Basis of Charge

At the core of the Income Tax Act lies the concept of ‘income.’ Section 2(24) of the Act provides an inclusive definition of income, encompassing various receipts and accruals. It includes not only revenue generated from traditional sources like salaries, profits, and dividends but also encompasses less tangible gains such as capital gains, winnings from lotteries or gambling, and income from undisclosed sources. This expansive definition ensures that the tax net covers a wide array of economic activities.

Basis of charge is established primarily through Sections 4 and 5 of the Income Tax Act. Section 4 deals with the charge of income tax on the total income of an assessee for a particular assessment year. It mandates that income tax shall be levied at the rates prescribed by the Finance Act on the total income of the previous year of every individual, Hindu Undivided Family (HUF), company, firm, association of persons (AOP), body of individuals (BOI), or any other artificial juridical person. This provision lays down the overarching principle that income tax is leviable on the total income earned by an assessee during the previous year.

The determination of total income is contingent upon the classification of income into various heads as specified under Sections 14 to 59 of the Income Tax Act. These heads of income include salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. Each head prescribes specific rules for computing taxable income, ensuring a comprehensive coverage of different sources of income.

Section 5 of the Income Tax Act provides further clarity on the basis of charge by specifying the scope of total income. It elucidates that the total income of any previous year of an individual, HUF, AOP, BOI, or artificial juridical person includes all income from whatever source derived which:

• Received or deemed to be received in India during such year; or
• Accrues or arises or is deemed to accrue or arise in India during such year.

This provision embodies the territorial and residence-based principles of taxation, whereby income earned within India’s jurisdiction or deemed to have been earned here is subject to taxation. It ensures that both residents and non-residents are liable to pay tax on income generated within India.

The concept of ‘residence’ assumes significance in determining the tax liability of individuals under the Income Tax Act. Section 6 of the Act lays down the criteria for determining the residential status of an individual. It classifies individuals into three categories: resident, non-resident, and resident but not ordinarily resident, based on the duration of their stay in India during the relevant financial year and preceding years. The residential status governs the extent of tax liability, with residents being liable to pay tax on their global income, whereas non-residents are taxed only on income earned in India or deemed to be earned here.

Moreover, the Income Tax Act incorporates provisions for the taxation of certain specific incomes, such as income of non-residents, income of representative assessees, income of members of AOPs, and income of political parties, among others. These provisions further delineate the basis of charge, ensuring comprehensive coverage of all sources of income within the tax ambit.

• Definition of Income:

This explores the expansive definition of income as provided in Section 2(24) of the Income Tax Act. It discusses the various types of receipts and accruals that constitute income, including but not limited to salaries, profits, dividends, capital gains, winnings from lotteries or gambling, and income from undisclosed sources.

• Heads of Income:

Each head of income, as specified in Sections 14 to 59 of the Income Tax Act, represents a distinct category of income subject to taxation. This sub-topic elaborates on the five heads of income: salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. It discusses the specific rules and methods for computing taxable income under each head.

• Scope of Total Income:

Section 5 of the Income Tax Act defines the scope of total income, delineating the parameters within which taxation operates. This sub-topic explores the provisions of Section 5, which stipulate that the total income of an assessee includes income received or deemed to be received in India and income accruing or arising or deemed to accrue or arise in India. It discusses the territorial and residence-based principles of taxation and their implications for taxpayers.

• Residential Status:

Determining the residential status of an individual is crucial for ascertaining their tax liability under the Income Tax Act. This delves into the criteria laid down in Section 6 for determining residential status, including the duration of stay in India during the relevant financial year and preceding years. It discusses the classification of individuals as resident, non-resident, and resident but not ordinarily resident, along with the tax implications for each category.

• Taxation of Specific Incomes:

Certain specific incomes are subject to special provisions under the Income Tax Act. This examines the provisions governing the taxation of non-residents’ income, income of representative assessees, income of members of AOPs, income of political parties, and other specified incomes. It discusses the rationale behind these provisions and their significance in ensuring comprehensive coverage of taxable incomes.

• International Taxation:

With the increasing globalization of economic activities, international taxation has become a prominent aspect of the Income Tax Act. This explores the provisions related to taxation of foreign income, double taxation relief, transfer pricing regulations, and other international tax issues. It discusses the principles of source-based and residence-based taxation, along with mechanisms for preventing tax evasion and ensuring compliance with international tax standards.