Definition 3

3Applied Direct taxation

STUDY NOTE - 3

DEFINITIONS

This Study Note includes

• Basic Concept

• Scope of Income-Tax Law

• Various Terminology used in the Income Tax Act

3.1 BASIC CONCEPT

Income-tax is a tax on income, whether actual or deemed, in cash or in kind. According toArticle 270 of the Constitution of India, levy and collection of taxes on income (excludingagricultural income) is within the powers of the Central Government. The net tax proceedsdetermined in the prescribed manner are, however, distributed between the Centre and thestates as per the recommendations of the Finance Commission, which is appointed by thePresident of India in every five years. According to Art. 265 of the Constitution of India, levyand collection of any tax shall be under the authority of a State Law (a valid Act of a componentlegislation). The Income-tax Act, 1961 (43 of 1961) extends to the whole of India.

The main thing under the Income-tax Act centers round the term “taxable income” and it shallbe determined on the basis of residential status of the assessee. Thus there are certain incomesunder the Income-tax Act which are specifically excluded, certain deductions are availablewhile computing income under the different heads e.g. salary, house property, profits andgains of business or profession, capital gains and income from other sources. Moreover, incomputing taxable income one has to consider the deemed income, clubbing of incomes, setoffand carry forward of losses. Once the taxable income is ascertained, the next step is to ascertainthe income-tax payable by the assessee (by applying the corresponding income-tax rates of therelevant assessment year). Net tax payable is ascertained by deducting the tax rebates, reliefs,advance tax paid and tax deducted at source from the tax so payable.

The components of income-tax law are—

(i) The Income-tax Act, 1961, as amended from time to time.

(ii) The annual Finance Acts passed by Parliament.

(iii) The Income-tax Rules, 1962 as made by the Central Board of Direct Taxes and amendedup-to-date.

Moreover, the circulars and notifications issued by the Central Board of Direct Taxes are bindingon the assessing authorities in the same way as is under the Income-tax Rules. The judicial

Applied Direct taxation4

Definitions

decision given by the Supreme Court becomes law and as such it is binding on all the courts,Appellate Tribunals, the Income-tax Authorities as well as on all the assesses. However, decisionsgiven by the High Court, Income-tax Appellate Tribunal are binding on all assessees as well asIncome Tax Authorities which fall under their jurisdiction unless it is overruled by a higherauthority.

3.2 SCOPE OF INCOME-TAX LAW

The history of income-tax dates back to 1860’s when the British Government first levied income-tax in India. Thereafter the law was amended in 1886, 1922 and 1961. The Income-tax Act, 1961as amended covers—

The basis of charging incomeIncomes exempt from income–taxComputation of incomes under various headsClubbing of income

Setoff and carry forward of lossesPermissible deductionsRebates and reliefsDouble taxationDetermination of tax in certain special casesNon–resident (special provisions)Presumptive taxationIncome–tax authorities and their powersSurvey, search and seizureAssessment procedureAssessment of individuals, firms, companies, etc.Collection and recovery of taxPayment of advance taxRefund of tax

Advance RulingsAppeal and revision, Settlement CommissionAcquisition of immovable propertyPenaltyProsecution.


3.3 DEFINITIONS UNDER THE ACT [Sec.2 & 3]

ASSESSEE – [Sec. 2(7)]

“Assessee” means a person by whom any tax or any other sum of money is payable under thisAct, and includes—

(a) every person in respect of whom any proceeding under this Act has been taken for theassessment of his income or assessment of fringe benefits or of the income of any otherperson in respect of which he is assessable, or of the loss sustained by him or by suchother person, or of the amount of refund due to him or to such other person;

(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.

Under the Income-tax Act, following classification of assesses has been made which are asfollows—

(a) An Individual

(b) Hindu Undivided family

(c) Partnership firm

(d) Company

(e) Association of Person (AOP) or Body of Individuals (BOI)

(f) Local Authority

(g) Other artificial juridical entities.

Case Law :

i) “Assessee” includes deemed assessee also - The term “assessee” includes actual assessees aswell as deemed assessees under the provisions of the Act. It is, therefore, not correct to contendthat unless there are actual assessment proceedings pertaining to any person, he cannot beconsidered to be an assessee - ITO v. Delhi Development Authority 252 ITR 772 /CIT v. ShriManakram 183 ITR 382/53 Taxman 448 .

ASSESSMENT – [Sec. 2(8)]

Assessment means computation of taxable income and imposition of tax liability. Assessmentincludes reassessment. The different kinds of assessment are self-assessment, regular assessment,best judgement assessment, reassessment, block assessment etc.

ASSESSMENT YEAR – [Sec. 2(9)]

“Assessment Year” means the period of 12 months commencing on the 1st day of April everyyear and ending on 31st March of the next year. Thus, the Assessment Year 2003-04 commenceson April 1, 2002 and ends on March 31, 2003. The income of previous year of an assessee istaxed during the next following assessment year at the rate prescribed for each assessmentyear by the relevant Finance Act.


Definitions

PREVIOUS YEAR – [Sec. 2(34) & 3]

“Previous Year” means the financial year immediately preceding the assessment year. Thus,income earned during the previous year 2006-07 is taxable in the immediately followingAssessment Year 2007-08.

