Concept of income

Income – Section 2(24)
“Income is the consumption and savings opportunity gained by an entity within a specified
timeframe, which is generally expressed in monetary terms. However, for households and
individuals, “income is the sum of all the wages, salaries, profits, interests payments, rents,
and other forms of earnings received in a given period of time.”
In general terms, Income is a periodical monetary return with some sort of regularity.
However, the Income Tax Act, even certain income which does not arise regularly are treated
as income for tax purposes e.g. Winnings from lotteries, crossword puzzles.
The definition of Income as given in Section 2(24) of the Act starts with the word includes
therefore the list is inclusive not exhaustive. The definition enumerates certain items,
including those which cannot ordinarily be considered as income but are treated statutorily as
such.
As per Section 2(24) income includes profit and gains, dividend, salary, city compensatory
allowance, dearness allowance etc.,.
Principles regarding the Concept of Income

1. Cash or kind
Income may be received in cash or kind. When the income is received in kind, its valuation
will be made in accordance with the rules prescribed in the Income-Tax Rules, 1962.
2. Receipt basis/ Accrual basis
Income arises either on receipt basis or on accrual basis. It may accrue to a taxpayer without
its actual receipt. The income in some cases is deemed to accrue or arise to a person without
its actual accrual or receipt. Income accrues where the right to receive arises.
3. Legal or illegal source
The income-tax law does not make any distinction between income accrued or arisen from a
legal source and income tainted with illegality. In CIT v. Piara Singh (1980) 3 Taxman 67,
the Supreme Court has held that if smuggling activity can be regarded as a business, the
confiscation of currency notes by customs authorities is a loss which springs directly from the
carrying on of the business and is, therefore, permissible as a deduction.
4. Temporary/Permanent
There is no difference between temporary and permanent income under the Act. Even
temporary income is taxable under the Income Tax Act.
5. Lumpsum/instalments
Income whether received in lump sum or in instalment is liable to tax. For example- arrears
of salary or bonus received in lump sum is income and charged to tax as salary.
6. Gifts
Normally, gifts constitute a capital receipt in the hands of the recipient. However, certain
gifts are brought within the purview of income- tax, for example, receipt of property without
consideration is brought to tax under section 56(2)(x). Gifts of personal nature do not
constitute income subject to maximum of Rs. 50,000 received in cash. The recipient of gifts
like birthday, marriage gifts, etc., is not liable to income-tax as received in kind however as
per the Finance Act, 2009 gifts in kind having fair value upto Rs. 50,000 are not liable to tax
but having fair value of more than Rs. 50,000 is wholly taxable.
7. Revenue or Capital receipt
Income-tax, as the name implies, is a tax on income and not a tax on every item of money
received. Therefore, unless the receipt in question constitutes income as distinguished from
capital, it cannot be charged to tax. For this purpose, income should be distinguished from
capital which gives rise to income. However, some capital receipts have been specifically
included in the definition of income.
The Act contemplates a levy of tax on income and not on capital and hence it is very essential
to distinguish between capital and revenue receipts. Capital receipts cannot be taxed, unless
they fall within the scope of the definition of “income” and so the distinction between capital
and revenue receipts is material for tax purposes.
Certain capital receipts which have been specifically included in the definition of income are
compensation for modification or termination of services, income by way of capital gains etc.
It is not possible to lay down any single test as infallible or any single criterion as decisive,
final and universal in application to determine whether a particular receipt is capital or
revenue in nature. Hence, the capital or revenue nature of the receipt must be determined with
reference to the facts and circumstances of each case.

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Concept of income

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Income – Section 2(24)

Principles regarding the Concept of Income

2. Receipt basis/ Accrual basis

3. Legal or illegal source

7. Revenue or Capital receipt

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