Income Tax

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.

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 Act. 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.

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.

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