CERTAIN CASES WHEN INCOME OF A PREVIOUS YEAR WILL BE ASSESSED INTHE PREVIOUS YEAR ITSELF

The income of an assessee for a previous year is charged to income-tax in the assessment yearfollowing the previous year. However, in a few cases, this rule does not apply and the incomeis taxed in the previous year in which it is earned. These exceptions have been made to protectthe interests of revenue. The exceptions are as follows:

(1) Shipping business of non-resident [Sec. 172] —Where a ship, belonging to or chartered bya non-resident, carries passengers, livestock, mail or goods shipped at a port in India, the shipis allowed to leave the port only when the tax has been paid or satisfactory arrangement hasbeen made for payment thereof. 7.5% of the freight paid or payable to the owner or the chartereror to any person on his behalf, whether in India or outside India on account of such carriage isdeemed to be his income which is charged to tax in the same year in which it is earned.Case Laws :

(i) Charges for hire of vessel cannot be treated as charges for carriage of goods - In order thatit might be said that the amount was payable on account of the carriage of goods, itwould be necessary to show that one was the consideration for the other, i.e., that thepayment which the charterers have agreed to make to the owners of the ship was inconsideration of the carriage of goods. If the charterers were liable to pay the amountirrespective of whether they carried the goods or not, it would be difficult to say that theamount was payable on account of the carriage of goods - Union of India v. GosaliaShipping (P.) Ltd. 113 ITR 307.

(ii) Section 172 will not apply if time-charterer carries his own goods - When the time-charterers carried their own cargo, they served their own interests and this kind of self-service was not what seemed to be contemplated for the purpose of assessment, andsection 172 would not be attracted - Lima Leitao & Co. Ltd. v. Union of India 70 ITR 518.

(2) Persons leaving India [Sec. 174] —Where it appears to the Assessing Officer that anyindividual may leave India during the current assessment year or shortly after its expiry andhe has no present intention of returning to India, the total income of such individual for theperiod from the expiry of the respective previous year up to the probable date of his departurefrom India is chargeable to tax in that assessment year.

Example: Suppose Mr. X is leaving India for USA on 10.06.2007 and it appears to the AssessingOfficer that he has no intention to return. Before leaving India, Mr. X will be required to payincome tax on the income earned during the PY 2006-07 as well as the total income earnedduring the period 1.04.2007–10.06.2007.


Case Law :

(i) Obligations of principal and agent continue if ITO fails to resort to section 174 - Section174 is merely an enabling provision authorising the ITO to have recourse to that sectionin the circumstances postulated by that section. If the ITO however fails to take advantageof that enabling provision, neither the non-resident principal nor the agent can be relievedof its obligation. There are no provisions in the Act to the effect that, if no action undersection 174 was taken, proceedings could not be continued against the agent - BariumChemicals Ltd. v. ITO 100 ITR 637.

(3) AOP / BOI / Artificial Juridical Person formed for a particular event or purpose [Sec.174A]—If an AOP/BOI etc. is formed or established for a particular event or purpose and theAssessing Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or inthe next year, he can make assessment of the income up to the date of dissolution as income ofthe relevant assessment year.

(4) Persons likely to transfer property to avoid tax [Sec. 175] - During the current assessmentyear, if it appears to the Assessing Officer that a person is likely to charge, sell, transfer, disposeof or otherwise part with any of his assets to avoid payment of any liability0020under this Act,the total income of such person for the period from the expiry of the previous year to the date,when the Assessing Officer commences proceedings under this section is chargeable to tax inthat assessment year.

(5) Discontinued business [Sec. 176]—Where any business or profession is discontinued inany assessment year, the income of the period from the expiry of the previous year up to thedate of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax inthat assessment year.

Case Laws :

(i) Assessment for two previous years is not contemplated - Section 176 contemplates theusual assessment in respect of the income of the previous year and a special and separateassessment in the same assessment year in respect of the income of the broken periodbetween the end of the previous year and the end of the discontinuance; it does notcontemplate assessments in the same assessment year in respect of two previous years -Esthuri Aswathaiah v. CIT 60 ITR 411.

(ii) Professional fees realised after death are assessable to tax - Where considerable amountswere due to a deceased barrister towards professional services rendered by him, and thedepartment realised the amounts through garnishee proceedings in order to adjust themagainst income-tax dues, the amounts must be deemed to have been received by thedeceased within the meaning of section 176(4) - Mrs. Roma Bose v. ITO 95 ITR 299.


Definitions

PREVIOUS YEAR FOR UNDISCLOSED SOURCES OF INCOME

There are many occasions when the Assessing Officer detects cash credits, unexplainedinvestments, unexplained expenditure etc, the source for which is not satisfactorily explainedby the assessee to the Assessing Officer. The Act contains a series of provisions to provide forthese contingencies:

(1) Cash Credits [Sec. 68] : Where any sum is found credited in the books of the assessee andthe assessee offers no explanation about the nature and source or the explanation offered is notsatisfactory in the opinion of the Assessing Officer, the sum so credited may be charged asincome of the assessee of that previous year.

