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Unit 1: Income Tax: Basic Framework

“Income Tax is levied on the total income of the previous year of every person.” Notes
Thus Income tax is a tax imposed by the Government of India on anybody who earns income in
India.

Income earned in the twelve months contained in the period from 1st April to 31st March
commonly referred to as Financial Year is taken into account for purposes of calculating Income
Tax. Under the income tax Act this period is called a “Previous Year”. Income earned in India is
not limited to income earned within the geographical limits or boundaries of the country.
Certain incomes are also deemed to have been earned in India although they may have been
earned outside the country.
The word “Income” has a very broad and inclusive meaning. In case of a salaried person, all that
is received from an employer in cash, kind or as a facility is considered as income. For a
businessman, his net profits will constitute income. Income may also flow from investments in
the form of Interest, Dividend, and Commission etc. Infect the Income Tax Act does not
differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes
earned by persons are classified into five different heads, such as:
Income from Salary

Income from House property
Income from Business or Profession
Income from capital gains
Income from other sources
Therefore to levy income tax, one must have the understanding of the various concepts related
to the charge of tax like previous year, assessment year, Income, total income, person etc. which
is discussed in detail in the following sections.

Self Assessment

Fill in the blanks:
1. Income tax is one of the forms of ………………………..
2. ………………………..tax is paid by the person other than the person who utilizes the
product or service.
3. Income-tax is one of the major sources of revenue for the ……………………………
4. ……………..contains various amendments such as the rates of income tax and other taxes.
5. Circulars also issued by…………………………. to clarify the doubts regarding the scope
and meaning of the provisions.

1.2 Concept of Income

No precise definition of the word ‘Income’ is attempted under the Income Tax Act, 1961. The
definition of Income as given in Section 2(24) of the Act starts with the word includes therefore
the list is inclusive not exhaustive. The definition enumerates certain items, including those
which cannot ordinarily be considered as income but are treated statutorily as such. Income
includes not only those things which the interpretation clause declares. It shall also include all
such things the word signifies according to its natural import.

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