Income Tax

A Brief Overview of Section 2 Provisions of Income Tax Act, 1961

A Brief Overview of Section 2 Provisions of Income Tax Act, 1961

Sеction 2 outlinеs thе dеfinitions of kеy tеrms utilizеd throughout thе Act. Familiarity with thеsе dеfinitions is еssеntial in ordеr to comprеhеnd thе еxtеnt and rеlеvancе of thе Act’s provisions.

Thе importancе of Sеction 2 liеs in thе dеfinitions it providеs, which sеrvе crucial purposеs.

  1. Firstly, thеy offеr a comprеhеnsivе undеrstanding of thе еxtеnt and rеlеvancе of thе diffеrеnt provisions of thе Act.
  2. Sеcondly, thеy aid in rеsolving any uncеrtaintiеs or quеriеs that may arisе from intеrprеting thе various provisions of thе Act.
  3. Lastly, they serve as the foundation for judicial decisions concerning income tax matters.

It is important to note that the definitions provided under Section 2 are not exhaustive, and in case of any doubts or ambiguities, reference may be made to definitions provided in other statutes or judicial pronouncements.

Section 2 of the Income Tax Act, 1961: A Comprehensive Analysis

Assessee: Section 2(7)

As per Section 2(7) of the Income Tax Act of 1961, an assessee is an individual who is required to pay taxes under any provision of the Act.

The term ‘assessee’ encompasses a person who has been evaluated for their income, another person’s income for which they are assessable, or the profit and loss they have incurred.

An assessee can also be referred to as any person for whom

  • many processes under the statute for the assessment of their income are underway,
  • income of another individual for which they are liable to be taxed,
  • any loss incurred by them or any other person,
  • Or a person who is eligible for a tax refund.

It is crucial to understand the definition of an assessee as they are the ones who pay a specific amount to the government.

The Income Tax Act categorizes them into four groups: normal assessee, assessee representative, deemed assessee, an assessee in default:

  1. A normal assessee is a person who is required to pay taxes on income generated during the fiscal year,
  2. While an assessee representative is a person, who is obligated to pay taxes on income or losses caused by a third party.
  3. A deemed assessee is a person who is legally obligated to pay taxes and can be anyone who is regarded as an assessee under the Act or anyone for whom an action has been brought under the Act to assess the income/loss of any other person in respect of whom they are assessable or the amount of refund due to them or such other person.
  4. Assessee-in-default: Individuals are classified as assessees in default when they are unable to fulfill their legal obligations of paying taxes. For instance, an employer is obligated to deduct taxes from their employees’ salaries before disbursing them. Additionally, the employer must remit the deducted taxes to the government within the stipulated time frame. Failure to deposit the taxes renders the employer an assessee in default.
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Assessment: Section 2(8)

The process of evaluating the accuracy of the income claimed by the assessee and determining the corresponding tax liability, as per Section 2(8), is known as assessment. Subsequently, the responsibility of paying the assessed tax amount is imposed on the individual.

Assessment Year: Section 2(9)

An “Assessment year” is defined in Section 2(9) as a twelve-month period starting on April 1st of each year. Each assessment year begins on April 1st and ends on March 31st of the following year. For example, the Assessment year 2021-22 is a one-year period starting on April 1, 2020, and ending on March 31, 2021. During an assessment year, the assessee’s income from the previous year is subject to taxation at the rates specified in the relevant Finance Act1. Consequently, it is also referred to as the “Tax Year.”

Income: Section 2(24)

Although income tax is a tax on earnings, the Act does not provide a comprehensive definition of “income.” Instead, the term “income” is broadly defined by including various types of income mentioned in Section 2(24).

The term “income” generally encompasses various forms of monetary gains, including

  • illicit earnings,
  • sporadic income,
  • taxable income from foreign sources,
  • quantifiable advantages, assistance, or reimbursement,
  • gifts exceeding INR 50,000 without consideration,
  • awards, and
  • causal earnings from lotteries or horse racing betting.

This section applies only to individuals who have received a benefit, which is taxable regardless of its origin as capital or revenue. The provision does not require a director to be an employee to be taxed on benefits obtained from the company. The director’s service is not linked to any advantage gained under Section 2(24) of the IT Act, 1961.

