Basic Concepts under Income Tax Act, 1961- Important definitions

 Assessee [Section 2(7)]

1. “Assessee” means a person by whom any tax or any other sum of money is
payable under this Act. In addition, it includes –
• Every person in respect of whom any proceeding under this Act has been taken for
the assessment of –
▪ his income; or
▪ the income of any other person in respect of which he is assessable; or
▪ the loss sustained by him or by such other person; or
▪ the amount of refund due to him or to such other person.
• Every person who is deemed to be an assessee under any provision of this Act;
• Every person who is deemed to be an assessee-in-default under any provision of this
Act.
 Assessment [Section 2(8)]
This is the procedure by which the income of an assessee is determined by the
Assessing Officer. It may be by way of a normal assessment or by way of
reassessment of an income previously assessed.
Types of income-tax assessment:
1. Self-assessment under section 140A
2. Summary assessment under section 143(1)
3. Scrutiny assessment under section 143(3)
4. Best judgment assessment under section 144
5. Re-assessment or income escaping assessment under section 147
6. Assessment in case of search under section 153A
 Person [Section 2(31)]
The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is
closely connected with the latter. The term ‘person’ is important from another point of
view also viz., the charge of income-tax is on every ‘person’. The definition of the
term ‘person’ is inclusive and not exhaustive.
We may briefly consider some of the following seven categories of assessees each of
which constitute a separate unit of assessment or a separate tax entity.
(i) Individual The term ‘individual’ means only a natural person, i.e., a human
being.
• It includes both males and females.
• It also includes a minor or a person of unsound mind. But the assessment in
such a case may be made under section 161(1) on the guardian or manager of
the minor or lunatic who is entitled to receive his income. In the case of
deceased person, assessment would be made on the legal representative.
(ii) HUF
Under the Income-tax Act, 1961, a Hindu undivided family (HUF) is treated as
a separate entity for the purpose of assessment. It is included in the definition
of the term “person” under section 2(31). The levy of income-tax is on “every
person”. Therefore, income-tax is payable by a HUF.
 "Hindu undivided family" has not been defined under the Income-tax Act,
1961. The expression is, however, defined under the Hindu Law as a family,
which consists of all males lineally descended from a common ancestor and
includes their wives and daughters. Some members of the HUF are called co-
parceners. They are related to each other and to the head of the family. HUF
may contain many members, but members within four degrees including the
head of the family (Karta) are called co-parceners. A Hindu Coparcenary
includes those persons who acquire an interest in joint family property by
birth.
Earlier, only male descendants were considered as coparceners. With effect
from 6th September, 2005, daughters have also been accorded coparcenary
status. It may be noted that only the coparceners have a right to demand
partition. A daughter of coparcener by birth shall become a coparcener in her
own right in the same manner as the son. Being a coparcener, she can claim
partition of assets of the family. The rights of a daughter in coparcenary
property are equal to that of a son. However, other female members of the
family, for example, wife or daughter-in-law of a coparcener are mere
members of the HUF and are not eligible for such coparcenary rights. The
existence of a HUF does not arise from a contract but arises from status. There
need not be more than one male member or one female coparcener w.e.f. 6th
September, 2005 to form a HUF.
The Income-tax Act, 1961 also does not indicate that a HUF as an assessable
entity must consist of at least two male members or two coparceners. Under
the Income-tax Act, 1961, Jain undivided families and Sikh undivided families
would also be assessed as a HUF.
iii. Company [Section 2(17)]
For all purposes of the Act, the term ‘Company’, has a much wider connotation
than that under the Companies Act. Under the Act, the expression ‘Company’
means:
(a) any Indian company as defined in section 2(26); or
(b) any body corporate incorporated by or under the laws of a country outside
India, i.e., any foreign company; or
(c) any institution, association or body which is assessable or was assessed as a
company for any assessment year under the Indian Income-tax Act, 1922 or for
any assessment year commencing on or before 1.4.1970 under the present Act; or
(d) any institution, association or body, whether incorporated or not and whether
Indian or non-Indian, which is declared by a general or special order of the CBDT
to be a company for such assessment years as may be specified in the CBDT’s
order.
