Person, Income, Agricultural Income- Definitions and Basic Concepts of Income Tax, Income Tax Laws | Income Tax Laws - B Com PDF Download

PERSON [ Section 2(31) ]

The word “Person” is a very wide term and embraces in itself the following :

• Individual: It refers to a natural human being whether Male or Female , Minor or Major.

• Hindu Undivided Family (HUF):  It is a relationship created due to operation of Hindu Law. The Manager of HUF is called “ Karta” and its members are called ‘Coparceners’.

• Company: It is an artificial person registered under Indian Companies Act 1956 or any other Law.

• Firm: It is an entity which comes into existence as a result of partnership agreement. The Income Tax accepts only these entities as Firms which are  accessed  as Firms under Section 184 of the Act.

• Association of Persons (AOP) or Body of Individuals (BOI): Co-operative societies, MARKFED, NAFED, etc are the examples of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an Association of Persons. An  A.O.P. can have firms, companies, associations and individuals as its members.

• Body of Individuals: A Body of Individuals ( B.O.I.) cannot have non-individuals as its members. Only natural human being can be the members of a Body of Individuals.

• Local Authority: Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.

• Artificial Judicial Person:  Statutory Corporations like Life Insurance Corporation, a University etc. are called Artificial  Judicial Persons.

These are seven categories of person chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive. Therefore,  any  person, not falling in the above mentioned seven categories, may still fall in the four corners of the term “Person” and accordingly may be liable to tax under Sec 4.

Example:
Determine the status of the following :

• Delhi University
• Microsoft Ltd.
• Delhi Municipal Corporation
• Swayam Education Pvt. Ltd.
• Axis Bank Limited.
• ABC Group Housing Co-operative Society.
• DC & Co., firm of Mr. Dust and Mr. Clean
• A joint family of Mr.Dirty, Mrs. Dirty and their sons Mr. Dust and Mr. Clean
• X and Y who are legal heirs of Z ( Z died in 1995 and X and Y carry on his business without entering into partnership).

Solutions :

1.  Artificial Judicial Person        
2.  A Company     
3. A Local Authority         
4. A Company       
5. A Company     
6. An Association of Persons       
7. A Firm         
8. A Hindu Undivided Family
9. An Association of Persons

 MEANING OF “INCOME” [ Section 2(24) ]

The Definition given u/s 2 (24) is inclusive and not exhaustive. According to English dictionary, the term “Income” means “periodical monetary return coming in regularly from definite sources like one’s business, Land, Work, Investments etc.”

It’s nowhere mentioned that “Income” refers to only monetary return. It includes value of Benefits and Perquisites.

The term 'Income' includes not only what is received by using the property but also the amount saved by using it himself. Any thing which is convertible into income can be regarded as source of accrual of income.

 'Income' includes :

• Profit and Gains :     For instance, Profit generated by a businessman is taxable as “Income”.
• Dividend :   For instance, “Dividend”  declared/paid  by a company to a shareholders is taxable as “ income” in the hands of shareholders .
• Voluntary contribution received by a Trust : In the hands of a Trust, income includes voluntary contributions received by it.  This rule is applicable in the following cases.

• Such contribution is received by a trust created wholly or partly for charitable or religious purpose ; or
• Such contribution is received by a scientific research association ; or
• Such contribution is received by any fund or institution established for charitable purposes ; or
• Such contribution is received by any university or other educational institutions or hospital.

Example :
ABC Trust is created for public charitable purposes. On Dec 15, 2008, it receives a sum of Rs.2 Lakh as voluntary contribution from a business house. Rs. 2 Lakh would be included in the income of the Trust.

• In the hands of a Trust, income includes voluntary contributions received by it.

Example:
Mr. You is employed by XYZ Ltd. Apart from Salary, he has been provided a Rent-Free House by the employer. The value of perquisites in respect of the Rent-Free House is taxable as “Income” in the hands of Mr. You.

• The value of any Perquisites or Profit in lieu of Salary taxable in the hand of employee.

Example:
Mr. You is employed by XYZ Ltd. He gets Rs.5,000 per month as conveyance allowance other than  Salary Rs. 5,000 per month is treated as " Income”.

• Any Special Allowance or Benefit : Any type of special allowance given/allowed to the assessee to meet the expenses exclusively, wholly and necessarily for the duties he performed for the  office or employment is treated as “Income”.

Example:
Mr. You owns a House Property. On its transfer, he generates a Capital Profit of Rs.1,20,000. It is treated as  “Income” even if it is Capital Profit.

