Meaning of Income under the Income Tax Act, 1961 | Incidence of Tax

Q. Define income under the Income Tax Act, 1961. “The incidence of tax depends upon the residential status of an assessee.” Discuss.

Meaning of Income under the Income Tax Act, 1961

Meaning of Income: Generally speaking the word `Income’ covers receipts in the shape of money or money’s worth which arise with certain regularity or expected regularly from a definite source. However, all receipts do not form the basis of taxation under the Act. According to Section 2(24) `Income’ includes the following:

(i) Profits and gains;

(ii) Dividends (voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes.)

(iii) The value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;

(iv) The value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director

(v) Any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;

(vi) Any capital gains chargeable under section 45;

(vii) The profit and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society;

(vii) Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever;

(ix) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set-up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948); or any other fund for the welfare of such employees;

(x) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

(xi) Any sum referred to in clause (vii) of section 28.

(xii) Receipts without consideration – any sum received u/s 56(2) (v) where any sum of money exceeding Rs. 50,000 is received by an individual or HUF from any person on or after 1.9.2009. However, this clause is not applied if money received from relative or on the occasion of marriage or under will.

Incidence of Taxes (Scope of Total Income)

As per Section 5 of the Income Tax Act 1961, the incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income. To understand the relationship between residential status and tax liability, one must understand the meaning of “Indian income” and “Foreign income”. An Indian income is one which satisfies any of the following conditions:

1)      If income is received or deemed to be received in India during the previous year and at the same time it accrues or arises or is deemed to accrue or arise in India during the previous year, or

2)      If income is received or deemed to be received in India during the previous year but it accrues or arises outside India during the previous year, or

3)      If income is received outside India during the previous year but it accrues or arises or is deemed to accrue or arise in India during the previous year.

 Similarly, foreign income is one which satisfies both the following conditions:

1)      Income received or deemed to be received outside India; and

2)      Income accrued or deemed to be accrued outside India.

Indian income is always taxable in India irrespective of the residential status of the taxpayer. Foreign income of an individual and HUF from a business controlled or a profession set up in India will be taxable in the hands of resident and ordinarily resident and resident but not ordinarily resident but not in the hands of a non-resident. However, Foreign income from a business controlled or a profession set up outside India will be taxable only in the hands of resident and ordinarily resident and not in the hands of a resident but not ordinarily resident or a non-resident person.

Foreign income of any other taxpayer (Company, Firm, AOP, BOI etc.) will be taxable if the taxpayer is resident in India and will not be taxable in case the taxpayer is non-resident in India. 

Tax incidence of different taxpayers is as follows—

Particulars	ROR	RNOR	NR
Income received in India Income deemed to be received in India Income accruing or arising in India Income deemed to accrue or arise in India Income received/ accrued outside India from a business or profession controlled in India Income received/ accrued outside India from a business controlled outside India	Yes Yes Yes Yes   Yes   Yes	Yes Yes Yes Yes   Yes   No	Yes Yes Yes Yes   No   No