Case Laws :

(i) Gift received by NRI shown as credit to his account, however it was held that such incomeis undisclosed income. The burden to prove that the income lies within the taxingprovisions is on the Department. The Supreme Court held that where any sum is foundcredited in the books of the assessee for any previous year the same is to be charged to theincome tax if the explanation offered by the assessee is not satisfactory. Commissioner ofIncome Tax vs P. Mohanakala & Ors. 291 ITR 278.

(2) Unexplained Investments [Sec. 69] : Where in the financial year immediately preceding theassessment year, the assessee has made investments which are not recorded in the books ofaccount and the assessee offers no explanation about the nature and the source of investmentsor the explanation offered is not satisfactory, the value of the investments are taxed as incomeof the assessee of such financial year.

Case Laws :

(i) Amount credited in business books can normally be presumed as business receipt - Whenan amount is credited in business books, it is not an unreasonable inference to draw thatit is a receipt from business, if the explanation given by the assessee as to how the amountscame to be received is rejected by all the income-tax authorities as untenable - LakhmichandBaijnath v. CIT 35 ITR 416

(ii) Burden of proof - Burden is on assessee to prove source of receipt - The law is well settledthat the onus of proving the source of a sum of money found to have been received by anassessee is on him. Where the nature and source of a receipt, whether it be of money orother property, cannot be satisfactorily explained by the assessee, it is open to the revenueto hold that it is the income of the assessee and no further burden lies on the revenue toshow that the income is from any particular source - Roshan Di Hatti v. CIT 107 ITR 938/ Kale Khan Mohammad Hanif v. CIT 50 ITR 1.

(3) Unexplained money etc. [Sec. 69A] : Where in any financial year the assessee is found to bethe owner of any money, bullion, jewellery or other valuable article and the same is not recordedin the books of account and the assessee offers no explanation about the nature and source of


acquisition of such money, bullion etc. or the explanation offered is not satisfactory, the moneyand the value of bullion etc. may be deemed to be the income of the assessee for such financialyear.

Ownership is important and mere possession is not enough.

Case Laws :

(i) Income’ has a wide meaning - The word ‘income’ used in section 69A has wide meaning,and means anything which comes in or results in gain - Chuharmal v. CIT 172 ITR 250 .

(ii) Person can be owner of money even after giving incorrect explanation - A person can stillbe held to be the owner of a sum of money even though the explanation furnished by himregarding the source of that money is found to be not correct. From the simple factthat the explanation regarding the source of money furnished by A in whose namethe money is lying in deposit has been found to be false, it would be a remote and far-fetched conclusion to hold that the money belongs to B - CIT v. Daulat Ram Rawatmull87 ITR 349 .

(4) Amount of investments etc., not fully disclosed in the books of account [Sec. 69B] : Wherein any financial year the assessee has made investments or is found to be the owner of anybullion, jewellery or other valuable article and the Assessing Officer finds that the amountspent on making such investments or in acquiring such articles exceeds the amount recordedin the books of account maintained by the assessee and he offers no explanation for the differenceor the explanation offered is unsatisfactory, such excess may be deemed to be the income of theassessee for such financial year.

For example, if the assessee is found to be the owner of say 300 gms of gold (market value ofwhich is Rs.25,000) during the financial year ending 31.3.07 but he has recorded to have spentRs.15,000 in acquiring it, the Assessing Officer can add Rs.10,000 (i.e. the difference of themarket value of such gold and Rs.15,000) as the income of the assessee, if the assessee offers nosatisfactory explanation thereof.

Case Law:

(i) Accounts must have been maintained - Where accounts are not maintained, additionsmade as unexplained investments would not be sustainable under section 69B - Dr.Prakash Tiwari v. CIT 148 ITR 474.

(5) Unexplained expenditure [Sec. 69C] : Where in any financial year an assessee has incurredany expenditure and he offers no explanation about the source of such expenditure or theexplanation is unsatisfactory the Assessing Officer can treat such unexplained expenditure asthe income of the assessee for such financial year. Such unexplained expenditure which isdeemed to be the income of the assessee shall not be allowed as deduction under any head ofincome.


Definitions

Case Law :

(i) Question of addition depends on satisfactory explanation of source - Section 69C dealswith unexplained source of expenditure. If from documents it appears that there was anexpenditure, unless its source is satisfactorily explained, the same would also be deemedto be the income of the assessee for such financial year. The question of addition dependson the satisfactory explanation of the source. It cannot be negated simply because theexpenditure was actually incurred. On the failure to explain the source of the expenditure,it is liable to be added - CIT v. Bhagwati Developers (P.) Ltd. 261 ITR 658.

(6) Amount borrowed or repaid on hundi [Sec. 69D] :Where any amount is borrowed on ahundi or any amount due thereon is repaid other than through an account-payee cheque drawnon a bank, the amount so borrowed or repaid shall be deemed to be the income of the personborrowing or repaying for the previous year in which the amount was borrowed or repaid, asthe case may be.

However, where any amount borrowed on a hundi has been deemed to be the income of anyperson, he will not be again liable to be assessed in respect of such amount on repayment ofsuch amount. The amount repaid shall include interest paid on the amount borrowed.