Classes of Companies
(1) Domestic company [Section 2(22A)] –
It means an Indian company or any other company which, in respect of its income
liable to income-tax, has made the prescribed arrangements for the declaration and
payment of dividends (including dividends on preference shares) within India,
payable out of such income.
 Indian company [Section 2(26)] - Two conditions should be satisfied so that a
company can be regarded as an Indian company –
(a) the company should have been formed and registered under the Companies Act,
19561 and
(b) the registered office or the principal office of the company should be in India.
The expression ‘Indian Company’ also includes the following provided their
registered or principal office is in India:
i. a corporation established by or under a Central, State or Provincial Act (like
Financial Corporation or a State Road Transport Corporation);
ii. an institution or association or body which is declared by the Board to be a
company under section 2(17)(iv);
iii. a company formed and registered under any law relating to companies which
was or is in force in any part of India [other than Jammu and Kashmir and
Union territories mentioned in (v) below];
iv. in the case of Jammu and Kashmir, a company formed and registered under
any law for the time being in force in Jammu and Kashmir;
v. in the case of any of the Union territories of Dadra and Nagar Haveli, Goa,
Daman and Diu, and Pondicherry, a company formed and registered under any
law for the time being in force in that Union territory.
(2) Foreign company [Section 2(23A)] - Foreign company means a company which is not
a domestic company.
(3) Company in which public are substantially interested [Section 2(18)] - The following
companies are said to be companies in which the public are substantially interested:
(a) A company owned by the Government (either Central or State but not Foreign) or
the Reserve Bank of India (RBI) or in which not less than 40% of the shares are held
by the Government or the RBI or corporation owned by that bank.
(b) A company which is registered under section 25 of the Companies Act, 19562
(formed for promoting commerce, arts, science, religion, charity or any other useful
object and which prohibits payment of dividends to its members).
(c) A company having no share capital and if, having regard to its objects, the nature
and composition of its membership and other relevant considerations, it is declared by
the Board for the specified assessment years to be a company in which the public are
substantially interested.
(d) A mutual benefit finance company which carries on its principal business of
accepting deposits from its members and which is declared by the Central
Government under section 620A of the Companies Act, 19563 to be Nidhi or a
Mutual Benefit Society.
(e) A company whose equity shares (not being shares entitled to a fixed rate of
dividend) carrying at least 50% of the voting power have been allotted
unconditionally to or acquired unconditionally by and were beneficially held
throughout the relevant previous year by one or more co-operative societies.
(f) A company which is not a private company as defined in the Companies Act, 1956
and which fulfills any of the following conditions: - its equity shares should have, as
on the last day of the relevant previous year, been listed in a recognised stock
exchange in India.
 (4) Person having substantial interest in the company [Section 2(32)] – 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 at least 20% of the
total voting power.
(iv) Firm [Section 2(23)]
The terms ‘firm’, ‘partner’ and ‘partnership’ have the same meanings as assigned to
them in the Indian Partnership Act, 1932.
In addition, the definitions also include the terms limited liability partnership, a
partner of limited liability partnership as they have been defined in the Limited
Liability Partnership Act, 2008. However, for income-tax purposes a minor admitted
to the benefits of an existing partnership would also be treated as partner. A
partnership is the relation between persons who have agreed to share the profits of
business carried on by all or any of them acting for all. The persons who have entered
into partnership with one another are called individually ‘partners’ and collectively a
‘firm’.
v. Association of Persons (AOP)
When persons combine together for promotion of joint enterprise they are assessable as an
AOP, when they do not in law constitute a partnership. In order to constitute an association,
persons must join for a common purpose or action and their object must be to produce
income; it is not enough that the persons receive the income jointly. Co-heirs, co-legatees or
co-donees joining together for a common purpose or action would be chargeable as an AOP.
For e.g., Mr. Yash, AB & Co. (Firm) and X (P) Ltd. Join together to carry on construction
activity otherwise than as a partnership firm, such an association will be recognized as an
association of persons.
vi. Body of Individuals (BOI)
Body of individuals refers to a conglomeration of individuals who carry on some activity
with or without the object of producing income. It denotes the status of persons like executors
or trustees who merely receive the income jointly and who may be assessable in like manner
and to the same extent as the beneficiaries individually. Thus, co-executors or co-trustees are
assessable as a BOI as their title and interest are indivisible. Income-tax shall not be payable
by an assessee in respect of the receipt of share of income by him from BOI and on which the
tax has already been paid by such BOI. For e.g., mutual trade associations, members club,
etc.
