Chapter I – Preliminary

Introduction

Income tax Act, 1962 is one of the Act enacted by Parliament that affects a vast proportion of earning persons in India, either directly or indirectly. This book seeks to provide my understanding of the Act.

Definitions (S.2)

Agricultural income

 (S. 2(1A)) 20 (S. 2(1A))-According to Section 2(1A) of Income Tax Act, 1961, 

agricultural

tax (S.4) 28 income and its year of taxability (S.8) 31" means— (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

(b) any income

37 derived from such land by— (i) agriculture; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ;

(c) any income

– S.10 37 derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on : Provided that—

(i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and

(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated—

(A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand; or

(B) in any area within the distance, measured aerially,—

(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten lakh.

Explanation 1.—For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income

also taxable 163 arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section. Explanation 2.—For the removal of doubts, it is hereby declared that income

– Ss. 23 & 24 164 derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income. Explanation 3.—For the purposes of this clause, any income

from co-owned property – S. 26 167 derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income; Explanation 4.—For the purposes of clause (ii) of the proviso to sub-clause (c), "population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

Assessee and person (S. 2(7) and 2(31))

According to Section 2(7) of Income Tax Act, 1961,

"assessee" means a person by whom any tax or any other sum of money is payable under this Act, and includes—

(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income

167 or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other 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

According to Section 2(31) of Income Tax Act, 1961,

"person" includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income

– S. 27 167, profits or gains; 

Previous year and Assessment year (S. 2(34), 3 & 2(9))

According to Section 2(34) of Income Tax Act, 1961:

"previous year" means the previous year as defined in section 3.

According to Section 3 of Income Tax Act, 1961:

For the purposes of this Act, "previous year" means the financial year immediately preceding the assessment year :

Provided that, in the case of a business or profession newly set up, or a source of income

– Ss. 29, 30 to 43D 171 newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. According to Section 2(9) of Income Tax Act, 

"assessment year" means the period of twelve months commencing on the 1st day of April every year ;

Books of accounts and document (S. 2(12A) & 2(22AA))

According to Section 2(12A)

"books or books of account" includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;

According to Section 2(22AA)

"document" includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000);

Income – Revenue and capital receipts (S. 2(24)

According to Section 2(24)

"income

by way of royalties, etc., in case of non-residents – S. 44DA 264" includes— (i) profits and gains ;

(ii) dividend ;

(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.

Explanation.—For the purposes of this sub-clause, "trust" includes any other legal obligation ;

(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17 ;

(iiia) 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 ;

(iiib) 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 ;

(iv) the value of any benefit or perquisite, 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 the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid ;

(iva) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income

310 is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the "beneficiary") and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary ; (v) any sum chargeable to income

– S. 59 312-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59 ; (va) any sum chargeable to income

313-tax under clause (iiia) of section 28 ; (vb) any sum chargeable to income

is transferred – S. 60 313-tax under clause (iiib) of section 28 ; (vc) any sum chargeable to income

where asset is transferred by revocable transfer – S. 61 313-tax under clause (iiic) of section 28 ; (vd) the value of any benefit or perquisite taxable under clause (iv) of section 28 ;

(ve) any sum chargeable to income

arising to – S. 64 314-tax under clause (v) of section 28 ; (vi) any capital gains chargeable under section 45 ;

(vii) the profits 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 ;

(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;

(viii) Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub-clause (viii) was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;

(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.

Explanation.—For the purposes of this sub-clause,—

(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called;

(ii) "card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game ;

(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 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.

Explanation.—For the purposes of this clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to clause (10D) of section 10 ;

(xii) any sum referred to in clause (va) of section 28;

(xiii) any sum referred to in clause (v) of sub-section (2) of section 56;

(xiv) any sum referred to in clause (vi) of sub-section (2) of section 56;

(xv) any sum of money or value of property referred to in clause (vii) or clause (viia) of sub-section (2) of section 56;

(xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in clause (viib) of sub-section (2) of section 56;

The following sub-clause (xvii) shall be inserted after sub-clause (xvi) of clause (24) of section 2 by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015 :

(xvii) any sum of money referred to in clause (ix) of sub-section (2) of section 56;

i. Real income

ii. and set off or carry forward of loss 318 Keyman insurance policy

iii. Subsidy and sales tax

iv. Change in character

v. Sales tax

vi. Interest and interest on securities (S. 2(28A) and 2(28B))

According to Section 2(28A)

interest"  means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.

According to Section 2(28B)

"interest on securities" means,—

(i) interest on any security of the Central Government or a State Government ;

(ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act 

Insurer (S. 2(28BB))

According to Section 2(28BB)

"insurer" means an insurer, being an Indian insurance company, as defined under clause (7A) of section 2 of the Insurance Act, 1938 (4 of 1938), which has been granted a certificate of registration under section 3 of that Act;

Average rate of tax and Maximum marginal rate (S. 2(10) & 2(29C))

According to Section 2(10)

average rate of income

329-tax" means the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income According to Section 2(29C)

"maximum marginal rate" means the rate of income

– S. 80B 330-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual , association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year./Substantial interest (S. 2(32))

According to Section 2(32)

"person who has a substantial interest in the company", in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power ;

Prescribed (S. 2(33))

According to Section 2(33)

"prescribed" means prescribed by rules made under this Act ;

vii. Relative (S. 2(41))

According to Section 2(41)

"relative", in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual ;

viii. Gross total income

 expenditure: 347 and total income (S. 80B and 2(45)) According to Section 80B

“gross total income

of authors of certain books – S. 80RRB 397” means the total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VI. According to Section 2(45)

"total income

of any other person – S. 153C 466" means the total amount of income referred to in section 5, computed in the manner laid down in this Act ; Anyone interested in reading further may contact author at [email protected] 

from international transaction – S. 92 505-tax by transfer of income to non-residents – S. 93 519 by way of dividends on GDRs other than those covered u/s. 115-O purchased in foreign currency, and LTCG arising from the transfer of such bonds or GDRs – S. 115AC 529 533 – S. 115G 536 of unit holders – Ss. 115R to 115T 577-tax – S. 245C 648, etc. – S. 271 666 – S. 271F 672 – S. 276CC 683 – S. 288A 696