Case Law :

(i) Provision is constitutionally valid - Section 69D did not suffer from any vice and it wasnot violative of articles 14 and 19(1)(g) of the Constitution - Dulichand Gulzari Lal Jainv. Union of India 90 Taxman 337/226 ITR 753.

PERSON [Sec. 2(31)]

The definition of ‘assessee’ leads us to the definition of Person’ as the former is closely connectedwith the latter. The term ‘person’ is important from another point of view also i.e. the charge ofincome-tax is on every ‘person’.

The definition is inclusive i.e. a person includes,

(i) an individual,

(ii) a Hindu Undivided Family (HUF),

(iii) a company,

(iv) a firm,

(v) an AOP or a BOI, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person e.g., an idol or deity.


The following is the detail discussion of each type of Person :

(i) Individual— The term ‘individual’ means only a natural person, i.e., a human being. Itincludes both males and females. It also includes a minor or a person of unsound mind. But theassessment in such a case may be made under section 161(1) on the guardian or manager of theminor or lunatic. In the case of deceased person, assessment would be made on the legalrepresentative.

(ii) HUF — Under the Income-tax Act, a Hindu undivided family (HUF) is treated as a separateentity for the purpose of assessment. It is included in the definition of the term “person”under section 2(31). The levy of income-tax is on “every person”. Therefore, income-tax ispayable by a HUF. “Hindu undivided family” has not been defined under the Income-tax Act.The expression is however defined under the Hindu Law as a family, which consists of allmales lineally descended from a common ancestor and includes their wives and unmarrieddaughters.

The relation of a HUF does not arise from a contract but arises from status. A Hindu is borninto a HUF. A male member continues to remain a member of the family until there is a partitionof the family. After the partition, he ceases to be a member of one family. However, he becomesa member of another smaller family. A female member ceases to be a member of the HUF inwhich she was born, when she gets married. Thereafter, she becomes a member of the HUF ofher husband.

Some members of the HUF are called co-parceners. They are related to each other and to thehead of the family. HUF may contain many members, but members within four degreesincluding the head of the family (karta) are called co-parceners. A hindu coparcenary includesthose persons who acquire by birth an interest in the joint coparcenary property. Only thecoparceners have a right to partition.

A Jain undivided family would also be assessed as a HUF, as Jains are also governed by thelaws as Hindus.

Case Law :

(i) Single person cannot constitute HUF - The word ‘family’ always signifies a group. Pluralityof persons is an essential attribute of a family. A single person, male or female, does notconstitute a family. He or she would remain, what is inherent in the very nature of things,an individual, a lonely wayfarer till perchance he or she finds a male. A family consistingof a single individual is a contradiction in terms - C. Krishna Prasad v. CIT 97 ITR 493/CIT v. Ved Parkash 136 ITR 238.

(iii) Company [Sec. 2(17)] —For all purposes of the Act the term ‘Company’, has a much widerconnotation than that under the Companies Act. Under the Act, the expression ‘Company’means:


Definitions

1. any Indian company as defined in section 2(26); or

2. any body corporate incorporated by or under the laws of a country outside India, i.e., anyforeign company; or

3. any institution, association or body which is assessable or was assessed as a company forany assessment year under the Indian Income-tax Act, 1922 or for any assessment yearcommencing on or before 1.4.1970 under the present Act; or

4. any institution, association or body, whether incorporated or not and whether Indian ornon-Indian, which is declared by a general or special order of the CBDT to be a companyfor such assessment years as may be specified in the CBDT’s order.

Classes of Companies :

1. Indian company [Sec. 2(26)] - Two conditions should be satisfied so that a company canbe regarded as an Indian company—

(a) the company should have been formed and registered under any law relating tocompanies which was or is in force in any part of India, and

(b) the registered office of the company should be in India.2. Company in which public are substantially interested [Sec. 2(18)] - The following

companies are said to be companies in which the public are substantially interested:

(i) A company owned by the Government (either Central or State but not foreign) orthe Reserve Bank of India (RBI) or in which not less than 40% of the shares are heldby the Government or the RBI or corporation owned by that bank.

(ii) A company which is registered u/s 25 of the Companies Act, 1956 (formed forpromoting commerce, arts, science, religion, charity or any other useful object).

(iii) A company having no share capital which is declared by the Board for the specifiedassessment years to be a company in which the public are substantially interested.

(iv) A company which is not a private company as defined in the Companies Act, 1956and which fulfills any of the following conditions :

- its equity shares should have, as on the last day of the relevant previous year, been listed in arecognised stock exchange in India; or

- its equity shares carrying at least 50% (40% in case of industrial companies) voting powershould have been unconditionally allotted to or acquired by and should have been beneficiallyheld throughout the relevant previous year by (a) Government or (b) a Statutory Corporationor (c) a company in which public are substantially interested or (d) any wholly owned subsidiaryof company mentioned in (c).

(v) A company which carries on its principal business of accepting deposits from itsmembers and which is declared by the Central Government under section 620A ofthe Companies Act to be Nidhi or a Mutual Benefit Society.


