Definition:

Income [Section 2(24) of the Income Tax Act ] - Income is the money an individual
receives in compensation for their work, services, or investments. For businesses, Income means
revenue that a business generates by selling its goods and services throughout its operations.
Income under Indian Tax law encompasses every aspect of Gross Income, including all sources of
revenue, and taxable income, which is gross income minus deductions u/s 80C – 80U and other
adjustments. Income is the amount of money that’s susceptible to income tax.

Income can be divided into a total of five categories:

1. Income from Salary: This includes any remuneration an individual receives in exchange for
services rendered under a contract of employment. This sum qualifies for income tax
consideration only if an employer-employee relationship exists between the payer and the
payee. All basic salary, as well as commissions and bonuses, are subject to full taxation.

Under this head salary includes various allowances such as; Leave travel allowance, House rent
allowance, Medical allowance, etc.

2. Income from House Property: In terms of income tax, a vacant residential property is
considered self-occupied. When a taxpayer owns more than one self-occupied house, only two
are classified as house property. Rest are regarded as let out. Taxes are imposed on any
commercially owned residence or property.

3. Profits and Gains of Business or Profession: Any profits or gains earned

by an individual from a business or profession is considered as income for
taxation purposes. Example- Profits from an organization’s revenue. Profits made from
the selling of a specific licence. Cash received as a result of an individual’s export under a
government scheme, etc.

4. Capital Gains: Any profits or gains earned from the sale of a capital asset,
such as property or shares, is considered as income. Capital gains are earned on
an investment made by an individual for a business or profession. Capital gains includes income
earned from investments in mutual funds, equities, real estate, and other assets.

There are total two types of gains short term and long term capital gains:

 Short-term capital gains are profits earned when an individual sells an asset within 24
months (2 years) of acquiring it. EXCEPTION – Shares, Mutual Funds, etc. where the 24
months come down to 12 months so anything beyond 12 months in this exceptional case
becomes long term.
 Long Term Capital Gains are the profits made on an asset transfer after 24 months (2
years) from the day of acquiring it.

5. Income from Other Sources: Any income earned from sources other than
those mentioned above, such as interest on bank deposits, lottery winnings,
or gifts, is considered as income.
 CASE- Universal Radiators v. CIT – This case talks about income being a recurring monetary
gain and says that the definition of income can,t be exhaustive at one point in time. Since, with
time the scope of income is to be expanded to include more things.

Previous Year (Section 3) - Previous Year means the financial year immediately
preceding the Assessment Year. Income earned in a year is assessed in the next year. The year in
which income is earned is known as Previous Year and the next year in which income is assessed
is known as Assessment Year. It is mandatory for all assessee [Section 2(7)] to follow financial
year (from 1st April to 31st March) as previous year for Income-Tax purpose.
Financial Year According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year
means the year commencing on the 1st day of April. Hence, it is a period of 12 months starting
from 1st April and ending on 31st March of the next year. It plays a dual role i.e. Assessment
Year as well as Previous Year.
Example: Financial year 2019-20 is
• Assessment year for the Previous Year 2018-19; and
• Previous Year for the Assessment Year 2020-21.
Determination of the first previous year in case of a newly set-up business or profession or
for a new source of income
In case of Previous Year is the Period
Business or profession being newly set-up
Beginning with the date of setting up of the
business & ending on 31st March of that
financial year.
A source of income newly coming into Beginning with the date on which the new
existence source of income comes into existence &
ending on 31st March of that financial year.

