The word ‘Income’ covers receipts in the shape of money or money’s worth which arise with certain regularity or expected regularity from a definite source. However, all receipts do not form the basis of taxation under the Act. Broadly, an analogy is drawn of a tree and the fruits of that tree. The tree symbolises the source from which one gets fruits which symbolises ‘Income’. The receipt arising from the sale of tree itself is, therefore, considered a capital receipt which is not income; but the receipts flowing from this source viz., fruits is income. On application of this analogy, it can be said that while the receipt arising from the sale of a house is not income, the receipt arising from the realisation of rent is income. In the same way, receipt from the sale of a machine is not income but from the sale of produce brought out from the machine is income. In these cases, however, if a person deals in purchase and sale of house properties or machines, these assets do not remain a source and the profit derived from activities of purchase and sale becomes income. The source need not necessarily be tangible as the return for human exertion is also income.
1. The above is a broad generalisation. While a distinction is generally made between the capital receipt and revenue receipt, as illustrated above, the Act has widened the scope of income by expressly including within the meaning of “Income”, the receipts which do not fall under the broad concept explained above. For instance, the Act specifically makes the profit arising from the sale of certain capital assets also subject to tax under certain circumstances as income under the head Capital Gains. The winnings from lotteries, crossword puzzles, races, card games, etc. which do not arise from any definite source and do not have the element of regularity have also been specifically clarified to be ‘Income’ under the Act.
2. It is not the gross receipts but only the net receipts arrived at after deducting the related expenses incurred in connection with earning such receipts, that are made the basis of taxation.
1. Definition of Income [Section 2(24)]
(i) profits and gains;
(iii) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such religious purposes or by an association or institution or by a electoral trust;
(iv) the value of any perquisite or profit in lieu of salary taxable under section 17(2) and (3);
(v) any special allowance or benefit, other than perquisite included under (iv) above, specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit;
(vi) any allowance granted to the assessee either to meet the personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living;
(vii) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(viii) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the ‘beneficiary’) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary;
(ix) any sum chargeable to Income-tax under section 28(ii), (iii), (iiia), (iiib) and (iiic) or section 41 or section 59;
(x) the value of any benefit or perquisite taxable under section 28(iv);
(xi) any sum chargeable to Income-tax under section 28(v);
(xiii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a cooperative society; (xiiia) the profits and gains of any business of banking (including providing credit facilities) carried on by a cooperative society with its members;
(xiv) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever;
(xv) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 or any other fund for the welfare of such employee;
(xvi) any sum received under a Key-man Insurance Policy including the sum allocated by way of bonus on such policy;
(xvii) any sum referred to in section 28(vi);
(xx) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares. [Section 56(2)(viib)];
(xxi) any sum of money referred to in section 56(2)(ix);
(xxii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than—
(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to section 43(1);
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or State Government, as the case may be, shall also not form part of income.
(xxiii) any sum of money or value of property referred to in section 56(2)(x).
2. Important Principles of Income
Some important principles which explain the importance of income for income-tax purpose are given below:
(i) Regularity of Income:
Income connotes periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive but it must be one whose object is production of a definite return, excluding anything in the nature of a mere windfall. However, this does not mean that income which does not arise regularly will not be treated as income for tax purposes e.g. winnings from lotteries, etc.
(ii) Form of Income:
The income received by the assessee need not be in the shape of cash only. It may also be some other property or right which has monetary value. Wherever income is received in kind like perquisites then their value has to be found as per the rules prescribed and this value shall be taken to be the income.
(iii) Tainted/Illegal Income:
Income is income, though tainted. For purposes of Income-tax, there is no difference between legal and tainted income. Even illegal income is taxed just like any legal income.
(iv) Application of Income v Diversion:
Where an assessee applies an income to discharge an obligation after the income reaches the hands of the assessee, it would be an application of income and this would result in taxation of such income in the hands of the assessee. However, where there is a diversion of income before it reaches the hands of the assessee, it cannot be treated as an income of the assessee.
(v) Disputed Income:
Any dispute regarding the title of the income cannot hold up the assessment of the income in the hands of the recipient. The recipient is, therefore, chargeable to tax though there may be rival claims to the source of the income. (vi) Contingent income: A contingent income is not income. Until the contingency has happened, it cannot be postulated that income has accrued or has arisen to the assessee.
(vii) Basis of Income:
Income can be taxed on receipt basis or on accrual basis. In case of income from business or income from other sources, the taxability would depend upon the method of accounting adopted by the assessee, while in other cases, it would generally be taxed on receipt or accrual basis, whichever happens earlier. However, a contingent income i.e. an income which may or may not arise cannot be taxed unless and until such contingency actually occurs and the income arises to the assessee.
(viii) Personal Gifts:
Gifts received by a person on occasions like birthdays, marriage, festivals, etc. should not ordinarily be the income of the assessee and therefore, cannot be taxed in the hands of the recipient as his income. However, gift of money or gift of immovable property or certain moveable property received by any person from unrelated person(s) shall be chargeable to income-tax if the aggregate sum of money or value of gift received in the previous year exceeds ₹50,000. For details see Chapter 8.
(ix) Composite Income:
Income-tax is a composite tax on all incomes received by or arising to a tax payer during a year. Therefore, tax will be imposed on the aggregate of all incomes earned/received by the assessee during the year.