Section 2(31) further explains that an association of persons/body of individuals or a local
authority or an artificial juridical person shall be treated as a person, whether or not it is
formed with the object of deriving income, profits or gains. Accordingly, even if such entities
have been formed not for earning any income/ profit still they are "person" for the purpose of
the Act and are covered by the provisions of the Act.
Difference between AOP and BOI:
In case of a BOI, only individuals can be the members, whereas in case of AOP, any person
can be its member i.e. entities like company, firm etc. can be the member of AOP but not of
BOI. In case of an AOP, members voluntarily come together with a common will for a
common intention or purpose, whereas in case of BOI, such common will may or may not be
present.
vii. Local Authority
The term means a municipal committee, district board, body of port commissioners or other
authority legally entitled to or entrusted by the Government with the control or management
of a municipal or local fund. Note: A local authority is taxable in respect of that part of its
income which arises from any business carried on by it in so far as that income does not arise
from the supply of a commodity or service within its own jurisdictional area. However,
income arising from the supply of water and electricity even outside the local authority’s own
jurisdictional areas is exempt from tax. Viii. Artificial Juridical Persons
Artificial Juridical Persons are the entities which are not natural persons but are separate
entities in the eyes of law. This is a residual category could cover all artificial persons with a
juristic personality not falling under any other category of persons. Deities, Bar Council,
Universities are some important examples of Artificial Juridical Persons.
 India [Section 2(25A)]
The term 'India' means –
(i) the territory of India as per article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone, or
(v) any other specified maritime zone and the air space above its territory and
territorial waters. Specified maritime zone means the maritime zone as
referred to in the Territorial Waters, Continental Shelf, Exclusive Economic
Zone and other Maritime Zones Act, 1976.
 Assessment year [Section 2(9)]
The term has been defined under section 2(9). This means a period of 12 months
commencing on 1st April every year. The year in which income is earned is the
previous year and such income is taxable in the immediately following year which is
the assessment year. Income earned in the previous year 2020-21 is taxable in the
assessment year 2021-22. Assessment year always starts from 1st April and it is
always a period of 12 months.
 Previous year [Section 3]
It means the financial year immediately preceding the assessment year. As mentioned
earlier, the income earned during the previous year is taxable in the assessment year.
Business or profession newly set up during the financial year - In such a case, the
previous year shall be the period beginning on the date of setting up of the business or
profession and ending with 31st March of the said financial year. If a source of
income comes into existence in the said financial year, then the previous year will
commence from the date on which the source of income newly comes into existence
and will end with 31st March of the financial year.
Exceptions to PY Income of the PY taxable in the PY itself instead of AY:
Section 172 Income of a Non-Resident shipping companies.
Section 174 Income of persons leaving India with no intention of returning to India.
 Section 174A Assessment of AOP / BOI / AJP formed for a particular purpose likely
to be dissolved in the same year of formation.
Section 175 The assessee is likely to transfer his assets with a view to avoid payment
of tax. Section 176 Income of a discontinued business or profession.
 Income [ Section 2(24)]
includes salary, rent, profit, dividend, gifts, donations, capital gain
 Gross Income [Section 14]
It provides for the purpose of charge of Income tax and computation of total income,
all incomes shall be classified under following five heads of income
(i) Income under the head ―Salaries.
(ii) Income under the head ―House Property.
(iii) Income under the head ―Profits and gains of Business or Profession.
(iv) Income under the head ―Capital Gains.
(v) Income under the head ―Other Sources.
After aggregating income under various heads (Duly applying clubbing provisions),
losses are adjusted and the resultant figure is called ―Gross Total Income (GTI).
Gross Total Income may also be understood as the total income of an assessee before
making any deduction under chapter VIA i.e., undersection 80C to 80U of the Act.
Thus, G. T. I. = Salary Income + House Property Income + Business or Profession
Income+ Capital Gains +Other Sources Income + Clubbing of Income - Set-off of
Losses