(vi) A company whose equity shares carrying at least 50% of the voting power havebeen allotted unconditionally to or acquired unconditionally by and were beneficiallyheld throughout the relevant previous year by one or more co-operative societies.

3. Domestic company [Sec. 2(22A)] - means an Indian company or any other company which,in respect of its income liable to income-tax, has made the prescribed arrangements forthe declaration and payment of dividends (including dividends on preference shares)within India, payable out of such income.

4. Foreign company [Sec. 2(23A)] - Foreign company means a company which is not adomestic company.

Person having substantial interest in the company [Sec. 2(32)]— is a person who is the beneficialowner of shares (not being shares entitled to a fixed rate of dividend), whether with or withouta right to participate in profits, carrying at least 20% of the total voting power.

(iv) Firm — The terms ‘firm’, ‘partner’ and ‘partnership’ have the same meanings as assignedto them in the Indian Partnership Act. However, for income-tax purposes a minor admittedto the benefits of an existing partnership would also be treated as partner. This is specifiedu/s 2(23) of the Act. A partnership is the relation between persons who have agreed to sharethe profits of business carried on by all or any of them acting for all. The persons who haveentered into partnership with one another are called individually ‘partners’ and collectively a‘firm’.

(v) Association of Persons (AOP) - When persons combine together for promotion of jointenterprise they are assessable as an AOP when they do not in law constitute a partnership. Inorder to constitute an association, persons must join in a common purpose, common actionand their object must be to produce income; it is not enough that the persons receive the incomejointly. Co-heirs, co-legatees or co-donees joining together for a common purpose or actionwould be chargeable as an AOP.

Body of Individuals (BOI)— It denotes the status of persons like executors or trustees whomerely receive the income jointly and who may be assessable in like manner and to the sameextent as the beneficiaries individually. Thus co-executors or co-trustees are assessable as a BOIas their title and interest are indivisible. Income-tax shall not be payable by an assessee inrespect of the receipt of share of income by him from BOI and on which the tax has alreadybeen paid by such BOI.

(vi) Local Authority— The term means a municipal committee, district board, body of portcommissioners or other authority legally entitled to or entrusted by the Government with thecontrol or management of a municipal or local fund.

Note : A local authority is taxable in respect of that part of its income which arises from anybusiness carried on by it in so far as that income does not arise from the supply of a commodityor service within its own jurisdictional area. However, income arising from the supply of waterand electricity even outside the local authority’s own jurisdictional areas is exempt from tax.


Definitions

(vii) Artificial Persons— This category could cover every artificial juridical person not fallingunder other heads. An idol, or deity would be assessable in the status of an artificial juridicalperson.

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 things which are included in sec. 2 (24), but also includes such thingwhich 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 as in sub-clause (4) above, speciallygranted to the assessee to meet expenses wholly, necessarily and exclusively for theperformance 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 dutiesof his office or employment of profit are ordinarily performed by him or at a place wherehe 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 aperson having substantial interest in the company or by a relative of the Director of suchperson;

(8) Any sum paid by a company in respect of any obligation which, but such payment wouldhave been payable by the director or the person having substantial interest;

(9) Value of any benefit or perquisite obtained by a representative assessee mentioned insec. 160(1)(iii) or (iv) or by any person on whose behalf or for whose benefit any incomeis receivable by the representative assessee and any sum for such payment, would havebeen 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 servicesperformed for its members as referred to in sec. 28(iii) or any amount obtained by way ofremission or cessation of liability previously allowed as deduction or balancing chargeor the excess of the amount of deduction in respect of expenditure on scientific researchor amount of bad debt subsequently recovered;

(11) Business income includes—

(i) compensation money [sec. 28(ii)]

(ii) income derived by a trade, professional or similar association for specific servicesperformed for its members [sec. 28(iii)]


(iii) export incentives [sec. 28(iiia), (iiib), (iiic)]

(iv) value of any benefit or perquisite arising from business or the exercise of profession[sec. 28(iv)]

(v) any interest, salary, bonus, commission or remuneration received by a partner of afirm from such firm [sec. 28(v)]

(vi) deemed business income [sec. 41] and deemed income chargeable under the headother 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 by acooperative society;

(14) Winnings from lotteries, crossword puzzles, races including horse races, card games andother games of any sort;

(15) Sum received by the assessee from his employees as contributions to any provident fundor superannuation fund set up under the provisions of the Employees’ State InsuranceAct, 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 allocated byway of bonus on such policy.

The above list given in sec. 2(24) of the income-tax Act is inclusive and not exhaustive.

Extention of definition of Income u/s 2(24)(IIA)

Voluntary contribution received by non-profit seeking university or other educational institutionreferred to in section 10(23C)(iiiad)(the annual receipts of which do not exceed Rs. 1 crore) orby any non-profit hospital or other institution referred to in section 10(23C)(iiiae)(the annualreceipts of which do not exceed Rs. 1 crore) shall also be deemed to be income of such institutions.

The above amendment has been made consequent to the introduction of new section viz section115BBC relating to taxation of certain anonymous donations.

Profit or gain of co-operative banks included in the definition of income [Sec. 2(24)]

A new sub-clause (viia) has been inserted in section 2(24) to provide that the profits and gainsof any business (including providing credit facilities) carried on by a co-operative society withits members shall be treated as income.

