INTRODUCTION OF BASIC TERMS

Hello students. In this module we will learn the basic terms used in Income tax like previous
year, assessment year, assessee, types of income, types of assesses, gross total income, taxable
income, agricultural income, and scheme of taxation.

1.1 Assessment Year

Tax is levied on the total income of the previous year of an assessee in the respective
assessment year. This is given under section 4 of the Income Tax Act 1961.This
statement explains the two basic terms which are related to each other and very
important terms in learning income tax. The two terms are (a) assessment year, and (b)
previous year

Assessment Year: Section 2(9)

Assessment year is the twelve months commencing on the first day of April every year.
For example, this year the assessment year is April 1st 2022 to March 31st
2023.From1990 onwards, it is uniform financial year followed by all assesses, that is
April 1st to March 31st. This rule is important as people follow different financial year
to maintain books of accounts like Diwali to Diwali, January to December, Ugadi to
Ugadi etc. For filing tax returns irrespective of the way, they keep books of accounts
uniform financial year is followed.

Difference Between Assessment Year and Financial Year

Assessment year comes after the financial year. We have to evaluate the income of the
previous year and pay tax for that. Nobody can be asked to pay tax before it is earned.
Some people may change jobs, make new investments, sell assets etc. These changes
may happen during the financial year. Thus, assessment year starts after the financial
year ends. The distinction between assessment year and financial year is given in the
following table;
Points of distinction Assessment Year Financial Year
Based on Income Tax Assessment year is the Financial year is the year
perspective year in which your income you earn income
is assessed
 Sequence Assessment year follows Financial year comes first
financial year
Represented as AY FY

Previous Year Section 3

Previous year is the year preceding the assessment year. The current financial year is
the previous year. The previous year for this year is 2019 April 1 st to March 31st
2021.All the assesses are required to follow the April 1 st to March 31st financial year,
even if in the case of a newly set up business, or a new job where the Financial year can
be less than twelve months. From the subsequent years, it will automatically become
twelve months like in all other assesses. The financial year cannot exceed twelve
months.

Distinction Between Assessment Year and Previous Year

Points of Distinction Assessment Year Previous Year

Meaning Assessment year is the Previous year is the year in
year in which income is which the sources of income
earned and assessed and are collected
paid tax
Duration It has to be twelve months It can be less than or equal to
twelve months, if the activity
started late or twelve months if
the activity continued for the
entire year
Relation with It is the current financial It is the financial year
Financial year year preceding the current financial
year

Cases in which Income is Assessed in the Same Year in which it is Earned

General rule for income tax assessment is that, income earned during the previous year
is taxed in the immediately preceding assessment year. But there are certain exemptions
to this rule, because, if it is not taxed in the year of receipt it may be difficult to collect
tax in these cases.
 Non - Resident Shipping Companies: These shipping companies carry cargo
and passengers from Indian ports. The income is taxed in the same year itself,
if they do not have any representative in India to pay tax during the assessment
year.
 Persons Leaving India: People leaving India with no intention to come back or
migrating to a foreign country, there income is taxed in the year in which it is
earned and before they leave India.
 Association of Persons or Body of Individuals or Artificial Juridical Person
formed for a limited period: For example, if an association of persons is formed
for six months for construction of a flyover, or building after the construction is
over, the business organization is discontinued. Therefore, tax is calculated in
the year of receipt itself.
 In the case of persons who are likely to transfer their assets to avoid tax: For
persons those who are likely to sell their assets for example, a person cheated
bank and trying to leave country with an intention to avoid tax, income of such
person or persons is taxed in the year of receipt itself.
 In case of discontinued business: In the case of discontinued business, the
income of the business is taxed in the same year it is discontinued. For example,
due to COVID 19, many businesses were closed down. Income tax due for the
income they earned so far is collected along with the closure.

