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INCOME
According to the Shorter Oxford Dictionary, income means that which comes in as the periodical product of ones work, business, lands, or investments (commonly expressed in terms of money); annual or periodical receipts accruing to a person or a corporation1. In CIT v. Shaw Wallace & Co.2, Sir George Lowndes defined income as: income connotes a periodical return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Legal or Illegal income: It is important to note that no distinction has been under the Income-tax Act as regards legal and illegal income. Therefore, illegal income is treated as income. By considering the profits of an illegal business under this Act, does not condone it or take part in crime nor does it become a party to the illegality assessee might be prosecuted for the offence and yet be taxed upon profits arising its commission 3 However, any expenditure incur the assessee in carrying on such illegal business is not deductible as Explanation to Section 37(1) provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have incurred for the purpose of business or profession. Burden of Proof: Under section 4 of this Act, assessee is liable to pay tax on all income but the Act does not provide that whatever is received by person must be regarded as taxable income in all the cases. In those cases in which a receipt is to be taxed as income the burden lies on tax department to prove that it was taxable income. However, where a receipt which is in the nature of income, the burden of proof that it is not taxable, because it comes under exemption, lies upon the assessee. 4

Dr. Vinod K. Singhania & Dr. Monica Singhania, Taxmann Students Guide to Income Tax Act including Service Tax/ VAT, p.7. 2 6 ITC 178 (PC). 3 Mann v Nash, 1932 (1) KB 752. 4 Parimisetti Seetharamamma v CIT (1965) 57 ITR 532 (SC).

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MEANING OF INCOME UNDER SECTION 2(24) OF INCOME TAX ACT, 1961

The meaning of term income is inclusive and not exhaustive in nature. Therefore, the scope is not limited to those categories which are specified in section 2(24) but also includes such things which the term signifies, according to its general and natural meaning. Income includes loss. While income, profits and gains represent plus income, losses represent minus income. Under section 2(24), the term income specifically includes the following: 1. PROFITS AND GAINS Income includes profits and gains. For instance, profit generated by a businessman is taxable as income. Similarly, profits from medical or legal profession are also taxable as income. Gains is really the equivalent of profits. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. The tax is upon income, profits or gains; it is not a tax on the gross receipts. The expression profits or gains is not limited to business only, but is used in the Act with reference to other sources of income as well5.

2. DIVIDEND Dividend declared or paid by a company to a shareholder is taxable as income. Dividend means a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).Depending upon whether dividend is declared by an Indian company or foreign company, it can of following two types 6: a) Dividend declared by an Indian Company: Dividend declared, distributed and paid by a domestic company on or after April 1, 2013 except deemed dividend under Section 2(22)(e) is exempted in the hands of shareholders under Section 10(34). On such dividends, dividend tax shall be paid by company declaring and paying such dividend under section 115-O. However, deemed dividend

5 6

CIT v. Bokaro Steel Ltd. (No. 1) [1988] 170 ITR 522 (Pat.). Dr. Jyoti Rattan, Bharats Taxation Laws, p.10.

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under Section 2(22)(e) is taxable in the hands of shareholders under section 56(2)(i). b) Dividend declared by a foreign company: Dividend declared, distributed and paid by a foreign company is not exempted under section 10(34) and hence, taxable in the hands of shareholders. The purpose of present definition is, however, to include as income distributions or payments falling within the definition of this expression in section 2(22).

3. VOLUNTARY CONTRIBUTIONS RECEIVED BY A TRUST Taxable income of a trust includes voluntary contribution if: a) Received by a trust, wholly or partly for charitable purposes; or b) Received by a scientific research association; or c) Received by any fund or institution, university or other educational institution or hospital or any other medical institution mentioned under section 10(23C). This definition, introduced with effect from 1 April, 1973 has to be read with section 12, also simultaneously introduced, which deems such income to be income derived from property held under trust or other legal obligation for the religious and charitable purposes unless received with a specific direction that it should form part of the corpus cannot be treated as income of trust 7 . Section 12 appears to fortify this proposition. The constitutionality of sub-clause (iia) was upheld in Amara Kondaiah v. ITO8.

4. PERQUISITES IN THE HANDS OF EMPLOYEE Any benefit or amenity [section 17(2)] or profit in lieu of salary. Section 17(3) is treated as income in the hands of an employee. The words benefit or perquisite obtained from a company would take in only such benefit or perquisite which the company had agreed to provide and which the person concerned could claim as of right based on such agreement and a mere advantage

7 8

Mersey Docks and Harbour Board v. Lucas, 2 TC 25 (HL). (1977) 106 ITR 73(AP).

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derived from the company without its authority or knowledge will not amount to a benefit or perquisite obtained9.

5. ANY SPECIAL ALLOWANCE/BENEFI Any allowance granted to an assessee to meet expenditure wholly, necessarily and exclusively for performance of the duties of an office or employment is treated as income.

