What is the concept of Income Taxable under the Income Tax Act, 1961?

Introduction

In India, the Finance Bill is introduced in the Parliament to explain changes in taxes proposed in the Budget, such as the imposition of new taxes, alteration of existing taxes, or the abolition of certain taxes. It is through the Finance Bill that amendments are made to the Income Tax Act, 1961, the Customs Act, 1962, and other related Acts. According to the Income Tax Act, 1961, income may be received in cash or kind; when income is received in kind, its valuation will be made by the Income Tax Rules, 1962. Income arises either on a receipt or accrual basis; income, whether received in a lump sum or in instalments is liable to tax. Property received as a gift or without consideration is liable to tax under Section 56(2)(x) of this Act, or any gift received having a fair value of more than fifty thousand rupees is wholly taxable.  It can be accrued or arise from legal sources or income tainted with illegality. In Commissioner of Income Tax, Patiala vs. Piara Singh (1980) [1] the Supreme Court held that if smuggling activity can be regarded as a business, the confiscation of currency notes by customs authorities is a loss that springs directly from the carrying on of the business and is therefore permissible as a deduction. Income tax as the name implies, is a tax on the income and not a tax on every item of money received. Therefore, unless the receipt in question constitutes income as distinguished from capital, it cannot be charged to tax. For this purpose, income should be distinguished from capital which gives rise to income. However, some capital receipts have been included in the definition of income provided under Section 2(24) of the Income Tax Act, 1961. Thus, income includes profits and gains from business or profession, dividends of shares, the value of any perquisites or profits instead of salary, capital gains, insurance profit, winnings from the lottery, etc.

Nature of Income

The income under the Income Tax Act is not limited to cash receipts alone but includes other forms of income such as:

• Monetary Income: Monetary income is direct income that is received in the form of cash or equivalents such as salary, interest, dividends, etc.
• Non-Monetary Income: Non-monetary income means benefits received in kind, such as gifts, perks, services, and free accommodations, which have some monetary value in the context of taxation.

Categories of Income

All incomes are categorised into five heads of income under the Income Tax Act, 1961. There is a charging section under each head of income that defines the scope of income chargeable under that particular head.

1. Income received from Salary 

The provisions relating to salary are provided under Sections 15 to 17 of the Income Tax Act, 1961. Income that is chargeable under the head Salaries is deemed to accrue or arise in India in all the cases when earned in India; for this purpose, income is said to be earned in India if the services are rendered in India. The actual place of accrual of the salaries, the residential status of the employer, the citizenship or nationality of the employee, and whether the employee is a government servant or an employee of private enterprises are immaterial. However, according to Section 9(2) of this Act, any pension payable outside India to a person residing permanently outside India should not be deemed to accrue or arise in India.

2. Income received from House Property 

The provisions relating to income received from house property are provided under Sections 22 to 27 of the Income Tax Act, 1961. Income received from the let-out buildings or lands adjoining to or forming a part of the building is chargeable under income tax. For example, Mr. X is the owner of a building. The building is given on rent. Income generated from the building is taxable under the head of House Property.

3. Income received from Profits and Gains of Businesses and Professions 

The provisions relating to income received from PGBP are provided under Sections 28 to 44DB of the Income Tax Act, 1961. The profits and gains of any business or profession carried on by the assessee at any time during the previous year are chargeable under this head of income.

4. Income received from Capital Gains

The provisions relating to income received from capital gains are provided under Sections 45 to 55A of the Income Tax Act, 1961. Section 45 of the Act provides that any profits and gains arising from the transfer of a capital asset in the previous year shall be chargeable under this head of income. In Navin Chandra Mafatlal vs. Commissioner of Income Tax, Bombay (1955)[2] the Supreme Court upholding the competence of Parliament in legislating concerning capital gains as a part of income observed that the term income should be given the widest connotation to include capital gains within its scope. However, all capital profits do not necessarily constitute capital gains. For instance, profit on the reissue of forfeited shares, profit on the redemption of debentures, and premium on the issue of shares are capital profit and not capital gains and hence not liable to tax.

5. Income received from Other Sources

The provisions relating to income received from other sources are provided under Sections 56 to 59 of the Income Tax Act, 1961. Income from other sources means it is not chargeable under the head of salary, house property, PGBP, and capital gains are chargeable under this head. Dividends, keyman insurance policy, winning from lotteries, contribution to provident fund, income by way of interest on securities, gifts, etc.

Computation of Taxable Income

Tax liability of the assessee’s income is calculated in the following manner:

• Determine the residential status of the person according to Section 6 of the Act.
• Calculate the income according to Section 14, income under the heads of salary, house property, profits and gains from business and profession, capital gains, and income from other sources.
• Consider all the deductions and allowances given under the respective heads before arriving at the net under each head.
• Excludes the incomes provided under Section 10 of this Act.
• The aggregate of incomes calculated under the five heads of income after applying clubbing provisions and making adjustments of set-off and carry forward of losses is known as gross total income.
• Deduct the amount of deductions admissible under respective provisions from Sections 80C to 80U of the Act; the balance amount is called total income.
• The total income is rounded off to the nearest multiple of rupees 10 as per Section 288A of the Act.

Thus, the income received under the five heads of income. It is then to be adjusted concerning the provisions of the Income Tax Act in the following manner:

Conclusion

The concept of income under the Income Tax Act, 1961, is complex, and it covers both monetary and non-monetary incomes. The Act recognises the complex nature of income categorised into the five distinct heads of income, such as salary, house property, profits and gains from business and profession, capital gains, and other sources, each of which has its own provisions, exemptions, and deductions. The manner of computing taxable income involves determining the residential status of the person, along with the income from various heads of income. Consider all deductions and exemptions available under the respective head to the specified person that are applied to arrive at the net taxable income. Thus, the Income Tax Act, 1961 provides a comprehensive approach to taxation by including various types of incomes, ensuring that taxpayers are taxed based on their total income after considering exemptions, deductions, and losses.

[1]  AIR 1980 SC 1271.                            

[2]  AIR 1955 SC 829.

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