Basic Concepts of Income Tax

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Sec 2(1A) of the Income tax Act defines Agricultural Income as:

  • Any rent and revenue derived from land which is situated in India and is used for agricultural purposes.

Any income derived from such land by

  1. Agricultural operations; or
  2. The performance of any process ordinarily employed by a cultivator or receiver of rent in kind to render the produce fit to be taken to the market, or
  3. The sale by cultivator or receiver of rent in kind of such produce in respect of which no one process has been performed other then the process mentioned above.
  4. Any income derived from any building owned and occupied by the receiver of rent and revenue of any such land provided the following conditions are satisfied: [(see2(1A)(c)]
  5. The building is on or in the immediate vicinity of land which is in India and is used of agriculture purpose.
  6. The cultivator or receiver of rent in kind uses the building as a dwelling house or as a store house.

Following are some of the examples of agriculture income:-

  • Income from use of land for grazing of cattle required for agriculture pursuits.
  • Compensation received from an insurance company for damage caused by hailstorm to the green leaf forms port of agricultural income.
  • Salary received by a partner or share of profit of a firm engaged in agricultural operation,
  • Interest on capital received by a partner of a farm engaged in agricultural operation.
  • Income from growing flowers and creepers.

Person under the Income Tax Act 1961                      

According to sec 2(31) the term ‘person’ includes the following-

  1. An individual

Means a nature person who be a male or female, minor child, he / she may be a unsound mind.

  • Hindu undivided family (HUF):

HUF means a family which consists of all persons legally descended from a common ancestor including their wives and unmarried daughters.

  • Associated of persons (AOP)

AOP means two or more person who joint for a common purpose with a view to earn  an income without forming a partnership firm.

  • Body of individual (BOI)

It means a large groups of persons who carry on some activity with object of the earning some income. It would consists only individuals.

  • A local authority

Local authority means any authority formed under any law for the local management of any area. They include-

  • Panchayat.
  • Municipality.
  • Municipal Committee District Board.


 According to sec 2(7) of Income Tax Act 1961 an assessee means a person by whom any tax or any sum of money is payable under income tax act band includes-

  1. Every person in respected of any proceeding under this Act, has taken.
  2. For assessment of his income, or
  3. For assessment of the income of any other income respect of which his assessable, or
  4. To determine the amount of loss sustained by him or such other person, or
  5. To determine the amount  due to him or to such other person.
  6. Every person who is deemed to be an assessee under any person of this act.
  7. Every person who is deemed to be an assessee in default under any provision of the act.

Classification of  the assessee on the basis of their residential status.

The tax liabilities of an assessee depends on the residential status of an assessee. Sec6 of the income Tax Act, 1961 prescribe the procedure of ascertaining the residential status of a assessee which classify the assessee in following ways-

  1. Residential in India.
  2. Non Resident in India.

Again, in case of an individual assessee who is resident in India, his status may be-

  1. Resident and ordinarily resident.
  2. Resident and not ordinarily resident.

Income [Section 2(24)]

Though ‘Income’ is a very important word for the Income Tax Act but no precious definition of the word “Income” is attempted under the Income Tax Act, 1961.

The term “Income”, in the context of the Act, in inclusive. The narration given in Sub-Section (24) of Section 2 of the Act enumerates certain items, including those which cannot ordinarily be considered as income but are treated statutorily as such. 

Definition of Income [Section 2(24)]

Income includes:-

 1. Profit and gains;

 2. Dividend;

 3. Voluntary contributions received by a trust.

4. The value of a perquisite o profit in lieu of salary.

 5. Any special allowance or benefit other than perquisites included under 4.

6. Any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office 

7. The value of any benefit or perquisite obtained from a company.

8. Any compensation

9. Profit on sale of License

10.Cash assistance received 

11. Any interest, salary, bonus, commission/remunerations 

12. Profit/gain of mutual or co-operative insurance co.

13. Capital gain arising from transfer of capital gain 

14. Any sum received under a key man insurance police.  


  • Previous year means the financial year immediately preceding the assessment year e.g. for the assessment year 2019-2020 previous year will commence on 1st of April, 2019 and end on 31st March, 2020.
  • Previous year for income tax purposes will be financial year which ends on 31st of March, however the assessee can close his books of accounts on other date.
  • Example: an assessee may maintain books of accounts on calendar year basis but his previous year, for Income Tax purpose, will be financial year and not the calendar year.

Important points in relation to previous year:

 Under the following situation the previous year would be –

  1. Where a different accounting year is followed

2. Previous year in case of newly set up business

3. In case of newly created source of income  

Exception to the rule of Previous Year:

  These exceptions are:                     

 1. Shipping business income of non-resident ship-owners                      

2. In case of persons leaving India                                         

3. In case of persons who are likely to transfer their assets to avoid tax                       

4. In case of discontinued business  


The term ‘person’ includes:

 (1) An individual 

(2) A Hindu undivided family

(3) A Company;

(4) A Firm;

(5) An association of persons or a body of individuals, whether incorporated or not; 

(6) A local authority like Municipalities, Panchayats, Cantonment Boards, Port Trusts etc.


Gross Total Income means the aggregate amount of taxable income computed under five heads of income i.e. salaries, house property, business & profession, capital gains and other sources.

In other words, Gross Total Income means total income computed in accordance with the provisions of the Act before making any deduction under sections 80C to 80U. 

In simple words, the aggregate amount of the following heads of income is called Gross Total Income –

  • Salaries (Cash receipts and perquisites from the employer),
  • Income from House Property (Rental income)
  •  Profits and Gains of Business or Profession,
  • Capital Gains from transfer of movable and immovable assets,
  • Income from other Sources i.e. interest, royalty, lottery etc. 

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