Some important principles which explain the importance of income for income-tax purpose are given below:
(i) Regularity of Income:
Income connotes periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive but it must be one whose object is production of a definite return, excluding anything in the nature of a mere windfall. However, this does not mean that income which does not arise regularly will not be treated as income for tax purposes e.g. winnings from lotteries, etc.
(ii) Form of Income:
The income received by the assessee need not be in the shape of cash only. It may also be some other property or right which has monetary value. Wherever income is received in kind like perquisites then their value has to be found as per the rules prescribed and this value shall be taken to be the income.
(iii) Tainted/Illegal Income:
Income is income, though tainted. For purposes of Income-tax, there is no difference between legal and tainted income. Even illegal income is taxed just like any legal income.
(iv) Application of Income v Diversion:
Where an assessee applies an income to discharge an obligation after the income reaches the hands of the assessee, it would be an application of income and this would result in taxation of such income in the hands of the assessee. However, where there is a diversion of income before it reaches the hands of the assessee, it cannot be treated as an income of the assessee.
(v) Disputed Income:
Any dispute regarding the title of the income cannot hold up the assessment of the income in the hands of the recipient. The recipient is, therefore, chargeable to tax though there may be rival claims to the source of the income. (vi) Contingent income: A contingent income is not income. Until the contingency has happened, it cannot be postulated that income has accrued or has arisen to the assessee.
(vii) Basis of Income:
Income can be taxed on receipt basis or on accrual basis. In case of income from business or income from other sources, the taxability would depend upon the method of accounting adopted by the assessee, while in other cases, it would generally be taxed on receipt or accrual basis, whichever happens earlier. However, a contingent income i.e. an income which may or may not arise cannot be taxed unless and until such contingency actually occurs and the income arises to the assessee.
(viii) Personal Gifts:
Gifts received by a person on occasions like birthdays, marriage, festivals, etc. should not ordinarily be the income of the assessee and therefore, cannot be taxed in the hands of the recipient as his income. However, gift of money or gift of immovable property or certain moveable property received by any person from unrelated person(s) shall be chargeable to income-tax if the aggregate sum of money or value of gift received in the previous year exceeds ₹50,000. For details see Chapter 8.
(ix) Composite Income:
Income-tax is a composite tax on all incomes received by or arising to a tax payer during a year. Therefore, tax will be imposed on the aggregate of all incomes earned/received by the assessee during the year.
(x) Pin Money:
Pin money received by a woman for her dress or private expenditure as also small savings effected by a housewife out of moneys given to her by her husband for running the expenses of the kitchen would not be income in the eyes of the law. Any property acquired with the aid of such money or savings would form a capital asset belonging to the lady.
(xi) Lumpsum Receipt:
If a receipt is an income then whether it is received in lumpsum or in instalments would not affect its taxability; for example, if a person receives arrears of salary in a lumpsum amount, it would still be his income.
(xii) Income must come from outside:
A person cannot earn income from himself. In case of mutual activities, where some people contribute to the common fund and are entitled to participate in the fund and a surplus arises which is distributed to the contributors of the fund, such surplus cannot be called income.
(xiii) Revenue Receipt v Capital Receipt:
Section 4 brings to charge tax on total income. Prima facie, in order to come within the scope of the charging provision, the receipt in question should normally be a revenue receipt. Capital receipts are normally exempt. However, certain capital receipts have been specifically included in the definition of income, some of which are:
(a) Income by way of capital gains [Section 45];
(b) Compensation for modification/termination of services [Section 17(3)(i)];
(c) Compensation or other payment due to or received by some specified person covered under section 28(ii)(a), (b), (c) and (d);
(d) any sum or a property received by any person from unrelated person(s) without consideration if the aggregate amount received or value of gift during the previous year exceeds ₹50,000.
(e) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,––
(a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset.
(f) the fair market value of inventory referred to in section 28(via) i.e. if the inventory is converted into a capital asset.
On the other hand, there are certain receipts which are though revenue receipts but do not form part of total income.
(xiv) Income Received or Deemed to be Received in India [Section 7]
(1) Received in India:
Any income which is received in India, during the previous year by any assessee, is liable to tax in India, irrespective of the residential status of the assessee and the place of accrual of such income.
(2) Income Deemed to be Received in India [Section 7]:
The following incomes shall be deemed to be received in India in the previous year even in the absence of actual receipt:
(i) Contribution made by the employer to the recognized provident fund in excess of 12% of the salary of the employee;
(ii) Interest credited to the RPF of the employee which is in excess of 9.5% p.a.
(iii) Transfer balance from the unrecognized fund to a Recognised Provident Fund (It has been discussed in the Chapter on 'Income from Salaries');
(iv) The contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a notified contributory pension scheme referred to in section 80CCD.
(xv) Incomes which accrue or arise in India or are deemed to accrue or arise in India [Section 9]
(1) Accrue or arise in India:
'Accrue' means 'to arise or spring as a natural growth or result', to come by way of increase. 'Arising' means 'coming into existence or notice or presenting itself'. 'Accrue' connotes growth or accumulation with a tangible shape so as to be receivable. In a secondary sense, the two words together mean 'to become a present and enforceable right' and 'to become a present right of demand'.
Frequently, in the context of 'accrual' or 'arisal', the word 'earned' is used. The two are different concepts. A person may be said to have 'earned' his income in the sense that he has contributed to its production by rendering services or otherwise and the parenthood of the income can be traced to him. But in order that the income may be said to have 'accrued' to him, an additional element is necessary, that he must have created a debt in his favour.
(2) Incomes which are deemed to accrue or arise in India [Section 9]:
The following incomes shall be deemed to accrue or arise in India:
(a) Income from a business connection in India:
Any income which arises, directly or indirectly, from any activity or a business connection in India is deemed to be earned in India.
Business connections may be in several forms e.g. a branch office in India or an agent or an organization of a non-resident in India. Formation of a subsidiary company in India to carry on the business of the non-resident parent company would also be a business connection in India. Any profit of the non-resident which can be reasonably attributable to such part of operations carried out in India through business connections in India are deemed to be earned in India.