Assessee Section 2(7)

An assessee is a person who is liable to pay tax for the income earned or loss suffered
for a particular assessment year
Assessee also includes every person in respect of whom any proceeding under the
Income Tax Act has been taken for the assessment of his income or loss or the amount
of refund due to him.
For example, a salaried employee has not filed his tax returns despite his income is
above the taxable limit. Then the income tax department will send an intimation to file
the returns and remit the tax payable within a specified time. Then he is called an
assessee.
 An assessee may be an individual liable to pay tax on behalf of himself or on behalf of
others. For example, if I am the power of attorney holder of my sister living in U.K who
has taxable income in India and if I have not paid her income tax on time, I will be an
assessee in default.
Types of Assesses
Income Tax Act 1961 has classified assesses into four categories;
 Normal assessee
 Representative assessee
 Deemed assessee, and
 Assessee in default

1. Normal Assessee: A normal Assessee is an individual who is liable to pay taxes for the
income earned by him for a particular financial year. This list extends to people who have
to pay interest, penalty or has to get refund from the income tax department.

2. Representative Assessee: Many times, it so happens that an individual is liable to pay

taxes for income or losses incurred not only by him, but also for income or losses incurred
by a third party. Such an individual is known as Representative Assessee. Basically, he acts
as a representative for people who themselves are not in a position to file and pay their
taxes themselves. Generally, the people who need representatives are non-residents, minors
or lunatics.

The people representing them are either their agents or guardians. Such people are deemed
to be Representative Assesses. For example, if a minor child cine artist is earning an income
above the exempted limit of income tax, and if his father is filing his tax returns or clubbing
his income in father’s income, then the father is the representative assessee of his son.

3. Deemed Assessee
Deemed Assessee is an individual who is put in a position to pay taxes for some other
person by the legal authorities. Generally, the individuals who are treated as Deemed
Assesses

 The executors or the legal heirs of the property of a deceased person.

 The eldest son or any other legal heir of a deceased, who died without writing a will
 The guardian of a minor, a lunatic or an idiot
 The agent of a Non-Resident Indian, having taxable income in India

4. Assessee-in-default
An Assessee-in-default is an individual who has failed to file income tax returns and pay
tax. Every employer has to deduct tax at source from their salaries and remit to government
treasury. An employer is deemed to be an Assessee in default, if he fails to submit the TDS
and pay to treasury before distributing salary.

Person Section 2 (31)

There are seven categories of persons chargeable to tax under Income Tax Act are the
following;

 An individual
 A Hindu Undivided family or HUF
 A company
 A partnership Firm
 An association of persons or body of individuals whether incorporated or not
 A local authority, and
 Every artificial juridical person not falling within any of the preceding categories
From the definition of the term ‘person’ it can be observed that, apart from a natural
person, i.e., an individual, any sort of artificial entity will also be liable to pay Income-
tax.

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.

Income Section 2(24)]

Income is a periodical return with regularity or expected regularity. It can also be a casual
income like lottery winnings, gambling, crossword puzzles etc. It is not necessary that, income
is a monetary benefit always. Anything which can be converted in terms of money can be an
income. For example, if a district collector is getting a driver as part of his salary package, we
convert the perquisite of driver in monetary terms and include in the Collector’s salary income.

The term income is a very important term in income tax, as tax is charged on the income of a
person. It is the subject matter of the Income Tax Act. The term income is not defined in the
Income Tax Act, except it states as to what is included in income. Under Section 2(24) income
includes the following:

 Profits and gains

 Dividend
 Voluntary Contributions received by a trust.
 The value of any perquisite or profit in lieu of salary taxable under section 17(2)(3).
Example, free lunch
 Any special allowance or benefit, other than perquisite 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. For example, city compensatory
allowance
 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. For example, Dearness Allowance
 Any sum chargeable to income tax under the head business or profession
 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
 Any interest, salary, bonus, commission, or remuneration received by a partner of a
firm
 Any profits on sale of capital assets
 Any capital gains chargeable under section 45
  Any winnings from lotteries, cross word puzzles, horse races etc.
 Any sum received by the assessee from his employer as contribution to any provident
fund, super annuation benefits
 Any amount received under insurance policy including bonus
 Any gift whether in cash or property exceeding Rs 50,000 in the previous year

Casual Income
Casual income means an income which is casual in nature, that is, unplanned, uncertain,
accidental, sudden income which occurs just by chance and the person cannot depend upon it
to produce income in future. For example, winnings from lottery, gambling, betting, etc.

