Costing and Taxation · Ch 3 — Introduction to Taxation
Basic Concepts and Definitions under the Income Tax Act
Basic Concepts and Definitions under the Income Tax Act
Before any income can be taxed, the Income Tax Act, 1961 first needs a precise vocabulary — WHO is being taxed, WHEN the income is earned versus WHEN it is taxed, and HOW the many different kinds of income a person earns are grouped together for computation. This section builds that vocabulary, term by term, in the order the syllabus lists them.
Previous Year and Assessment Year
Income is earned in one year but taxed in the next — the Act gives each of these two years its own name.
Previous Year (Section 3)
The financial year (1st April to 31st March) immediately in which income is actually earned. For a business or profession newly set up during a financial year, the Previous Year is the shorter period from the date of setting up to the following 31st March.
Assessment Year (Section 2(9))
The financial year immediately FOLLOWING the Previous Year, in which the income of the Previous Year is assessed and the corresponding tax is paid. For example, income earned during the Previous Year 1st April 2025 to 31st March 2026 is assessed in the Assessment Year 2026-27 (1st April 2026 to 31st March 2027) — this is exactly the Assessment Year this chapter's tax figures are grounded on.
Assessee and Person
Person (Section 2(31))
"Person" is defined very broadly and includes: (i) an individual, (ii) a Hindu Undivided Family (HUF), (iii) a company, (iv) a firm (including an LLP), (v) an association of persons (AOP) or a body of individuals (BOI), (vi) a local authority, and (vii) every other artificial juridical person not falling within any of the above categories.
Assessee (Section 2(7))
An "Assessee" is a person by whom income tax, or any other sum of money, is payable under the Act, or a person in respect of whom any proceeding has been taken for the assessment of his/her income, or of a loss, or of a refund due to him/her, or a person who is deemed to be an assessee, or an assessee-in-default, under any provision of the Act.
Every Assessee is necessarily a "Person" as defined above, but the reverse is not automatically true — a Person becomes an Assessee only once tax becomes payable by or a proceeding is taken against them under the Act.
Sources of Income and Heads of Income
Sources of Income
The specific origin from which a particular item of income actually arises — for example, a specific employer, a specific house property let out, or a specific business carried on. A person may have several different sources of income falling under the same head.
Heads of Income (Section 14)
For the purpose of computation, the Income Tax Act groups every possible source of income under FIVE broad heads: (A) Salaries, (B) Income from House Property, (C) Profits and Gains of Business or Profession, (D) Capital Gains, and (E) Income from Other Sources. Every item of income a person earns, from whatever source, must fall under one — and only one — of these five heads.
Gross Total Income and Total Income
Gross Total Income (GTI) — Section 80B(5) …