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Income 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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1.2
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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 symbolise
'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.
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| 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. |
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| 1.3 |
CLUBBING OF INCOME |
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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.
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| 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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