The provision does not restrict the company’s ability to provide security deposits to directors or relatives in exchange for beneficial compensation, such as renting housing property or interest-free loans.

The phrase “whether converted into money or not” refers to non-financial benefits. The onus is on the assessee to prove that the benefit was provided in violation of any legal right. 

Section 2(24) (iv) of the Income-Tax Act encompasses a distinctive provision that encompasses both capital and revenue benefits. This provision specifically addresses the distribution of benefits to directors of a company who hold a fiduciary relationship and occupy a position of trust. The main objective of this provision is to prevent corporate directors from exploiting or misusing their official roles for personal profit.

Agricultural Income: Section 2 (1a)

As per Section 2 (1A) of the Income Tax Act, agricultural income can be defined as any rent or revenue derived from land situated in India and used for agricultural purposes. It also includes:

  • Income derived from such land through agricultural operations, which may involve processing agricultural produce to make it suitable for the market or for sale.
  • Additionally, income attributable to a farmhouse is considered agricultural income, provided certain conditions specified in section 2(1A) are satisfied.
  • Furthermore, any income derived from saplings or seedlings grown in a nursery is deemed to be agricultural income.

However, it is important to note that breeding livestock, poultry farming, fisheries, dairy farming, and income earned from the commercial use of agricultural land are not considered agricultural income.

Dividend Section 2(22)

When a company distributes its profits to its shareholders, it is commonly known as a dividend. Investors who have invested in stocks, ULIPs, or mutual funds are eligible to receive dividends. However, as per Section 2(22) of the Income-tax Act, the definition of dividend also includes the following scenarios:

  • distribution of accumulated profits to shareholders, resulting in the release of the company’s assets,
  • distribution of debentures or deposit certificates to shareholders from the company’s accumulated profits,
  • issuance of bonus shares to preference shareholders from the company’s accumulated profits,
  • distribution to shareholders on the company’s liquidation from its accumulated profits,
  • distribution to shareholders from the company’s accumulated profits on the reduction of capital, and
  • loans or advances made by closely held companies to their shareholders from accumulated profits.
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Other Provisions Relating To Section 2 of the Act

In this Act, unless the context otherwise requires:

  1. The Board refers to the Central Board of Direct Taxes constituted under the Central Board of Revenue Act, 1963 (54 of 1963) [Section-2(12)]
  2. Chief Commissioner or Commissioner refers to the Chief Commissioner or Commissioner of Income-tax appointed under Section 119 [Section-2(16)]
  3. Company refers to a company as defined in section 2 of the Companies Act, 1956 (1 of 1956), and includes foreign companies, bodies corporate incorporated by or under any law in force in any country outside India, and associations or bodies of individuals (whether incorporated or not) which the Central Government declares to be a company for the purposes of this Act [Section-2(18)]
  4. Firm refers to an association of persons carrying on business under a common name [Section-2(23)]
  5. Hindu undivided family refers to a Hindu undivided family as defined in the Hindu law [Section-2(31)(ii)]
  6. Income-tax Officer refers to a person appointed to be an Income-tax Officer under section 117 [Section-2(25)]
  7. Person includes an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, whether incorporated or not; the previous year means the financial year immediately preceding the assessment year [Section-2(31)]
  8. Prescribed means prescribed by rules made under this Act [Section-2(33)]
  9. Tax means income tax and includes advance Tax [Section-2(43)]. Taxable income means the total income as reduced by the deductions allowable under this Act
  10. Total income means the total amount of income, profits, and gains of any kind from whatever source derived (including agricultural income) which is received by or accrues or arises to any person during the previous year [Section-2(45)]
  11. Tax Recovery Officer” means:
    • a Collector;
    • an additional Collector or any other officer authorized to exercise the powers of a Collector under any law relating to land revenue for the time being in force in a State or
    • any Gazetted Officer of the Central or a State Government who may be authorized by the Central Government, by notification in the Official Gazette, to exercise the powers of a Tax Recovery Officer [Section-2(44)]

Conclusion

Section 2 of the Income Tax Act, 1961, holds significant importance as it forms the basis for interpreting and implementing the different provisions of the Act.

It is imperative for individuals involved in income tax matters to possess a comprehensive comprehension of the definitions outlined in Section 2.

