Charge of Income Tax and Key Definitions: Person, Income

Income tax rests on one charging section: tax is charged for every tax year on the total income of every person, at rates fixed by the Finance Act. Each element of that sentence is defined. This note covers the charge, the definitions of person, assessee, income and total income in section 2 of the Income-tax Act, 2025, and the judge-made principles that decide whether a receipt is income at all.

1. The Charge

Figure 1: Section 4

• Section 4. Income tax is charged for every tax year, at the rates the annual Finance Act prescribes, on the total income of every person.
• Finance Act. The Act creates the liability; the Finance Act of each year supplies the rates, surcharge and cess.
• Collection. Tax is collected in advance through deduction and collection at source and advance tax, and the balance on self assessment.

2. Person and Assessee

Figure 2: Section 2(77): person

• Person, s.2(77). Includes an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals whether incorporated or not, a local authority, and every artificial juridical person not falling within the earlier categories.
• AOP and BOI. An association of persons is formed by persons who join in a common purpose or action to produce income; a body of individuals is limited to individuals and does not need that common design.
• Assessee, s.2(11). A person by whom tax or any other sum is payable, including one against whom proceedings for assessment, loss or refund are taken, a deemed assessee and an assessee in default.
• Assessee in default. A person who fails to deduct or pay tax as required, such as a payer who does not deduct tax at source.

3. Income and Total Income

• Income, s.2(49). An inclusive definition: profits and gains, dividends, voluntary contributions received by trusts and similar bodies, perquisites and allowances, benefits to directors and substantial shareholders, capital gains, winnings from lotteries and games, and certain subsidies, among others.
• Inclusive nature. Because the definition is inclusive, a receipt not listed may still be income in its ordinary meaning.
• Total income, s.2(108). The total amount of income referred to in s.5, computed in the manner laid down in the Act.
• Agricultural income, s.2(5). Rent or revenue from, and income from cultivating, agricultural land in India, with certain buildings and nursery income; it is exempt (Topic 12)

4. Principles: Is It Income?

Figure 3: Judge-made principles

• Capital and revenue. Revenue receipts arising in the ordinary course are income unless exempt; capital receipts, such as compensation for loss of a source of income, are taxed only where the Act expressly brings them in.
• Diversion by overriding title. In CIT v Sitaldas Tirathdas (1961), the test was whether an obligation diverts the income at source before it reaches the assessee, so it is not his income, or whether he receives it and then applies it to meet the obligation, in which case it remains his income.
• Mutuality. Where contributors and participants are the same persons, any surplus returned to them is not income, because no one profits from himself.
• Illegal income. Tax law looks at receipt, not legality; income from an unlawful source is taxable.

5. Frequently Asked Questions

What is the difference between an association of persons and a body of individuals?

An association of persons may include non-individuals, such as companies, and requires a common purpose or action to produce income. A body of individuals consists only of individuals and need not have that common design.

Is income from an illegal business taxable?

Yes. Income tax is charged on income, whatever its source; the illegality of the activity does not take the income out of the charge, though it may lead to other consequences.

6. Related Topics

• Topic 9: Income-tax Act, 2025. Scheme and tax year.
• Topic 11: Residential Status and Scope of Total Income. Section 5.
• Topic 13: Income from Salaries. The first head of income.