6. CITY COMPENSATORY ALLOWANCE/DEARNESS ALLOWANCE Any allowance granted to an assessee either to meet his personal expenses at the place where the duties of his office or employment omit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for increased cost of living is income of the employee10. In the light of these provisions, the allowance given to the assessee for meeting the refreshment expenses during office hours is taxable as income11.

7. ANY BENEFIT OR PERQUISITE TO A DIRECTOR Value of any benefit or perquisite whether convertible into money or not, obtained from a company either by a director12 or by a person who has substantial interest in the company or by a relative of the director or such person and any sum paid by any such company in respect of any obligation of the director or other person mentioned above is taxable income of such director of such director or such other person.

Section 2(24)(iv) merely provides that if any relation of a director derives the benefit or perquisite from a company, it will be deemed to be his income. It does not state that the income should be derived by a relation in any particular capacity13. In the case of a person having substantial interest as statutorily defined, the capacity in which he was given the benefit or perquisite would be immaterial. Thus, share allotted to director pursuant to an agreement with promoters, constitutes a benefit assessable to

CIT v. A.R. Adaikappa Chettiar, [1973] 91 ITR 90 (Mad.). Dr. Jyoti Rattan, Bharats Taxation Laws, p. 10. 11 CIT v. M.R. Kini, [1991] 190 ITR 282 (Ker.). 12 Director need not to be a person having substantial interest- Diwan Rahul Nanda v. CIT, [2008] 25 SOT 455 (Mum.) 13 Lala Lakshmipat Singhania v. CIT [1976] 104 ITR 466 (All.).
10

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tax in directors hands14. The value of any benefit or perquisite derived by a director from a company has to be quantified at the estimated figure of what the director would have spent otherwise, having regard to his personal or family needs15. Even if the benefit received by the director of the company is of capital in nature, it can also be brought under the term value of any benefit as contemplated under section 2(24)(iv). In order to tax the benefit received by a director from the company, it is not necessary that the director should be an employee16.

8. ANY BENEFIT OR PERQUISITE TO A REPRESENTATIVE ASSESSEE Value of any benefit or perquisite obtained by any representative assessee: a) Mentioned under section 160(1)(iii)(iv); or b) By any person on whose behalf or for whose benefit any income is receivable assessee (hereinafter mentioned as beneficiary) and any sum paid by representative assessee in respect of any obligation payable by the beneficiary.

9. ANY SUM CHARGEABLE UNDER SECTIONS 28, 41 AND 59 The following receipts are treated as income: a) Compensation or other payments due to or received by any person specified in section 28(ii). Example: Mr. A is an agent of X & Co. He gets a compensation of Rs. 2 lakhs at the time of termination of his agency from X & Co. This Rs. 2 lakhs is treated as income of A. b) Income derived from profession or alike under section 28(iii). c) Profits on sale of a licence granted under the Imports (Control) Order, 1955 under section 28(iiia). Example: A profit under the Imports (Control) Order, 1955. Rs. 2 lakhs is treated as income of X & Co. d) Cash assistance received by any person against exports under any scheme of the Government of India under section 28(iiib). Example: A sum of Rs. 50,000 is received by X & Co. As cash assistance against exports from the Government of India. It is treated as income of X & Co. e) Any duty of customs or excise re-paid as drawback to any person against exports under section 28(iiic).
14 15

D.M. Neterwalla v. CIT [1980] 122 ITR 880 (Bom.) CIT v. P.R. Ramakrishnan [1980] 124 ITR 545 (Mad.) 16 CIT v. S. Varadarajan [1996] 89 Taxman 457 (Mad.)

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f) The value of any non-monetary benefit or perquisite arising from business or the exercise of a profession under section 28(iv). g) Any interest, salary, bonus, commission or remuneration received by a partner from a firm under section 28(v). h) Any sum received for not carrying out any activity in relation to any business or not to share any knowhow, patent, copyright, trademark etc. under section 28(va). i) Deemed profit taxable under section 41or 59.

10. CAPITAL GAINS Any profit arising from transfer of capital asset is taxable income (section 45). This does not mean that the capital gain chargeable under section 46(2) is not assessable as income. The definition of income in section 2(24) is inclusive and not exhaustive17.

11. INSURANCE PROFIT Any insurance profit computed under section 44 is treated as income.

12. BANKING INCOME OF A CO-OPERATIVE SOCIETY Profit from banking (including providing credit facilities) business carried on by a cooperative society with its members is regarded as income.

13. WINNING FROM LOTTERY The following are treated as income [Section 56(2)]: a) Winnings from lottery (it includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner). b) Winnings from crossword puzzles. c) Winnings from races including horse races. d) Winnings from card game and other games of any sort (it includes any game show, an entertainment programme on television or electronic mode; in which people compete to win prizes or any other similar game). e) Winnings from gambling. f) Winnings from betting.

