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.

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

• Any Special Allowance or Benefit : All type of special allowance are  given/allow  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 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”.

• Value of any Benefit or Amenity, whether convertible into money or not.
• Any Capital Gain taxable u/s 45 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 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.

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

• Any sum received by the assessee on account of his employer’s contributions to any Provident Fund, Superannuation Fund or any other Fund for the welfare of such employees in the business.
• Amount exceeding Rs.50,000 by way of Gift.

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 (PFAOP) provided the total income of such PFAOP is assessed to tax at the rates applicable to an individual.

ASSESSEE [ Section 2(7) ]

Assessee’ means a Person  by whom any Tax or any other sum of money is payable under this Act. And this is divided into 3 categories.

• Ordinary Assessee : It includes …

  • Any person against whom some proceedings under this Act are going on. It is immaterial whether any Tax or other amount is payable by him or not ;

  • Any person who has sustained loss and has filed return of Loss u/s 139(3).

  • Any person by whom some amount of Interest , Tax or Penalty is payable under this Act ; or

  • Any person who entitled to refund of Tax under this Act.

•  Representative Assessee or Deemed Assessee :

A person may not be liable only for his own income or loss but also on the income or loss of other persons e.g. Guardian of Minor or Lunatic, Agent of a Non-Resident etc. in such case the persons responsible for the assessment of Income of such persons are called Representative Assessee. Such person is Deemed to be an Assessee.

• Assessee-in-default :

A person is deemed to be an assessee-in-default if he fails to fulfill his statutory obligations. In case of an employer paying Salary or a person who is paying interest it is their duty to deduct tax at source and deposit the amount of tax so collected in Government treasury. If he fails to deduct tax at source or deducts tax but does not deposit it in the treasury, he is known as Assessee-in-default.
Example :

• Income of Mr. You ( age : 30 years) is Rs. 1,45,000 for the assessment year 2009-10. he does not file his return of income because his income is not more than the amount of exempted slab. Income-Tax  Department does not take any action against him. He is not an “assessee” because no tax or any other sum is due from him.

• Income of Mr. Me ( age: 35 years) is Rs.1,60,000 for the assessment year 2009-10. He does not file his return of income. Since he is supposed to file  his return of income ( income being more than exempted slab of Rs.1,50,000) . he is an “Assessee”.

• Income of Mr. S ( age : 50 years) is Rs. 70,000 for the assessment year 2009-10. He files his return of income ( even if his taxable income is less than Rs.1,50,000 ). Assessment order is passed by the Assessing Office without any adjustment. Mr.S is an “ Assessee”.

• Income of Mr. Ram ( age : 25 years) is less than Rs.1,50,000 for the assessment year 2009-10. He files his return of income to claim Refund of Tax deducted by XYZ Ltd. on interest paid to him. B is an “Assessee”.

• Income of MR. Clean ( age : 30 years) is less than Rs.1,50,000 for the assessment year 1009-10. He does  not file his return of income. During 2008-09 , he has paid salary of Rs.2,40,000 to an employee. Though he is supposed to deduct TDS (Tax deducted at Source ), yet due to ignorance of law, no tax deducted by him. In this case, Mr. Clean is an “assessee” as he has failed to deduct tax at source. This rule is applicable even if his own taxable income is below Rs.1,50,000.

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 member 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 asFirms 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 example 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.

A Body of Individual ( B.O.I.) cannot have non-individuals as its members. Only natural human being can be  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.

• Axsis 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 person

7.  a firm ;

8.  a Hindu Undivided Family

9.  an association of persons.

THE RULES OF DEBIT AND CREDIT

Define debit and credit.

Debit is defined as “a record of indebtedness.” It is related to the word debtor—a person who owes a debt. A credit is “something entrusted to another.” It is related to the word creditor—a person to whom a debt is owed. The two words are opposites: one is used to record increases and the other to record decreases in amounts owed to and/or by an organization. The use of debit and credit to describe changes that occur in accounting records is a language convention. Accountants use the words debit and credit to describe actions taken in the accounting records.

WHY DO THE TERMS DEBIT AND CREDIT SOMETIMES CAUSE DIFFICULTY?

The words debit and credit are not used exclusively by accountants. English-speaking people use these terms in common, everyday language. If I say that something is “to your credit,” what do I mean? Most of us will understand that I mean you have accomplished something worthwhile or honourable. In common usage, a credit is desirable or good. We assume, then, that a debit must be undesirable or bad. Assigning these “values” to these two terms is what often causes students problems. In accounting, debit and credit are not assumed to be good or bad; they are simply actions performed in the accounting records. Think of them as “decreases and increases,” not “bad and good.”

DESCRIBE THE RELATIONSHIP BETWEEN DEBITS AND CREDITS AND THE ACCOUNTING EQUATION

Like all equations, the accounting equation must balance. The left side must equal the right side: Left = Right. In accounting terms, the debits and credits must balance. The debits must equal the credits: Debits = Credits. The key to remembering the rules for using debits and credits lies in the accounting equation and the need to remain in balance: Assets = Liabilities + Owner’s Equity Left = Right Debits = Credits Assets are on the left side of the accounting equation; increases to assets will be recorded on the left and called debits. Liabilities and owner’s equity are on the right side of the accounting equation; increases to liabilities and owner’s equity will be recorded on the right and called credits. Since debits and credits are opposites, decreases to assets (on the left side of the accounting equation) will be made on the right and called credits. Decreases to liabilities and owner’s equity (on the right side of the accounting equation) will be made on the left and called debits.

DEBITS AND CREDITS

The analysis of each transaction produces at least two effects. The effect of an entry on the debit, or left side of one account is balanced by the effect of an entry on the credit, or right side of another account. For this reason, the modern system of accounting is usually called the double-entry system. This system involves recording both effects of every transaction to present a complete picture.

ACCOUNTS FOR ASSETS, LIABILITIES, AND OWNER’S EQUITY

The accounting equation is a tool for analyzing the effects of business transactions. It would be awkward, though, to record every transaction in the equation format if a business had many transactions. Instead, separate written records called accounts are kept for the business’s assets, liabilities, and owner’s equity. Accounts are kept so that financial information can be analyzed, recorded, classified, summarized, and reported. Accounts are identified by their account classification; that is, as asset accounts (the property a business owns), liability accounts (the debts of the business), or owner’s equity accounts (the owner’s financial interest in the business). The title of each account describes the type of property, the debt, or the financial interest.

JOURNALS

Business transactions are recorded in a financial record called a journal, which is a diary of business activities that lists events involving financial affairs—transactions—as they occur. The transactions are entered in chronological order—the order in which they happen day by day. Since the journal is the first accounting record where transactions are entered, it is sometimes referred to as a record of original entry. A number of different types of journals are used in business. The one that will be examined in this chapter is the general journal. As we discuss more complex accounting systems and records in later chapters, you will become familiar with other kinds of journals.

 

Hello world!

This is very helpful for those students who are wishing to make a career in the field of accounting and taxation.

This blog would update all the amendments, notices. circulars etc by CBDT or CBEC.