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Unit 1: Income Tax: Basic Framework

Assessment year is the financial year (ending on 31st March) following the previous year. Notes
The income of the previous year is assessed during the assessment year following the
previous year. For instance, income of previous year 2012-13 is assessed during the year
2013-14. Therefore, 2013-14 is the assessment year for assessment of income of the previous
year 2012-13.

1.1.1 Features of “Income”

The following features of income can help a person to understand the concept of income:
1. Defi nite Source: Income has been compared with a fruit or a crop from the fi eld. Fruit

comes from a tree and crop from fields. Thus, the source of income is definite in both the
cases. The existence of a source for income is somewhat essential to bring a receipt under
the charge of tax.
2. 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.
3. 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.
4. Temporary or Permanent: Whether the income is permanent or temporary, it is immaterial
from the tax point of view.
5. 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.

1.1.2 Tax Treatment of “Income”

For the purposes of treatment of income for tax purposes it can be divided into three categories:

1. Taxable Income: These incomes from part of total income and are fully taxable. These are

salaries, rent, business profits, professional gains, capital gain, interest dividend and so
on.
2. Exempted Income: These incomes do not from part of total income either fully or partially.
Hence, no tax is payable on such incomes.

3. 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.

Self Assessment

State whether the following statements are true or false:

1. Income means a periodic monetary return which accrues or is expected to accrue regularly
from definite sources.

2. Income is taxable only on due basis.

3. Income earned in a previous year is chargeable to tax in the assessment year.

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