The above sub-clause has been inserted to provide that even if the co-operative bank is earningprofit or gains from its members only, such profits shall be included in the meaning of incomeand taxable. It shall not be treated as income of mutual character.The above amendment had been made as the income of a co-operative bank shall now not beeligible for deduction u/s 80P.


Definitions

Case Laws :

(i) Treating cash assistance as income is valid - Clause (vb) introduced in section 2(24) toinclude cash assistance in the definition of ‘income’ with retrospective effect from1-4-1967, is valid and is within the legislative competence of Parliament under entry 82of List I of Schedule VII to the Constitution of India - Aero Leather (P.) Ltd. v. Union of India194 ITR 7.

(ii) Items not falling under specified categories can still be income - Even if a receipt does not fallwithin the ambit if any of the sub-clauses in section 2(24), it may still be income if itpartakes of the nature of the income. The idea behind providing inclusive definition insection 2(24) is not to limit its meaning but to widen its net. The word ‘income’ is ofwidest amplitude, and it must be given its natural and grammatical meaning - CIT v.G.R. Karthikeyan 68 Taxman 145/201 ITR 866.

TOTAL INCOME [Sec. 2(45)]

“Total income” means the total amount of income as referred to in sec. 5 and computed in themanner laid down in the Act. Total income constitutes the tax with reference to which incometax is charged.

BOOKS OF ACCOUNT [Sec. 2(12A)]

It includes ledgers, day books, cash books, account-books and other books, whether kept in thewritten form or as printouts or data stored in a floppy, disc, tape or any other form ofelectromagnetic data storage device.

DOCUMENT [Sec. 2(22AA)]

It includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of theInformation Technology Act, 2000 (21 of 2000).

RELATIVE [Sec. 2(41)]

In relation to an individual, means the husband, wife, brother or sister or any lineal ascendantor descendant of that individual.

RESULTING COMPANY [Sec. 2(41A)]

It means one or more companies (including a wholly owned subsidiary thereof) to which theundertaking of the demerged company is transferred in a demerger and, the resulting companyin consideration of such transfer of undertaking, issues shares to the shareholders of thedemerged company and includes any authority or body or local authority or public sectorcompany or a company established, constituted or formed as a result of demerger.

INSURER [Sec. 2(28BB)]

It means an insurer being an Indian insurance company, as defined under clause (7A) of section2 of the Insurance Act, 1938 (4 of 1938), which has been granted a certificate of registrationunder section 3 of that Act.


SUBSTANTIAL INTEREST [Sec. 2 (32)]

Person who has a substantial interest in the company, in relation to a company, means a personwho is the beneficial owner of shares, not being shares entitled to a fixed rate of dividendwhether with or without a right to participate in profits, carrying not less than twenty per centof the voting power. In the case of a non-corporate entity, a person can be said to have substantialinterest if 20% or more share of profit is held.

Case Law :

(i) Voting power, connotation of - Expression ‘voting power’ in section 2(32) of the Actwould denote the total voting strength exercisable by all the equity shareholders in acompany and where a shareholder has the voting right for each and every equity shareheld by her in her own name and on behalf of minor infants, the total shares held by hershould be taken into account - CIT v. T.P.S.H. Sokkalal 236 ITR 981.Definition of infrastructure capital company, infrastructure capital fund and infrastructurefacility shifted from section 10(23G) to section 2 [ Sec. 2(26A) and 2(26B)]

Under the existing provision of Income-tax Act, infrastructure capital company andinfrastructure capital fund have been defined in clause (23G) of section 10. Further, this definitionis also with reference to sections 80-IA and 80IB. The definitions of infrastructure capital companyand infrastructure capital fund existing in section 10(23G) have been used in the Income-taxAct in various other provisions. Since section 10(23G) has been omitted from the Income-taxAct, section 2 has been amended so as to provide for a general definition of infrastructurecapital company and infrastructure capital fund.

(1) “Infrastructure capital company” means such company which makes investments by wayof acquiring shares or providing long-term finance to any enterprise or undertaking whollyengaged in the business referred to in sub-section (4) of section 80 –IA or sub-section (1)of section 80-IAB or an undertaking developing and building a housing project referredto in sub-section (10) of section 80- IB or a project for constructing a hospital with at leastone hundred beds for patients.[ Sec. 2(26A)].

(2) “Infrastructure capital fund” means such fund operating under a trust deed registeredunder the provisions of the Registration Act, 1908 established to raise monies by thetrustees for investment by way of acquiring shares or providing long-term finance to anyenterprise or undertaking wholly engaged in the business referred to in sub-section (4) ofsection 80-IA or sub-section (1) of section 80- IAB or an undertaking developing andbuilding a housing project referred to in sub-section (10) of section 80-IB or a project forconstructing a hotel of not less than three star category as classified by the CentralGovernment or a project for constructing a hospital with at least one hundred beds forpatients. [ Sec 2(26B)].


