UNIT I

INTRODUCTION AND BASIC CONCEPTS OF INCOME TAX

Introduction:
Under the Constitution of India Central Government is empowered to levy tax on the income.
Accordingly, the Central Government has enacted the Income Tax Act, 1961. The Act
provides for the scope and machinery for levy of Income Tax in India. The Act is supported
by Income Tax Rules, 1961 and several other subordinate and regulations. Besides, circulars
and notifications are issued by the Central Board of Direct Taxes (CBDT) and sometimes by
the Ministry of Finance, Government of India dealing with various aspects of the levy of
Income tax. Unless otherwise stated, references to the sections will be the reference to the
sections of the Income Tax Act, 1961. Income tax is a tax on the total income of a person
called the Assessee of the previous year relevant to the assessment year at the rates prescribed
in the relevant Finance Act.
Some of the important definitions under Income Tax Act, 1961 are as follows:
ASSESSMENT YEAR – S. 2(9)
Section 2(9) defines an “Assessment year” as “the period of twelve months starting from the
first day of April every year.” An assessment year begins on 1st April every year and ends on
31st March of the next year. For example, Assessment year 2012-13 means the period of one
year beginning on 1 st April, 2011 and ending on 31st March, 2012. In an assessment year,
income of the Assessee during the previous year is taxed at the rates prescribed by the
relevant Finance Act. It is therefore, also called as the “Tax Year”
2 PREVIOUS YEAR- S. 2(34)
Definition:
Section 3 defines “Previous year” as “the financial year immediately preceding the
assessment year”. Income earned in one financial year is taxed in the next financial year. The
year in which income is earned is called the “previous year” and the year in which it is taxed
is called the “assessment year” Common previous year for all source of income:
A person may earn income from more than one sources but previous year will always be
common for all the sources of income. This will be so even if a person maintains records or
books of accounts separately for different sources of income. Total income of a person from
all the sources of income will be taken together and considered in the previous year or the
financial year immediately preceding the assessment year.
PERSON –Section 2(31)
The term “person” includes:
a. an individual;
b. a Hindu undivided family (HUF);
c. a company;
d. a firm;
e. an Association of Persons(AoP) or a Body of Individuals,(BoI) whether incorporated or
not;
f. a local authority; and every artificial juridical person not falling within
any of the preceding categories. These are seven categories of persons chargeable to tax
under the Act. The aforesaid definition is inclusive and not exhaustive. Therefore, any
person, not falling in the abovementioned seven categories, may still fall within the four
corners of the term “person” and accordingly may be liable to tax.
ASSESSEE–S. 2(7)
Definition :
U/s 2(7) “Assessee” means a person by whom income tax or any other sum of money is
payable under the Act and it includes:
a. every person in respect of whom any proceeding under the Act has been taken for the
assessment of his income or loss or the amount of refund due to him
b. a person who is assessable in respect of income or loss of another person or who
is deemed to be an Assessee, or
c. an Assessee in default under any provision of the Act A minor child is treated as a separate
Assessee in respect of any income generated out of activities performed by him like singing
in radio jingles, acting in films, tuition income, delivering newspapers, etc. However, income
from investments, capital gains on securities held by minor child, etc. would be taxable in the
hands of the parent having the higher income (mostly the father), unless if such assets have
been acquired from the minor’s sources of income.
ASSESSMENT - S 2(8)
An assessment is the procedure to determine the taxable income of an Assessee and the tax
payable by him. S. 2(8) of the Income Tax Act, 1961 gives an inclusive definition of
assessment “an assessment includes reassessment “ U/s 139 of the Act, every Assessee is
required to file a self- declaration of his income and tax payable by him called “return of
income”.
INCOME- S 2(24)
Definition;
Although, income tax is a tax on income, the Act does not provide any exhaustive definition
of the term “Income”. Instead, the term ‘income’ has been defined in its widest sense by
giving an inclusive definition. It includes not only the income in its natural and general sense
but also incomes specified in section 2 (24).
Broadly the term “Income includes the following:
i. profits and gains ;
ii. Dividend;
iii. Voluntary contributions received by certain institutions
iv. Receipts by employees the value of any benefit or perquisite, whether convertible into
money or not.
vi. Incomes from business – s-28
vii. Any capital gains chargeable under section 45;
viii. Any sum earlier allowed as deduction and chargeable to income-tax under
Section 59
ix. 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 ;
x. any contribution received from employees towards any provident fund or superannuation
fund or Employees State Insurance Act, 1948 , or any other fund for the welfare of such
employees ;
xi. Any sum received under a Keyman insurance policy including the sum allocated by way
of bonus on such policy.
xii. Any sum of money or value of property received as gift –S 56(2) and Shares of closely
held companies transferred to another company or firm are covered in the definition of gift
except in the case of transfer of such shares for reorganization of business by amalgamation
or demerger etc.

