Scheme
of Income Taxation in India
1.2 Generally
speaking, the word 'income' covers receipts in the shape
of money or money's worth which arise with certain
regularity or expected regularity from a definite
source. It is not all receipt that form the basis of
taxation under the Act.
Broadly, an analogy is drawn of
a tree and the fruits of that tree. The tree symbolises
the source from which one gets fruits which syIncome tax is charged under the
Indian Income Tax Act, 1961, It is an annual tax on
income levied by the Central Government. Tax is charged
in respect of the income of the financial year (known as
previous year) in the next financial year (known as
assessment year) at the rates fixed for such assessment
year in the Finance Act passed each year by the
Parliament.
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'income'. The receipt arising from the sale of tree
itself is, therefore, considered a capital receipt which
is not income; but the receipts flowing from this source
viz., fruits is income. On application of this analogy,
it can be said that while the receipt arising from the
sale of a house is not income, the receipt arising from
the realisation of rent is income. In the same way,
receipt from the sale of a machine is not income but
from the sale of produce brought out from the machine is
income. In these cases, however, if a person deals in
purchase and sale of house properties or machines, these
assets do not remain a source and the profit derived
from activities of purchase and sale become income. The
source need not necessarily be tangible as the return
for human exertion is also income.
1.2.1 The above is
a broad generalisation. While a distinction is generally
made between the capital receipt and revenue receipts,
as illustrated above, the Act has widened the scope of
income by expressly including within the meaning of
'income' the receipts which do not fall under the broad
concept explained above. For instance, the Act
specifically makes the profit arising from the sale of
certain capital assets also subject to tax under certain
circumstance. The winnings from lotteries, cross-word
puzzles, races, card games etc. which do not arise from
any definite source and do not have the element of
regularity have also been specifically clarified to be
'income' under the Act.
1.2.2 It is not the
gross receipts but only the net receipts arrived at
after deducting the related expenses incurred in
connection with earning such receipts that are made the
basis of taxation.
1.2.3 The tax is
charged in respect of the income of the previous year
and the same is chargeable in the assessment year.
"Previous year" means the financial year i.e. the period
beginning on 1st April and ending on 31st March. The
return of income for this period is due in the next
financial year called the Assessment Year in which the
proceedings for assessment commence either by filing of
return voluntarily by the income earner or by the Income
Tax Department initiating action for calling the return.
The income earned in the period beginning on 1st April
1995 and ending on 31st March 1996 will, for instance,
be assessable earliest in the next financial year i.e.
the year 1996-97.
1.2.4
The Act categorises the income of a person
under different heads and provides for the manner of
computation of taxable income of each head. These heads
of income are:-
-
Salaries
Income from house
property,
Profits and gains of business or
profession,
Capital gains, and
-
Income from other
sources
A discussion on the scope of each
head of income and the manner of computing the headwise
income is made in Chapter IV.
1.2.5 All receipts
having the character of income are taxable unless
they are specifically exempted from
taxation. Such exempted income are enumerated and
discussed in Chapter III.
1.2.6 The total of
the income under each head as worked out in accordance
with the provisions of the Act
is termed as 'gross total
income. The act provides for certain deduction from such
gross total income. These deductions which are discussed
in Chapter V, are not referable to any particular head
of income, but are allowed from the aggregate of income
under all the heads and are in the nature of incentive
provisions of different kinds. For example, deductions
are allowed for promotion of charitable activities,
promoting exports and other activities resulting in the
inflow of foreign exchange, for development of
industries and for other socio-economic objectives.
Incentives for promotion of savings are provided in the
form of deduction in tax liability by grant of rebate at
certain percentage on certain savings made out of
taxable income.
1.2.7 After
reducing the 'gross total income' by the amount of
incentives deductions mentioned in the preceding
paragraph. What is left is the amount on which tax is to
be calculated at the rates prescribed by the relevant
Finance Act. This amount is termed as Total income and
is the base for taxation. For certain categories of tax
payers, a basic exemption limit is provided and tax is
calculated only on that part of the total income which
is in excess of such exemption limit. If such 'Total
income' is below the basic exemption limit, no tax is
chargeable. For instance, under the Finance Act, 2000,
no tax is payable by an individual if his total income
is below Rs. 50,000/-. The rates of taxation and the
exemption limit applicable to different categories of
Assessees are given in Chapter XIII.
1.3 Clubbing of Income
The total income of an individual also includes
certain income of other persons. These are:-
income of spouse from,
-
remuneration derived from the
concern in which the individual is substantially
interested unless the remuneration is by virtue of
the application of technical or professional skill
possessed by him or her;
-
assets transferred by the
individual to the spouse or to any other person for
the benefit of the spouse unless the transfer is for
adequate consideration or in consideration of an
agreement to live apart.
-
income of son's wife from assets
transferred by the individual to her or to any other
person for her benefit unless the transfer is for
adequate consideration.
-
income of his
minor child - other than the minor child suffering
from disability specified in section 80-U, referred to
in para 5.3.9 except when such income arises to the
child on account of any manual work done by him or on
account of any activity which involves application of
any skill, talent or specialised knowledge and
experience.
1.3.1 The individual in whose
income the income of other spouse as mentioned in (a)
(i) above is to be included will be the husband or wife
whose total income - before including such remuneration
income - is greater. Similarly the income of minor child
is to be included in the income of the parent having
greater income. If the marriage of the parents does not
subsist, it will be parent who maintains the child.
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