Important Concepts To Be Kept In Mind While Understanding The Meaning Of The Term ‘Income’ As Defined In Income-Tax [i.e., Under Section 2(24)]

Few important concepts to be kempt in mind while interpreting the term income viz:

 

o          Tax treatment of tax free income

o          Income in kind

o          Pin money received by wife

o          Diversion of income by overriding title vs. Application of income

 

1.      Tax free income

If a person is receiving tax free income, i.e., tax on such income is paid by the payer, then the gross amount of such income, i.e., tax free income plus tax paid by the payer will be treated as taxable income of the receiver.

 

Example

Mr. Sanjay is working in Essem Ltd. on a monthly salary of Rs. 84,000 (tax free because tax on salary is paid by the company). In addition to salary of Rs. 84,000, the company is paying tax of Rs. 25,200 on the said salary. In this case, the taxable income of Mr. Sanjay will be Rs. 1,09,200 per month (Rs. 84,000 salary plus Rs. 25,200 tax on salary paid by the company).

 

2.      Income can be in cash or in kind

Income-tax has nothing to do with the nature of income, i.e., whether in cash or in kind. An income received in kind is charged to tax in the same way as income received in cash. In case of income received in kind, the taxable value is computed by computing the fair value of such an income. The fair value of income received in kind is computed by following the rules prescribed in this behalf. If no specific rules in this regard are prescribed under the income-tax law, then the market value of such an income is to be considered.

 

Example

Gifts in kind received by a doctor from his patients are charged to tax in the hands of the doctor.

 

3.      Pin money received by wife

Pin money received by a wife for her personal expenses is not regarded as an income of the wife. Further, any savings made by wife from money received from her husband for household expenses are also not regarded as income of the wife.

 

4.      Diversion of income by overriding title vs. application of income

If an assessee claims that there has been a diversion of income, then the income for which diversion is claimed cannot be treated as taxable income of the assessee. However, if there is an application of income (and not diversion), then income so applied will be charged to tax in the hands of the assessee.

 

In other words, diversion of income will not result in taxable income in the hands of the assessee. However, application of income will be taxed in the hands of the assessee.

 

Diversion will occur when income does not reach the assessee and is directly diverted to any other person. In other words, in case of diversion of income the assessee has no right over the income as the income does not reach in his hands.

 

Application occurs when the income reaches the assessee, i.e., the assessee has right over the income.

 

Example

Mr. Kapoor and Mr. Sunil prepared an article and the same was published in a magazine. The publisher issued a cheque of Rs. 84,000 in the name of Mr. Kapoor (since he is first author). Out of Rs. 84,000, Mr. Kapoor paid Rs. 42,000 to Mr. Sunil. In this case, the taxable income of Mr. Kapoor will be Rs. 42,000 only (even though he has received Rs. 84,000). Rs. 42,000 paid by Mr. Kapoor to Mr. Sunil will be treated as diversion of income by an overriding title and cannot be treated as his taxable income.

 

5.      Rule of taxation on the basis of residential status of the assessee

The following chart highlights the tax incidence in case of different persons on the basis of their residential status :

 

 
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