Meaning and importance of residential status

The taxability of an individual in India depends upon his residential status in India for any
particular financial year. The term residential status has been coined under the income tax
laws of India and must not be confused with an individual’s citizenship in India. An
individual may be a citizen of India but may end up being a non-resident for a particular year.
Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a
particular year. Also to note that the residential status of different types of persons viz an
individual, a firm, a company etc is determined differently. In this article, we have discussed
about how the residential status of an individual taxpayer can be determined for any
particular financial year
How to determine residential status?
For the purpose of income tax in India, the income tax laws in India classifies taxable persons
as:
A resident
A resident not ordinarily resident (RNOR)
A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get into
taxability, let us first understand how a taxpayer becomes a resident, an RNOR or an NR.

Resident A taxpayer would qualify as a resident of India if he satisfies one of the following 2
conditions:
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or
more in the relevant financial year
In the event an individual who is a citizen of India or person of Indian origin leaves India for
employment during an FY, he will qualify as a resident of India only if he stays in India for
182 days or more. Such individuals are allowed a longer time greater than 60 days and less
than 182 days to stay in India. However, from the financial year 2020-21, the period is
reduced to 120 days or more for such an individual whose total income (other than foreign
sources) exceeds Rs 15 lakh.
In another significant amendment from FY 2020-21, an individual who is a citizen of India
who is not liable to tax in any other country will be deemed to be a resident in India. The
condition for deemed residential status applies only if the total income (other than foreign
sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of
his domicile or residence or any other criteria of similar nature.
The amendment can be further simplified as below-
Residential Status for Income Tax – Individuals & Residents
Resident Not Ordinarily Resident
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident
ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following
conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
 Therefore, if any individual fails to satisfy even one of the above conditions, he would be an
RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for
employment outside India during the year will be a resident and ordinarily resident if he stays
in India for an aggregate period of 182 days or more. However, this condition will apply only
if his total income (other than foreign sources) exceeds Rs 15 lakh. Also, a citizen of India
who is deemed to be a resident in India (w.e.f FY 2020-21) will be a resident and ordinarily
resident in India.
NOTE: Income from foreign sources means income which accrues or arises outside India
(except income derived from a business controlled in India or profession set up in India).
Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR
for the year

Incidence Of Tax—Scope Of Total Income (Section 5)

Total income of an assessee cannot be computed unless we know his residential status
in India during the previous year. According to the residential status, the assessee can
either be:

i. Resident in India; or
ii. Non-resident in India.

However, individual and HUF cannot be simply called resident in India. If individual
is a resident in India he will be either:

a. Resident and Ordinarily resident in India; or

b. Resident but not ordinarily resident in India.

Other categories of persons shall either be resident in India or non-resident in India.

There is no further classification into ordinarily resident or not ordinarily resident in
their case.

Scope of Total Income according to residential status is as under:

(A). In the case of Resident in India (resident and ordinarily resident in case of
individual or HUF) [Section 5(1)]:

The following incomes from whatever source derived form part of Total Income in
case of resident in India/ordinarily resident in India:

(a) any income which is (b) any income which (c) any income which
received or is deemed to be accrues or arises or is accrues or arises
received in India in the relevant deemed to accrue or arise in outside India during the
previous year by or on behalf of India during the relevant relevant previous year.
such person; previous year;

(B) In the case of a Resident but not Ordinarily Resident in India (In
the case of individuals and HUF only) [Section 5(1) and its proviso]:
The following incomes from whatever source derived form part of Total Income in
the case of resident but not ordinarily resident in India:

(a) any income which is

(b) any income which (c) any income which accrues or
received or is deemed to
accrues or arises or is arises to him outside India during
be received in India in the
deemed to accrue or the relevant previous year if it is
relevant previous year by
arise to him during the derived from a business controlled
or on behalf of such
relevant previous year; in or a profession set up in India.
person;
(C) In the case of Non-Resident [Section 5(2)]:
The following incomes from whatever source derived form part of Total Income in
the case of Non-Residents in India:

(a) any income which is received or is

(b) any income which accrues or arises
deemed to be received in India during the
or is deemed to accrue or arise to him in
relevant previous year by or on behalf of
India during the relevant previous year.
such person;
Thus it may be noted that income described in items (a) and (b) in all the three cases
above are to be included in total income of all the three categories of the assessees in
the same manner. The income described in item (c) i.e. income which accrue or arise
outside India is:

i. not includible in the total income at all in case the assessee is non-resident in
India.
ii. includible in the total income in the case of resident but not ordinarily resident
in India only when it is derived from a business controlled in or profession set
up in India

Therefore, the incidence of tax is likely to be more in case of an assessee who is

resident and ordinarily resident in India, a little less in case of a resident but not
ordinarily resident in India and the least in case of non-resident in India if the assessee
has various incomes both inside and outside India.
The provisions regarding incidence of tax above may be summarised in the
following table:

Particulars of Income Whether Taxable

Resident
Not-
and Non-
  Ordinarily
Ordinarily Resident
Resident
Resident
1. Income received or deemed to be received in
Yes Yes Yes
India whether earned in India or elsewhere.
2. Income which accrues or arises or is deemed
to accrue or arise in India during the previous Yes Yes Yes
year, whether received in India or elsewhere.
3. Income which accrues or arises outside India
and received outside India from a business Yes Yes No
controlled from India.
4. Income which accrues or arises outside India
and received outside India in the previous year Yes No No
from any other source.
5. Income which accrues or arises outside India
and received outside India during the years
No No No
preceding the previous year and remitted to India
during the previous year.