FAQ’s  

  1. What is Section 2 of the Income Tax Act 1961 43 of 1961?

    Section 2 of the Income Tax Act,1961 mentions all the necessary definitions that are required to be known to understand the Income Tax Act.

  2. What is the Clause 24 of Section 27?

    Section 24 of the Income Tax Act allows homeowners to claim a deduction of up to Rs. 2 lakhs on their home loan interest if the owner or his family resides in the house property. For the last financial year, the deduction limit is Rs. 1,50,000. However, if the house is rented out, the entire interest amount is waived off as a deduction.

  3. What is Section 43B of the Income Tax Act?

    Section 43B primarily pertains to a comprehensive list of expenses that can only be claimed as deductions if they have been actually paid. It is important to note that Tax Deducted at Source (TDS) is not considered an expense but rather a tax that is deducted on behalf of the deductee and subsequently deposited into the government's treasury.
    To illustrate this, let us consider an example. If an expense is deemed disallowed under section 43B for the fiscal year 2016-17 but is actually paid in April 2018, the deduction for this expense will be permitted in the assessment year 2019-20. It is crucial to understand that in this scenario, the deduction is not allowed in the assessment year 2018-19, even if the payment is made prior to the due date for filing the return of the assessment year 2018-19.

  4. What is Section 2(1B) of Income Tax Act 1961?

    Section 2 (1B) of the Income Tax Act provides a definition for the term “amalgamation” in relation to companies. According to this section, “amalgamation” refers to the merging of one or more companies with another company or the merging of two or more companies to form a single company.

  5. What is the subclause IX of Clause 24 of Section 2?

    As per Section 2(24) of the Income Tax Act, income encompasses salaries, which refers to any payment received by an individual from their employer, including but not limited to salary, wages, annuity, pension, gratuity, or any other form of payment. Such income is subject to taxation.

  6. What are the exemptions claimed under Section 10?

    Section 10 of the IT Act, 1961 outlines the provisions for income tax exemption benefits related to a range of allowances disbursed. These allowances encompass rent, tuition fees, travel, insurance policy premiums, gratuity, and other similar categories.

  7. What are the most exemptions you can claim?

    The Budget 2023 has increased the current basic exemption limit from Rs 2.5 lakh to Rs 3 lakh. Consequently, an individual's income will be subject to taxation if it surpasses Rs 3 lakh within a financial year.

  8. What is Section 79 of the Income Tax Act, for example?

    Section 79 aims to deter the exploitation of a company's historical losses by a new owner who acquires the company solely with the intention of utilizing its accumulated losses to minimize the tax obligations of their other lucrative enterprises or to obtain tax reimbursements.

  9. What is Section 71 of the Income Tax Act?

    Section 71 discusses the provision for setting off losses against income in the case where the computation under any head of income results in a net loss for a particular assessment year. The assessee is entitled to have the amount of such loss offset against any income assessable under a different head for that assessment year, subject to the provisions outlined in this Chapter.

  10. What is Section 80 of the Income Tax Act?

    Taxpayers can benefit from tax exemptions and reduce their taxable income by utilizing Section 80 of the Income Tax Act 1961. By engaging in specific activities, individuals can qualify for tax deductions of up to Rs 150,000 within a financial year under Section 80 C.

  11. What is Section 79(2) of the Income Tax Act?

    The company, which was previously under public ownership, must ensure that it retains a minimum of 51% of voting power either directly or through its subsidiaries following the completion of strategic disinvestment, as per the compliance requirements.

  12. What is Section 47 of the Income Tax Act?

    The section provides a definition for transfer, encompassing the transfer of a capital asset. This includes various actions such as sale, exchange, relinquishment, or extinguishment of the capital asset. Additionally, it covers the extinguishment of any rights associated with the asset or the compulsory acquisition of the asset under any law.

  13. What is Section 56 of the Income Tax Act?

    Any income that is not eligible for exclusion from the total income as per the provisions of this Act shall be subject to income tax under the category of “Income from other sources”, provided it is not liable to income tax under any of the heads mentioned in section 14, items A to E.

  14. What is Section 77(1) of the Income Tax?

    Where the assessee is an unregistered firm that has not been assessed as a registered firm under the provisions of clause (b) of section 183, any loss of the firm shall be set off or carried forward and set off only against the income of the firm.

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References

  1. https://incometaxindia.gov.in/pages/acts/finance-acts.aspx

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