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Corporate Tax Planning

Notes additional write-offs). Every country generates income from ‘Income Tax’ in the form of direct
tax levied by government. Income tax plays a vital role in the economy of every country in the
world. Income tax Act was enacted in the year 1961. So, before one can embark on a study of the
law of income tax, it is absolutely vital to understand some of the expressions found under the
Income tax Act, 1961. The purpose of this Unit is to enable the students to comprehend basic
expressions. Therefore, all such basic terms are explained and suitable illustrations are provided
to define their meaning and scope.

1.1 Concept of Income

A basic income is an income unconditionally granted to all on an individual basis, without means
test or work requirement. It is a form of minimum income guarantee that differs from those that
now exist in various countries in three important ways:
1. it is being paid to individuals rather than households;

2. it is paid irrespective of any income from other sources;
3. it is paid without requiring the performance of any work or the willingness to accept a job
if offered.

There is no specifi c definition of income but for statutory purposes there are certain items which
are listed under the head income. These items include those heads also which normally will not

be termed as income but for taxation we consider them as income. The definition of income as
per the Income tax Act, 1961, begins with the words “Income includes”. Income is a periodical
monetary return with some sort of regularity. It may be recurring in nature. It may be broadly

defined as the true increase in the amount of wealth which comes to a person during fi xed period
of time.
The definition of the term “income” in sec. 2 (24) is inclusive and not exhaustive. The term

“income” not only indicates those things which are included in sec. 2(24), but also includes such

thing which the term signifies according to its general and natural meaning.
Therefore, it is an inclusive definition and not an exhaustive one. Such a definition does not

confine the scope of income but leaves room for more inclusions within the ambit of the term.

Certain important principles relating to income are enumerated below:
1. Income, in general, means a periodic monetary return which accrues or is expected to

accrue regularly from definite sources. However, under the Income tax Act, 1961, even
certain incomes which do not arise regularly are treated as income for tax purposes e.g.
Winnings from lotteries, crossword puzzles.
2. Income normally refers to revenue receipts. Capital receipts are generally not included
within the scope of income. However, the Income tax Act, 1961 has specifi cally included
certain capital receipts within the definition of income e.g. capital gains i.e. gains on sale of

a capital asset like land.
3. Income means net receipts and not gross receipts. Net receipts are arrived at after deducting
the expenditure incurred in connection with earning such receipts. The expenditure which
can be deducted while computing income under each head is prescribed under the Income
tax Act, 1961.

4. Income is taxable either on due basis or receipt basis. For computing income under the
heads “Profits and gains of business or profession” and “Income from other sources”, the

method of accounting regularly employed by the assessee should be considered, which can
be either cash system or mercantile system.
5. Income earned in a previous year is chargeable to tax in the assessment year. Previous
year is the financial year, ending on 31st March, in which income has accrued/received.

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