(x) Pin Money:
Pin money received by a woman for her dress or private expenditure as also small savings effected by a housewife out of moneys given to her by her husband for running the expenses of the kitchen would not be income in the eyes of the law. Any property acquired with the aid of such money or savings would form a capital asset belonging to the lady.
(xi) Lumpsum Receipt:
If a receipt is an income then whether it is received in lumpsum or in instalments would not affect its taxability; for example, if a person receives arrears of salary in a lumpsum amount, it would still be his income.
(xii) Income must come from outside:
A person cannot earn income from himself. In case of mutual activities, where some people contribute to the common fund and are entitled to participate in the fund and a surplus arises which is distributed to the contributors of the fund, such surplus cannot be called income.
(xiii) Revenue Receipt v Capital Receipt:
Section 4 brings to charge tax on total income. Prima facie, in order to come within the scope of the charging provision, the receipt in question should normally be a revenue receipt. Capital receipts are normally exempt. However, certain capital receipts have been specifically included in the definition of income, some of which are:
(b) Compensation for modification/termination of services [Section 17(3)(i)];
(c) Compensation or other payment due to or received by some specified person covered under section 28(ii)(a), (b), (c) and (d);
(d) any sum or a property received by any person from unrelated person(s) without consideration if the aggregate amount received or value of gift during the previous year exceeds ₹50,000.
(e) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,––
(a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset.
(f) the fair market value of inventory referred to in section 28(via) i.e. if the inventory is converted into a capital asset.
On the other hand, there are certain receipts which are though revenue receipts but do not form part of total income.
(xiv) Income Received or Deemed to be Received in India [Section 7]
(1) Received in India:
Any income which is received in India, during the previous year by any assessee, is liable to tax in India, irrespective of the residential status of the assessee and the place of accrual of such income.
(2) Income Deemed to be Received in India [Section 7]:
The following incomes shall be deemed to be received in India in the previous year even in the absence of actual receipt:
(i) Contribution made by the employer to the recognized provident fund in excess of 12% of the salary of the employee;
(ii) Interest credited to the RPF of the employee which is in excess of 9.5% p.a.
(iii) Transfer balance from the unrecognized fund to a Recognised Provident Fund (It has been discussed in the Chapter on ‘Income from Salaries’);
(iv) The contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a notified contributory pension scheme referred to in section 80CCD.
(xv) Incomes which accrue or arise in India or are deemed to accrue or arise in India [Section 9]
(1) Accrue or arise in India:
‘Accrue’ means ‘to arise or spring as a natural growth or result’, to come by way of increase. ‘Arising’ means ‘coming into existence or notice or presenting itself’. ‘Accrue’ connotes growth or accumulation with a tangible shape so as to be receivable. In a secondary sense, the two words together mean ‘to become a present and enforceable right’ and ‘to become a present right of demand’.
Frequently, in the context of ‘accrual’ or ‘arisal’, the word ‘earned’ is used. The two are different concepts. A person may be said to have ‘earned’ his income in the sense that he has contributed to its production by rendering services or otherwise and the parenthood of the income can be traced to him. But in order that the income may be said to have ‘accrued’ to him, an additional element is necessary, that he must have created a debt in his favour.
(2) Incomes which are deemed to accrue or arise in India [Section 9]:
The following incomes shall be deemed to accrue or arise in India:
(a) Income from a business connection in India:
Any income which arises, directly or indirectly, from any activity or a business connection in India is deemed to be earned in India.
Business connections may be in several forms e.g. a branch office in India or an agent or an organization of a non-resident in India. Formation of a subsidiary company in India to carry on the business of the non-resident parent company would also be a business connection in India. Any profit of the non-resident which can be reasonably attributable to such part of operations carried out in India through business connections in India are deemed to be earned in India.
3. How to Compute Total Income
Aggregate of incomes computed under the below 5 heads (given below), after applying clubbing provisions and making adjustments of set off and carry forward of losses, is known as Gross Total Income (GTI). [Section 80B(5)]
As per section 14, all income shall, for purposes of Income-tax and computation of total income, be classified under the following heads of income:
(ii) Income from House Property,
(iii) Profits and Gains of Business or Profession,
(iv) Capital Gains,
(v) Income from Other Sources.
The steps in which the Total Income, for any assessment year, is determined are as follows:
- Determine the residential status of the assessee to find out which income is to be included in the computation of his Total Income.
- Classify the income under each of the following five heads. Compute the income under each head after allowing the deductions prescribed for each head of income.
|(a) Income from Salaries|
|Value of Taxable perquisites||–|
|Less: Deductions under section 16||–|
|Net taxable income from Salary||–|
|(b) Income from House Property|
|Net annual value of House Property||–|
|Less: Deductions under section 24||–|
|Income from House Property||–|
|(c) Profit and Gains of Business and Profession|
|Net profit as per P & L Account||–|
|Less/Add: Adjustments required to be made to the profit as per provisions of Income-tax Act.||–|
|Net Profit and Gains of Business and Profession||–|
|Net profit as per P & L Account||–|
|Less/Add: Adjustments required||–|
|(d) Capital Gains Capital|
|Gains as computed||–|
|Less: exemptions under section 54/54B/54D, etc.||–|
|Income from Capital Gains||–|
|(e) Income from Other Sources|
|Net Income from Other Sources||–|
|Gross Total Income [(a) + (b) + (c) + (d) + (e)]||–|
|Less: Deduction available under Chapter VIA||–|
|(Sections 80C to 80U)||–|