17

Addl. CIT v. Uma Devi Budhia, [1986] 157 ITR 478 (Pat.)/CIT v. M.A. Alagappan, [1977] 108 ITR 1000 (Mad.)

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All crosswords puzzles are not of gambling nature. Some are; some are not. Even in card games, there are some games which are of skill without an element of gamble. The words other games of any sort are of wide amplitude. Their meaning is not confined to the games of gambling nature alone. It, thus, appears that sub-clause (ix) is not confined to mere gambling or betting activities18 The term lottery has been defined in the Corpus Juris Secundum which says that pooling the proceeds derived from chances or tickets taken or purchased and then allotting such proceeds or a part of them or their equivalent by chance to one or more such takers or purchasers are indicia of a lottery. Hence, it is necessary that the winner must be not only a contributor to the prize amount, but must also be a participant in the lottery. All the ingredients which are set out in the definition in Corpus Juris Secundum must be present to identify the winner and the winnings of the lottery19. A lottery is a chance for a prize against a price and, therefore, the element of purchase of a lottery ticket must be present and, secondly, the purchaser of a lottery ticket must have a right to participate in the draw. Undoubtedly, it is a sale of goods and lastly it is an income liable to tax20. Where the assessee-lottery agent was entitled to receive a bonus equivalent to 10 per cent of the prize amount won on a ticket sold by it, and for this purpose the agent retained the counterfoil of the ticket, it could not be said that the agent was not participating in the lottery. The bonus amount received by the assessee was winnings from lottery under section 2(24)(ix) of the Act21. However, distribution of prizes under the District Level Gift Linked Savings Mobilisation Scheme does not constitute lottery22.

14. EMPLOYEES CONTRIBUTION TOWARDS PROVIDENT FUND Any sum received by an employer from his employees as employees contribution to the following is treated as income of the employer:

18 19

CIT v. G.R. Karthikeyan, [1983] 68 Taxman 145/201 ITR 866(SC) Visveswaraiah Lucky Centre v. CIT, [1991] 56 Taxman 80/189 ITR 698 (Kar.) 20 Commercial Corpn. of India Ltd. v. ITO [1993] 201 ITR 348 (Bom.) 21 CIT v. G. Krishnan [1997] 141 CTR (Mad.) 475 22 CIT v. Dy. Director of Small Savings [2004] 266 ITR 27/136 Taxman 261 (Mad.)

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a) Employees

contribution

to

any provident

fund

(recognised

or

unrecognised). b) Employees contribution to the superannuation fund. c) Employees contribution to any fund set up under the provisions of the Employees State Insurance Act, 1948. d) Employees contribution to any other fund for the welfare of the employees. Example: Net profit of X Ltd. for the previous year 2010-2011 is Rs. 1,86,000. It is calculated after debiting salary to employees; Rs. 5 lakh. Out of Rs. 5 lakh, Rs. 50,000 is employees contribution is towards provident fund. Rs. 50,000 is transferred by X Ltd. to the provident fund account of the employees as follows- Rs. 30,000 before the due date of making such payment and Rs. 20,000 after the due date of such payment. Income of X Ltd. shall be Rs. 2,06,00023. 15. AMOUNT RECEIVED UNDER KEYMAN INSURANCE POLICY Any sum received under a Keyman insurance policy (including bonus) is treated as income in the hands of recipient.

16. AMOUNT EXCEEDING RS. 50,000 BY WAY OF GIFT Gift exceeding Rs. 50,000 received without consideration is taxable as income in a few cases.

17. CONSIDERATION FOR ISSUE OF SHARES Consideration received for issue of shares [as exceeds fair market value of shares referred to in section 56(2)(viib) is taxable as income.

WHAT ALL ARE NOT TREATED AS INCOME

Relief or reimbursement of expenses not treated as income: Mere relief or reimbursement of expenses is not treated as income. For instance, reimbursement of actual travelling expenses to an employee is not an income.

23

Dr. Vinod K. Singhania & Dr. Monica Singhania, Taxmann Students Guide to Income Tax Act including Service Tax/ VAT, p.11.

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Receipt on account of dharmada etc: Receipt on account of dharmada, gaushala and pathshala is not income and therefore, not liable to tax. Same income cannot be taxed twice: It is a fundamental rule of law of taxation that, unless otherwise expressly provided, the same income cannot be taxed twice. Pin money: Pin money received by wife for her dress/personal expenses and small savings made by a woman out of money received from her husband for meeting household expenses is not treated as her income.

Voluntary payment: A voluntary payment made entirely without consideration and is not traceable to any source which a practical man may regard as a real source of income, but depends entirely on the whim of the donor, cannot be treated as income24. However, nowadays, in some cases, a sum of money received without consideration is chargeable to tax.