Notes:
1. Above explanation signifies that the first previous year may be a period of less than 12 months
but in any case it cannot exceed a period of 12 months. However, next and subsequent previous
years s hall always be a period of 12 months.
2. Where an assessee has an existing regular income from various sources and he earns an
income from a new source during the financial year, his previous year shall commence
• For the existing income: From 1st April of previous year; and
• For new income: From the date when on which the new source of income comes into existence.
However, assessee is liable to tax on aggregate income from all the sources, therefore, all the
income will be included in the previous year.
Exceptions to the general rule that income of a Previous Year is taxed in its Assessment
Year
This is the general rule that income of the previous year of an assessee is charged to tax in the
immediately following assessment year. However, in the following cases, income of the previous
year is assessed in the same year in order to ensure smooth collection of income tax from the
taxpayer who may not be traceable, if assessment is postponed till the commencement of the
Assessment Year:
1. Income of a non-resident assessee from shipping business (Sec. 172)
2. Income of a person who is leaving India either permanently or for a long period (Sec. 174)
3. Income of bodies, formed for a short duration (Sec. 174A)
4. Income of a person who is likely to transfer property to avoid tax (Sec. 175)
5. Income of a discontinued business (Sec. 176). In this case, the Assessing Officer has the
discretionary power i.e. he may assess the income in the same previous year or may wait till the
Assessment year.

Assessment Year- Assessment year means the period of 12 months commencing on the
1st day of April every year. It is the year (just after the previous year) in which income earned in
the previous year is charged to tax.
E.g., A.Y.2020-21 is a year, which commences on April 1, 2020 and ends on March 31, 2021.
Income of an assessee earned in the previous year 2019-2020 is assessed in the A.Y. 2020-21.
Taxpoint:
► Duration: Period of 12 months starting from 1st April.
► Relation with Previous Year: It falls immediately after the Previous Year.
► Purpose: Income of a previous year is assessed and taxable in the immediately following
Assessment Year.

AGRICULTURAL INCOME - Agriculture is said to be the primary occupation in India. It is

usually the only source of income for the large rural population in India. The country as a whole
is entirely dependent on agriculture for its basic food requirements. The government has
numerous schemes, policies and other measures to promote growth in this sector – one of them
being an exemption from income tax.

It may seem like the fact that exemption to income tax is all that we need to know when it comes
to the taxation of agricultural income but there is more to it.

Agricultural income is defined under Sec. 2(14) of the Income Tax Act, 1961.
Agricultural income is any rent or revenue by means of cash or in-kind, derived from a land,
which is used for an agricultural purpose and land should be situated in India.
Income from agricultural should be produced by a cultivator or a rent receiver of that produce in-
kind, which can be fit to take that into the market.
The income should be derived from the sale by a cultivator or a rent receiver of that product
which is produced or received by him, no process can be performed other than the process to
render it fit for the market.

Income which is derived from the building should follow some conditions:
1. The building should be situated in India;
2. It should be occupied by a cultivator or a receiver of rent-in-kind.
3. In the connection of the land of a cultivator or a rent receiver, the building required to be as a
dwelling-house, store-house or other outbuildings.

Agricultural Income has been exempted from Income Tax under Sec. 10(1) of the Income
Tax Act, where it has been given that, in computing, the total income of a previous year of a
person whose source of income is agriculture will not fall under the category of total income.
The burden of proof that an income fall under this category is on the assessee.

Sri Ranganatha Enterprises v. CTT [1996] 232 ITR 568 (kar.)

In this case, the Court held that the burden lies on the assessee to prove that the income derived
by him is the agricultural income for which he is claiming an exemption under Sec 10(1) of the
Income Tax Act.

Necessary conditions for income to be Agricultural income

There are some necessary conditions which are required for income to be Agricultural income
 I) Income should be derived from land

The very first requirement is the income should be derived from land not from any other assets.
Land can be owned or occupied by a cultivator who produces on that land, or a rent receiver of
that produce. Land can be farming land or a building that should be occupied or owned by a
cultivator or a rent receiver. That building or farmhouse should be on the same land and used as
a dwelling-house, store-house or other outbuildings.

II) Land should be located in India but not within the jurisdiction of the municipality or
cantonment board where the population is not less than 10000.
III) Land must be used for basic agricultural operations only then exempted.
IV) Income from nursery are always exempted from the total income.

TAX
Tax Planning means reducing tax liability by taking advantage of the legitimate concessions and
exemptions provided in the tax law. It involves the process of arranging business operations in such
a way that reduces tax liability. It is the scientific planning so as to attract minimum tax liability or
postponement of tax liability for the subsequent period by availing various incentives, concessions,
allowance, rebates and relief provided in the Act.
Example:- 1. Investments Under Section 80C i.e. payment related deductions ,

2. Under Section 80CCD i.e. contribution to Pension Fund of LIC or other insurance company
3. Reinvestment Under Section 54, 54EC etc.

