SOME IMPORTANT TERMS –
- Assessment year [sec 2 (9)]
Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year.
Thus, an assessment year is a financial year immediately following the relevant previous year. It always starts on 1st April and ends on next 31st March.
- Previous year [sec 3]
The year in which income is earned is known as previous year. According to sec-3, previous year is the financial year immediately preceding the relevant assessment year.
- Uniform previous year
With effect from assessment year 1989-90 on wards all assesses are required to follow financial year as previous year.
- Previous year in case of newly started business.
In such a case, the first the first previous year starts from the date setting up of business or profession and from the date on which new source of income comes into existence. It will end on immediately following 31st march. So, the 1st previous year may not be a financial year. It may be a period, less than 12 months. Second and subsequent previous years are always financial years.
Income earned in a year is always chargeable to tax in next year. Is it true? Is there any exceptions? Following are the exceptions in which income is taxable in same year which it is earned. These exceptions are given to safeguard collection of income tax:
- Income of NRI from shipping business.
- Income of a person leaving India permanently or for long time
- Association of persons or body formed for short period time.
- Income of person likely to transfer property to avoid tax.
- Discontinued business
- Person : [sec 2 (3) ]
It includes following categories of person
- An Individual – natural person
- Hindu Undivided Family (HUF) – it means family consisting of all male persons lineally descended from a common ancestor and includes their wives and unmarried daughters. HUF is treated as a separate legal entity and income of HUF is taxable in the hands of HUF and not in the hands of members of HUF.
- Indian company – company registered under the COMPANY ACT 1956 or 2013 in INDIA.
- Foreign company – company registered under law of foreign country.
- Firm – sec 4 of Partnership act 1932 – partnership is a relation between two or persons who have agreed to share the profit of the business carried on by both or any one of them acting for all.
- Association of persons or body of individuals – Association of persons is a group of persons joining together out of their own will and work for some common purpose. Example: Baroda Cricket Association, ABC cooperative society, Lions club, etc. Body of individuals means group of individuals coming together not voluntarily but due to some compulsion or legal requirement. Example: executor of property.
- Local authority – an authority which is entitled to and entrusted by government for the control and management of local funds. Example: Ahmadabad Municipal Corporation, any given gram Panchayat, etc.
- Every other artificial person – any other artificial person having legal identity, which are not covered in any of the above categories will fall under this category. Example: Gujarat university, ICAI, etc.
Above categories of persons are chargeable to tax.
- ASSESSEE [SEC 2 (7)]
It means any person by whom any tax or any other sum of money (interest or penalty) is payable under income tax act. The term also includes followings:
- Every person against whom any proceeding under the act has been taken either.
- For assessment of his income or loss or amount of refund, due to him
- For assessment of income or loss or amount of refund due to any other person in respect of whom he is assessable.
- Every person who is deemed to be an Assessee under the provisions of income tax act. Example: legal representative of deceased assessee.
- Every person who is deemed to be an Assessee in default under any provision of income tax act. Example: if a person fails to submit his return of income the he will be treated as assessee as default.
Every assessee is person but every person may not be an assessee.
- INCOME [SEC 2 (24)]
This definition is inclusive of the followings:
- Profits and gains.
- Voluntary contribution of trust.
- Any perquisite or benefit of employee.
- Any perquisite to a director.
- Any perquisite of representative person.
- City compensatory allowance or dearness allowance.
- Any special allowance.
- Capital gain.
- Banking income of co-operative society.
- Winning a lottery, a card game, or any other game.
- Any sum received under insurance policy.
- Amount received exceeding RS. 50,000 by way of gift.
- BASIC PRINCIPLES OF INCOME
- Different forms of income – it may be received in cash or in kind.
- Receipts v/s accrual – income arises either on receipts basis or on accrual basis.
- Illegal income – income tax act doesn’t distinguish between illegal and legal income. Illegal income is also taxable.
- Disputed title – even if title of the asset is under dispute then also income received is taxable in the hands of the recipient.
- Reimbursement of expenses is not treated as income.
- Lump sum receipt – income whether received in installment of in lump sum amount is taxable.
- Income includes loss – profit represents (+) income and loss represents (-) income.
- Same income cannot be taxed twice.
- Source of income need not exist in assessment year.
- PIN money – if wife receives money from husband for meeting her personal and household expenses and if small savings is done by wife then it is known as PIN money and it is not treated as income of wife.