, or accumulates it for application, solely to the
objects for which it is established; and c. The association or institution is
approved by the Central Government.
28. Expenditure Related To Exempted Income [Sec. 14A]:
For the purposes of computing the total income, no deduction shall be allowed
in respect of expenditure incurred by the assessee in relation to income, which
does not form part of the total income under this Act. Where the AO is not
satisfied with the correctness of the claim of such expenditure by assessee, he
can determine the disallowable expenditure in accordance with the method
prescribed by the CBDT.

Residential status and their incidence of tax:

Tax incidence on an assessee depends on his residential status.

For instance, whether an income, accrued to an individual outside india, is

taxable in india depends upon the residential status of the individual in india.
Similarly, whether an income earned by a foreign national in india (or outside
india) is taxable in india, depends on the residential status of the individual,
rather than on his citizenship. Therefore, the determination of the residential
status of a person is very significant in order to find out his tax liability.