Tax Evasion is using illegal means to avoid paying taxes by deliberately suppressing income or sale
or by increasing expenses, etc., which results in reduction of total income of the assessee. Usually, tax
evasion involves hiding or misrepresenting income. This might be underreporting income, inflating
deductions without proof, hiding or not reporting cash transactions, or hiding money in offshore
accounts. Tax evasion is part of an overall definition of tax fraud, which is illegal intentional non-
payment of taxes. Fraud can be defined as “an act of deceiving or misrepresenting,” It is not legally
permissible under taxing statue.

Example:- 1. Bogus Expense 2. Underreporting of Income 3. Inflating deductions without proof 4.

Hiding or not reporting cash transactions, or hiding money in offshore accounts etc.

Tax avoidance means taking undue advantage of the loopholes, lacunae or drafting mistake for
reducing tax liability and thus avoiding payment of tax which is lawfully payable. Generally, it is done
by twisting or interpreting the provision of law and avoiding payment of tax. Tax avoidance is an
activity of taking unfair advantage of the shortcomings in the tax rules by finding new ways to avoid
the payment of taxes that are within the limits of the law. Tax avoidance can be done by adjusting
the accounts in such a manner that there will be no violation of tax rules. Tax avoidance is lawful but
in some cases it could come in the category of crime.

Case- Helvering vs. Greggory (1934) “Anyone may so arrange his affairs that his taxes shall be as low as
possible. He is not bound to choose that pattern which will best pay the Treasury; there is not even a
patriotic duty to increase one’s taxes.”
Example:- 1. Taking legitimate tax deductions to minimize business expenses and lower your
business tax bill. 2. Taking tax credits for spending money for legitimate purposes etc.

4) Tax Management It means planning affairs in such a manner, so that the tax obligation is
managed properly. The objective of Tax Management is to comply with the provisions of Income Tax
Law and its allied rules. Tax Management helps in avoiding payment of interest, penalty,
prosecution etc.

Example:- 1. Tax Management deals with filing of Return in time. 2. Getting the accounts audited. 3.
Deducting tax at source etc.

Distinguish between Tax Planning, Tax Evasion, Tax Avoidance and Tax
Management
Points of Tax planning Tax Avoidance Tax Evasion Tax Management
distinction
Definition It is a way to It is an exercise by It is the illegal way It is a procedure
reduce tax liability which the to reduce tax to comply with
by taking full assessee legally liability by the provisions of
advantages takes advantage deliberately the law.
provided by the of the loopholes suppressing
Act through in the Act. income or sale or
various by increasing
exemptions, expenses, etc.,
deductions, which results in
rebates & relief. reduction of total
income of the
assessee.
Feature Tax planning is a Tax avoidance is a Tax evasion is It is
practice to follow practice of illegal, both in implementation
the provisions of bending the law script & moral. or execution part
law within the without breaking of taxation
moral framework. it. department of an
organisation.
Object To reduce tax To reduce the tax To reduce tax To comply with
liability by liability to the liability by the provisions of
applying script & minimum by applying unfair laws.
moral of law. applying script of means.
law only
Approach It is futuristic and It is futuristic but It is concerned It is a continuous
 positive in nature. short term in with past and approach, which
The planning is nature, as applied after the is concerned with
made today to loophole of the liability of tax has past (rectification,
avail benefits in law will be arisen. It is done revisions etc.),
future. corrected in with negative present (filing of
future by approach to avail return, etc.) &
amendments of benefits by killing future (corrective
the law. the moral of law. action).
Benefit Generally, arises Generally, arises Generally, Penalty, interest
in long run. in short run. benefits do not & prosecution can
arise but it causes be avoided.
penalty and
prosecution.
Treatment of Law It uses benefits of It uses loopholes It overrules the It implements the
the law. in the law. law. law.
Practice It is tax saving. It is tax hedging. It is tax It is tax
concealment. administration.
Need It is desirable It is avoidable It is objectionable It is essential.
Morality It is moral in It is immoral in It is illegal. It is duty.
nature. nature