Definitions

Amendment in the definition of “ rate or rates in force” [Sec. 2 (37A)]

A new section 90A has been inserted to provide that any specified association, notified by theCentral Government may enter into an agreement relating to double taxation relief, etc. withany specified association outside India.Consequential amendment has been made in section 2(37A) to provide for a reference to thenew section 90A.Hence, for the purposes of TDS under section 195, the rates shall be the ratesof income-tax specified in the Finance Act or the rates specified in the agreement entered intounder section 90 or 90A.

Powers of the Tax Recovery Officer widened [ Sec. 2(44)]

Besides the powers already given to the TRO, he shall also exercise or perform such powersand functions which are conferred on, or assigned to, an Assessing Officer under this Act andwhich may be prescribed.

CHARGE OF INCOME TAX [Sec. 4]

According to sec. 4 of the Income-tax, 1961 the following basic principles are followed whilecharging income-tax—

(i) income-tax is a tax on the annual income of an assessee,

(ii) usually, the income of the Previous Year (PY) is charged to the following AssessmentYear (AY) at the prescribed rate fixed by the relevant Financial Act, and

(iii) tax is levied on the total income of every assessee

TOTAL INCOME AND RESIDENTIAL STATUS [Sec. 5]

While Sec. 4 of the Income-tax Act seeks to charge every person in respect of his “total income”of the previous year S. 5 delineates the gamut of total income. The scope of total income isrelated to the residential status of an assessee e.g. resident, resident but not ordinarily residentand non-resident.The tax incidence against residential status is as follows—

Status of assessee Tax incidence

1. Resident and ordinarily resident (a) Income is received or deemed to be received inIndia

(b) Income arises or accrued or is deemed to ariseor accrue in India

(c) Income arises or accrues outside India

2. Resident but not ordinarily resident (a) Income received or deemed to be received inIndia

(b) Income arises or accrues or is deemed to ariseor accrue in India

(c) Income arises or accrues outside India from abusiness controlled from a place within India


Status of assessee Tax incidence

3. Non-resident (a) Income received or deemed to be received inIndia

(b) Income arises or is deemed to arise or accrue inIndia irrespective of place of its receipt.

RECEIPT OF INCOME - DEEMED INCOME [Sec. 7]

The following income shall be deemed to be received in the Previous Year :(i) Employers contribution to recognized provident fund in excess of 12% of salary and

interest credited to the recognized provident fund in excess of 9.5%(ii) The transfer balance in a recognized provident fund, to the extent provided in sub rule

(4) of rule 11 of part A of fourth schedule.

DIVIDEND INCOME [Sec. 8]

Dividend include—

(a) any distribution by a company of accumulated profits whether capitalised or not, if suchdistribution entails the release by the company to its shareholders of all or any part of theassets of the company ;

(b) any distribution to its shareholders by a company of debentures, debenture-stock, ordeposit certificates in any form, whether with or without interest, and any distribution toits preference shareholders of shares by way of bonus, to the extent to which the companypossesses accumulated profits, whether capitalised or not ;

(c) any distribution made to the shareholders of a company on its liquidation, to the extentto which the distribution is attributable to the accumulated profits of the companyimmediately before its liquidation, whether capitalised or not ;

(d) any distribution to its shareholders by a company on the reduction of its capital, to theextent to which the company possesses accumulated profits85 which arose after the endof the previous year ending next before the 1st day of April, 1933, whether suchaccumulated profits have been capitalised or not ;

(e) any payment by a company, not being a company in which the public are substantiallyinterested, of any sum (whether as representing a part of the assets of the company orotherwise) [made after the 31st day of May, 1987, by way of advance or loan to ashareholder, being a person who is the beneficial owner of shares (not being shares entitledto a fixed rate of dividend whether with or without a right to participate in profits) holdingnot less than ten per cent of the voting power, or to any concern in which such shareholderis a member or a partner and in which he has a substantial interest (hereafter in thisclause referred to as the said concern)] or any payment by any such company on behalf,or for the individual benefit, of any such shareholder, to the extent to which the companyin either case possesses accumulated profits;


Definitions

But “dividend” does not include—

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of anyshare issued for full cash consideration, where the holder of the share is not entitled inthe event of liquidation to participate in the surplus assets ;

(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as suchdistribution is attributable to the capitalised profits of the company representing bonusshares allotted to its equity shareholders after the 31st day of March, 1964,

(ii) any advance or loan made to a shareholder [or the said concern] by a company in theordinary course of its business, where the lending of money is a substantial part of thebusiness of the company ;

(iii) any dividend paid by a company which is set off by the company against the whole orany part of any sum previously paid by it and treated as a dividend within the meaningof sub-clause (e), to the extent to which it is so set off;

(iv) any payment made by a company on purchase of its own shares from a shareholder inaccordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);

(v) any distribution of shares pursuant to a demerger by the resulting company to theshareholders of the demerged company (whether or not there is a reduction of capital inthe demerged company)

Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shallnot include capital gains arising before the 1st day of April, 1946, or after the 31st day of March,1948, and before the 1st day of April, 1956.