ASSESMENT YEAR SECTION 2(9):

It is the twelve-month period 1st April to 31st March immediately following the previous year. Income of previous year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant Finance Act. In the Assessment year a person files his return for the income earned in the previous year. For example for FY: 2006-07 the AY is 2007-08.

PREVIOUS YEAR SECTIONS 2(34) & 3

Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year. In other words, previous year is the financial year immediately preceding the assessment year. Example: For the assessment year 2006-07, the immediately preceding financial year (i.e., 2005-06) is the previous year. Income earned by an individual during the previous year 2005-06 is taxable in the immediately following assessment year 200607 at the rates applicable for the assessment year 2006-07.

24

CIT v. M.K.S. Ranjit Singh, [1998] 232 ITR 140 (Guj.)

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Similarly, income earned during the previous year 2006-07 by a company will be taxable in the assessment year 2007-08 at the rates applicable for the assessment year 2007-08. When Income Of Previous Year Is Not Taxable In The Immediately Following Assessment Year: The rule that the income of the previous year is taxable as the income of the immediately following assessment year has certain exceptions. These are: a. Income of non-residents from shipping; b. Income of persons leaving India either permanently or for a long period of time; c. Income of bodies formed for short duration; d. Income of a person trying to alienate his assets with a view to avoiding payment of tax; and e. Income of a discontinued business. In these cases, income of a previous year may be taxed as the income of the assessment year immediately preceding the normal assessment year. These exceptions have been incorporated in order to ensure smooth collection of income tax from the aforesaid taxpayers who may not be traceable if tax assessment procedure is postponed till the commencement of the normal assessment. Previous year in case of a newly set up business: In the case, a newly set up business or profession is the source of income, the previous year commences on the date of setting up of the business/profession or on the date when the new source of income comes into existence and ends with March 31 of the financial year. The duration of previous year is 12 months or less. Example: X joins an Indian Company on December 18, 2010. Prior to this, he is not in employment. Also, he does not have any other source of income. In such a case, previous years for the assessment year 2011-2012 will be from December 18, 2010 to March 31, 2011 and for the assessment year 2012-2013 his previous year will be from April 1, 2011 to March 31, 2012. Income tax is payable on the income earned during the previous year and it is assessed in the immediately succeeding financial year which is called an assessment

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year. Therefore, the income earned during the previous year 1-4-2007 to 31-3-2008 will be assessed or charged to tax in the assessment year 2008-09. All assessees are required to follow a uniform previous year i.e. the financial year (1st April to 31st March) as their previous year. Previous year, for Income Tax purposes, will be financial year which ends on 31st of March although the assessee can close his books of account on any other date e.g. an assessee may maintain books of account on calendar year basis but his previous year, for Income Tax purpose, will be financial year and not the calendar year. According to section 2(21) of the General Clauses Act, 1897, a financial year means the year commencing on the 1st day of April. Each financial year is both, previous year as well as assessment year. It is the previous year for the income earned during that financial year and assessment year for the income earned during the preceding previous year e.g. financial year 2007-08 is the previous year for the income earned during that financial year 2007-08 and assessment year for the income earned during the previous year 2006-07.

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BIBLIOGRAPHY
1. Ahuja, Dr Girish; Gupta, Dr. Ravi; Bharats Systematic Approach to Income Tax, Service Tax and VAT; Bharat Law House Pvt. Ltd., New Delhi; 26th edition, 2011. 2. Rai, Kailash; Taxation Laws; Bharats Law House Pvt. Ltd., New Delhi; Edition 2010. 3. Rattan, Jyoti; Taxation Laws(as per Assessment Year 2013-2014); Bharat Law House Pvt. Ltd., New Delhi; 5th Edition , 2013. 4. Shah, Pradeep S.; Kadakia, Pajesh S.; Taxmanns Master Guide to Income Tax Act with Commentary on Finance Act, 2007; Taxmann Publications (P.) Ltd, New Delhi; 17th edition, 2007. 5. Singhania, Dr. Vinod K.; Singhania, Dr. Monica; Taxmann Students Guide to Income Tax Act including Service Tax/ VAT; Taxmann Publications (P.) Ltd, New Delhi; 39th edition, 2008-2009.

WEBOGRAPHY
1. http://www.caclub.in/2011/09/definition-of-income-section-224-of.html 2. http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2001ITAct/Act2001/.. %5CW&P%5Cwpsec2%2824%29.htm 3. http://www.taxmann.com/TaxmannFlashes/Articles/flashart13-1-11_5.htm 4. http://www.taxmanagementindia.com/sitemap/income_tax/list_case_laws_sections.asp?Prov=002%2824%29 5. http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2001ITAct/Act2001/.. %5CW&P%5Cwpsec2%2824%29.htm