The Income Tax rule is that, any casual income up to five thousand is exempted from tax. Any
amount more than that, tax is deducted at source. The rate of tax deducted at source is ten
percent for dividend, bank interest, professional services. It is five percent for insurance
commission and thirty percent for income from card games, lottery, betting and other such
activities.

Gross Total Income (GTI): Section 80B(5)

As per section 14, all income shall, for purposes of Income-tax and computation of total
income, be classified under the following heads of income: as listed below;

 Income from Salaries

 Income from house property
 Income from business or profession
 Income from capital gains, and
 Income from other sources
Aggregate of incomes computed under the above five heads, after applying clubbing provisions
and making adjustments of set off and carry forward of losses, is known as Gross Total Income

G. T. I. = Salary Income + House Property Income + Business or Profession Income + Capital

Gains + Other Sources Income + Clubbing of Income - Set-off of Losses (Without adjusting
deductions from 80C to 80U)
Otherwise, gross total income means the total income computed in accordance with the
provisions of the Act, before making any deductions under section 80C to 80U of the Income
Tax Act.

Total Income
Total income of an assessee is the gross total income as reduced by the amount permissible as
deduction under sections 80C to 80Uof the Income Tax Act.

Total Income = Gross Total Income- Deductions from 80C to 80U

Agricultural Income Section 2(1) A

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, and one such initiative is exemption of
agricultural income from income tax. As per the Income Tax Act, agricultural income includes
the following three incomes;

Rent or revenue earned from agricultural land situated in India. For example, amount
received for renewal of land lease. But profit on sale of agricultural land is not agricultural
income

Income derived from agricultural land through basic operations like sowing seeds, planting or
cultivation or tilling of land. It also includes subsequent operations like, harvesting, pruning or
cutting.

Income derived from farm building required for agricultural operations. For example, a store
room for storing agricultural produce and equipment’s.

Taxation of Agricultural Income

Income tax Act indirectly tax agricultural income. This method or the concept is called the
partial integration of agricultural income with non- agricultural income. This method aims at
taxing non-agricultural income at higher rates of tax. This method is used, when net agricultural
income is above rupees five thousand and non-agricultural income is above the taxable limits
of income tax act

Scheme of Taxation:

Income Tax payable by a person for his income during the financial year is computed as
follows. Tax is levied on Total Income. For the purpose of computing the total income, the
various sources from which income is earned are classified in to different heads, and are called
Heads of Income. They are;

1) Income from Salary,

2) Income from House property.
3) Profits and gains from business and profession,
4) Income from Capital Gains, and
5) income from other sources.

Income from salary will be different from that of the actual salary received by an employee.

While computing the income from salary, one can claim various exemptions and deductions
as per the provisions of the finance bill.

For example; If a person’s annual salary is Rs.12,00,000, which includes conveyance

allowance Rs.1,20,000 and House rent allowance of Rs.1,80,000 which are exempted from tax,
then his income from salary will be Rs.9,00,000.

Similarly, if a person has rented out a building for a monthly rent of Rs.25,000, the income
from house property is not Rs.3,00,000.

He can claim various deductions such as municipal tax paid, interest on the loan taken to
construct the building etc. Assuming that, the municipal tax is Rs.30,000 and the interest on
loan for the year is Rs. 2,40,000, his income from house property will be Rs.30,000.

While computing the income under each head of income, every person can claim various
exemptions and deductions applicable for the respective head as per the finance bill.

The sum total of all the five heads of income is called the Gross Total income.
From the Gross Total Income, every person can claim various deductions under sections 80 C
to 80 U and balance amount is called Total Income.

If the Total Income exceeds the tax-free limit, tax will be computed for the amount exceeding
the tax free limit at the rate of tax applicable.

funds, fines, penalties etc.