Explanation 2.—The expression “accumulated profits” in sub-clauses (a), (b), (d) and (e), shallinclude all profits of the company up to the date of distribution or payment referred to in thosesub-clauses, and in sub-clause (c) shall include all profits of the company up to the date ofliquidation,[but shall not, where the liquidation is consequent on the compulsory acquisitionof its undertaking by the Government or a corporation owned or controlled by the Governmentunder any law for the time being in force, include any profits of the company prior to threesuccessive previous years immediately preceding the previous year in which such acquisitiontook place].

Explanation 3.—For the purposes of this clause,—

(a) “concern” means a Hindu undivided family, or a firm or an association of persons or abody of individuals or a company ;

(b) a person shall be deemed to have a substantial interest in a concern, other than a company,if he is, at any time during the previous year, beneficially entitled to not less than twentyper cent of the income of such concern;


INCOME DEEMED TO ACCRUE OR ARISE IN INDIA

There are certain incomes which may be deemed to accrue or arise in India under sec. 9 althoughthey may actually accrue or arise outside India. This section is applicable to all assesseeirrespective of their residential status, nationality, domicile and place of business. The categoriesof income which are deemed to accrue or arise in India are :

1. Income from business connection in India Sec. 9(1)(i)2. Income under the head “Salaries” earned in India Sec. 9(1)(ii)3. Salary payable abroad by a Government to the citizen of India Sec.9(1)(iii)4. Dividend paid by an Indian company Sec. 9(1)(iv)5. Income by way of interest Sec. 9(1)(v)6. Income by way of royalty Sec. 9(1)(vi)7. Income by way of fees for technical services Sec. 9(1)(vii)

Case Law:

(i) For section 9(1)(vii) to be applicable, it is necessary that services provided by a non-resident assessee under a contract should not only be utilized within India, but shouldalso be rendered in India or should have such a live link with India that entire incomefrom fees, etc., becomes taxable in India; thus, for a non-resident to be taxed on incomefor services, such a service needs to be rendered within India, and has to be a part of abusiness or profession carried on by such person in India. Whatever is payable by a residentto a non-resident by way of fees for technical services would not always come withinpurview of section 9(1)(vii) but it must have sufficient territorial nexus with India so as tofurnish a basis for imposition of tax - Ishikawajma-Harima Heavy Industries Ltd v. Directorof Income-tax 288 ITR (SC).

CAPITAL AND REVENUE RECEIPTS

The objective of the Income-tax Act is to tax only income generally revenue receipts unlessspecifically exempted. On the other hand capital receipts are not chargeable to tax except whenspecifically provided in the Act. The distinction between a capital receipt and a revenue receiptshould be perceived based on the facts and circumstances of each case. There is no specificprovision in the Act to distinguish between a capital receipt and revenue receipt. It may beobserved that :

A receipt in substitution of a source of income is a capital receipt while a receipt insubstitution of an income is a revenue receipt.

An amount received as a compensation for surrender of certain rights under an agreementis a capital receipt whereas an amount received under an agreement as compensation forloss of future profit is a revenue receipt.

Case Laws :

(i) Transfer of dealership for shares M.V. of shares capital receipt.- A.S. Bhargava v/s CIT

(ii) Lumpsums received in consideration of covenants not to compete with persons to whom


Definitions

exclusive licenses of patent rights are granted is Capital Receipt.- Murray v/s ImperialChemicals Industries Ltd.

(iii) % of profits received by partners for user of his goodwill and know how by the firm –Revenue Receipt. Hindustan Forests Co. Ltd. v/s CIT

(iv) Certain portion of net revenue collection given in perpetuity by way of pension to Jagirdarwho divested land – Revenue Receipt.- CIT v/s Kumar Trivikram Narayan Singh

(v) Interest on refund of Income Tax paid in excess.- Revenue Receipt - Ramanathan Chettairv/s CIT

(vi) Subsidy received from Government for early starting of Crushing of sugarcane RevenueReceipt.- H.R. Sugar Factory (P) Ltd. v/s CIT

(vii) Held in order that a payment with a gift element of bounty may be treated as part oftaxable income of businessman, it must be shown that gift had been received in course ofor as necessary incident of recipients business. CIT v/s Paramanand Uttam Chand

(viii) Gift to surgeon for saving life, as he had reimbursed fully for professional services No taxas capital receipt.- CIT v/s Dr. C.M. Sundaravadanam

CAPITAL AND REVENUE EXPENDITURE

In computing taxable income normally revenue expenditure incurred for the purpose of earningincome is deductible from revenue receipt unless the law provides specific rules to disallowsuch expenditure wholly or partly. On the other hand capital expenditure is not deductiblewhile computing taxable income unless the law expressly so provides.

Neither the capital expenditure nor revenue expenditure has been defined in the Act. However,from the facts and circumstances of each case and from the judicial decisions the followinggeneral principles to be kept in mind :

(i) Capital expenditure is incurred in acquiring, extending or improving a fixed asset whereasrevenue expenditure is incurred in the normal course of business as a routine expenditure.

(ii) Capital expenditure incurred for enduring benefits whereas revenue expenditure isconsumed within a Previous Year .

(iii) Capital expenditure makes improvement with earning capacity of a business whereas arevenue expenditure maintains the profit making capacity of a business.

(iv) Capital expenditure is a nonrecurring expenditure whereas revenue expenditure isnormally a recurring one.

Documents

Definition 3