• Any Capital Gain taxable u/s 45 is treated as “Income”

Example:
Mr. You wins a sum of Rs. 50,000 from gambling. Rs.50,000 is treated as “ Income” of Mr. You.

• Any winning from Lotteries (it included winning from prizes awarded) , Winning from Crossword Puzzles, winning from Races including Horse Race, winning from Card Games and other similar Games, winning from gambling or betting.

FEATURES OF “INCOME"
The following features of income can help a person to understand the concept of income.

(i) Definite  Source : Income has been compared with a fruit of a tree or a crop from the field. Fruit comes from a tree and crop from fields. Thus the source of income is definite in both cases. The existence of a source for income is somewhat essential to bring a receipt under the charge of tax.

(ii) Income must come from Outside : No one can earn income from himself. There can be no income from transaction between head office and branch office. Contributions made by members for the mutual benefit and found surplus cannot be termed as income of such group.

(iii) Tainted Income : Income earned legally or illegally remains income and it will be taxed according to the provisions of the Act.  Assessment of illegal income of a person does not grant him immunity from the applicability of the provisions of other Act. Any expenditure incurred to earn such illegal income is allowed to be deducted out of such income only.

(iv) Temporary or Permanent : Whether the income is permanent or temporary, it is immaterial from the tax point of view.

(v) Voluntary Receipt : The receipts which do not arise from the exercise of a profession or business or do not amount to remuneration and are made for reasons purely of personal nature are not included in the scope of total income.

(v) Dispute regarding the Title: In case a person is receiving some income but his title to such receipts is disputed, it will not free him from tax liability. The receipt of such income has to pay tax.

(vi) Income in Money or Money’s worth:  The income may be in Cash or in kind. It is taxable in both cases.
 

TAX TREATMENT OF "INCOME"
For the purposes of treatment of income for tax purposes, it can be divided into 3 categories :

A. Taxable Income : These incomes form part of total income and are fully taxable. These are treated u/s 14 to 69 of the Act. These are Salaries, Rent, Business Profits, Professional Gain, Capital Gain, Interest, Dividend, Winning from Lotteries, Races etc.

B.  Exempted Incomes : These incomes do not from part of total income either fully or partially. Hence, No Tax is payable on such incomes. These incomes are given u/s 10(1) to 10(32) of the Act.

C.  Rebateable ( Tax Free) Incomes : These incomes form part of total income and are fully taxable. Tax is calculated on total income out of which a Rebate of Tax at average Rate is allowed . The Rebateable incomes given u/s 86 of the Act are:

• Share of income received by a member of an association of persons provided the total income of such AOP is assessed to tax at the rates applicable to an individual.
• Share of income received by a partner of a firm assessed as an association of persons (AOP) provided the total income of such AOP is assessed to tax at the rates applicable to an individual.

WHAT IS AGRICULTURAL INCOME  ?

Sec.10(1) exempts Agricultural Income from Income-Tax. By virtue of Sec.2(1A) the expression “Agricultural Income” means :

• Any Rent or Revenue derived from Land which is situated in India and is used for agricultural purposes. [Sec. 2(1)(A)]
• Any income derived from such land  :
  • Use for Agricultural purposes ; or
  • Used for agricultural operations means- irrigating and harvesting , sowing, weeding, digging, cutting etc. It involves employment of some human skill, labour and energy to get some income from land. ; or

According to Sec. 2(1)(A) , if the following 3 conditions are satisfied, income derived from Land can be termed as “Agricultural Income”.

Condition-1 :    Income derived from Land 
It is essential that for any income to be termed as agricultural  Land must be effective and immediate source of Income and not indirect and secondary.
As a result, interest on arrears of land revenue, dividend paid by a company out of its profits which included agricultural income also and salary paid to a manager for managing agricultural farms are not agricultural incomes because in all these cases land is not the effective and immediate source of income.

Condition-2 :    Land is used for Agricultural Purposes
To term any income as agricultural income, it is necessary that income must be the result of agricultural operations performed on agricultural land. Agriculture means performance of some basic operations-irrigating and harvesting, sowing, weeding, digging, cutting etc. It involves employment of some human skill, labour and energy to get some income form land.

Condition-3 :    Land is situated in India 
To qualify the exemption u/s 10(1) of the Act, it is necessary that agricultural income must be derived from land situated in India. In case,income is derived from agricultural land situated outside India or is from any non-agricultural land, it will not be exempted u/s 10(1). It is taxable income under the head “Income from other Sources”.

What is the Tax Treatment of Income which is partially Agricultural and partially from Business [ Rules 7, 7A, 7B and 8]

For disintegrating a composite business income which is partly agriculture and partly non-agricultural, the following rules are applicable –