Basic Concepts

Period starting from April 1st and ending March 31st of the next year.
Income of previous year of an assessee is taxed during the next following assessment year
at the rates prescribed by the relevant Finance Act.
Income earned in a year is taxable in the next year. The year in which income is earned is
known as previous year (1) and the next year in which income is taxable is known as
assessment year (2).
Previous year in the case of newly set-up business/profession (3)
In the case of a newly set-up business/profession or in the case of a new source of income,
the previous year is determined as follows:
 The first previous year commences on the date of setting up of the business/profession
and ends on the immediately following March 31 (can never be more than 12 months)
 The second and subsequent previous years are always financial years. (=12 months)

Rule: Income of a previous year is taxable in the immediately following assessment year.
Exception (4):
1. Income of non-resident from shipping;
2. Income of persons leaving India either permanently or for a long period of time;
3. Income of bodies formed for short duration;
4. Income of a person trying to alienate his assets with a view to avoiding payment of
tax; and
5. Income of a discontinued business
The term “person” includes (5):
(a) An individual
(b) A Hindu Undivided Family (HUF)
(c) A company;
(d) A firm;
(e) An association of persons or a body of individuals, whether incorporated or not;
(f) A local authority; and
(g) Every artificial juridical person not falling within any of the preceding categories.
Assessee (6)
Any person by whom income-tax or any other sum of money is payable under the Act. It
includes 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. It also includes
deemed assessee and assessee in default.
Income (7)

Income is a periodical monetary return with some sort of regularity. It may be recurring in
nature.
It is defined as the true increase in the amount of wealth, which comes to a person during a
fixed period of time.
Under section 2(24), the term “income” specifically includes the following:
1. Profits and gains

2. Dividend

3. Voluntary Contributions received by a trust. Voluntary contributions received by a

trust are included in the definition of income. As such contributions received by
following types of trusts, funds, associations, bodies etc. are included in the income of
such bodies.

i. Contributions received by a trust created wholly or partly for charitable or

religious purposes.

ii. Contributions received by a scientific research association.

iii. Contributions received by a fund or institution set up for charitable purposes

and notified u/s 10(23c)(iv)(v).

iv. Contribution received by any university or other educational institution,

hospital referred in section 10(23c).

4. The value of any perquisite or profit in lieu of salary taxable under section 17(2)(3)
5. Any special allowance or benefit, other than perquisite included under sub-clause (iii),
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
6. Any allowance granted to the assessee either to meet his 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
7. Value of any benefit or amenity, whether convertible into money or not, obtained by a
representative assessee or by any person on whose behalf such benefit is received by
representative assessee and sum paid by representative assessee in respect of any
obligation which hut for such payment would have been payable by the person on
whose behalf representative assessee has made such payments
i. The profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;
8. The value of any benefits or perquisites, 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 a director of such person, and any sum
paid by such company in respect of any obligation but for which, such payment would
have been payable by the director or other person aforesaid
9. Any sum chargeable to income-tax under section 28(u) and (iii) or section 41 or
section 59;
10. Any sum chargeable to tax u/s 28 (iiia)
11. Any sum chargeable to tax u/s 28(iiib)
12. Any sum chargeable to tax u/s 28 (iiic),
13. The value of any benefit or perquisite taxable under section 28 (iv)
14. Any capital gain taxable under section 45
15. Any sum whether received or receivable in cash or in kind under an agreement for—
not carrying out any activity in relation to any business; or not sharing any know-how,
patent, copyright, trade-mark, license, franchise or any other business or commercial
right of similar nature or information or technique likely to assist in the manufacture
or processing of goods or provision of services
16. The profit and gains of any business of insurance carried on by a mutual insurance
company or by a co-operative society, computed in accordance with section 44 or any
surplus taken to be such profits and gains by virtue of provisions contained in the first
schedule
17. 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
18. Any sum received by the assessee as his employers’ contributions to any provident
fund or superannuation fund or any fund set up under the provisions of the
Employee’s State Insurance Act, 1948 or any other fund for the welfare of’ such
employees
19. Any sum received under a key man insurance policy including the sum allocated by
way of bonus on such policy
20. Any sum received by an individual or HUF from any person during 2013-14
i. in cash or by issue of cheque or draft or by any other mode or by way of credit
ii. otherwise, then by way of consideration for goods or services but does not
include
21. An aggregate amount of gift or gifts received (whether in cash or in the form of
property) exceeding Rs. 50,000 in a previous year by an individual or Hindu
undivided family from non-relatives shall be treated as income which will be taxable
in the hands of the recepient. (For details, please refer to chapter on Other Sources)
22. Gifts received by a firm or closely held company as provided in Section 56(2) (viia).
23. Any consideration for issue of shares by a closely held company as exceeds the fair
market value of shares as provided in Section 56(2) (viib) [w.e.f. Assessment year
2013-14].
i. The definition of term ‘Income’ as given above does not explain what income
is? It only tells that the above-mentioned receipts are also included in the
meaning of term income. The definition given u/s 2(24) is inclusive and not
exhaustive. According to English dictionary, the term income means
“periodical receipts from one ‘s business, land, work, investments etc.”
ii. The term income simply means something which comes in. It is a periodical
return with regularity or expected regularity. It’s nowhere mentioned that
income refers to only monetary return. It includes value of benefits and
perquisites. Anything which can reasonably and properly be described as
income is taxable under this Act unless specifically exempted under the
various provisions of this Act.
 iii. The term income includes not only what is received by using the property but
also the amount saved by using it himself. Anything which is convertible into
income can be regarded as source of accrual of income.

Gross Total Income (8):

As per section 14, income of a person is computed under the following five heads:
1. Salaries
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources
The aggregate income under these heads is termed as “gross total income”.
In other words, gross total income means total income computed in accordance with the
provisions of the Act before making any deduction under sections 80C to 80U.
Exemption Vs. Deduction (9)
If an income is exempt from tax, it is not included in the computation of income. Exemption
can never exceed the amount of income. Deduction is generally given form income
chargeable to tax. Deduction can be less than or equal to or more than amount of income. If
amount deductible is more than the amount of income, the resulting amount will be taken as
loss.
Capital receipts Vs. Revenue receipts (10)
There are two types of receipts: capital receipts and revenue receipts. Capital receipts are
exempt from tax unless they are expressly taxable. For instance, capital gains are taxable
under section 45 even if they are capital receipts. On the other hand, revenue receipts are
taxable, unless they are expressly exempt from tax. For instance, income exempt under
section 10.
Method of accounting (11)
Income chargeable under the head “Profits and gains of business or profession” or “Income
from other sources” is to be computed in accordance with the method of accounting regularly
employed by the assessee.
In other cases, method of maintaining books of account is irrelevant.
Types of Accounting Methods (12)
Mercantile System – Under mercantile system, income and expenditure are recorded at the
time of occurrence during the previous year.
Cash System – Under cash system of accounting, revenue and expenses are recorded only
when received or paid.
Tax Rates (13)