Income Tax Act, 1961
Section 2 – Core Definitions: Assessee | Person | Income
📘 Overview – Section 2: Foundation of Income Tax
Section 2 of the Income Tax Act, 1961 contains the definitional clause. It provides the meaning of key terms used throughout the Act. Understanding these definitions is the first and most crucial step in mastering Income Tax law.
| Term | Section | Meaning |
|---|---|---|
| Assessee | 2(7) | Person connected with tax liability |
| Person | 2(31) | Taxable entity (wide & inclusive) |
| Income | 2(24) | Gains or profits taxable under the Act |
⚖️ (A) ASSESSEE – Section 2(7)
📜 Bare Act Provision
"Assessee" means a person by whom—
- any tax or any other sum of money is payable under this Act, and
- includes—
(a) every person in respect of whom any proceeding under this Act has been taken,
(b) every person who is deemed to be an assessee,
(c) every person who is deemed to be an assessee in default.
💡 Simple Meaning
- Assessee = A person connected with tax liability
- He may pay tax, be under investigation, be responsible for someone else's tax, or be treated as a defaulting person
- Even if tax is not finally payable — he can still be an assessee
🔢 Types of Assessee
Normal Assessee
Person who pays tax on his own income.
Example: Mr. A earns ₹10,00,000 salary → pays income tax.
Deemed Assessee
A person legally treated as assessee for another.
Example: Legal heir of a deceased person.
Assessee in Default
Person who fails to deduct or deposit tax.
Example: Employer deducts TDS but does not deposit it.
| Type | Who | Example | Key Feature |
|---|---|---|---|
| Normal | Taxpayer himself | Salaried employee | Tax payable on own income |
| Deemed | Legal representative | Heir of deceased | Treated as assessee by law |
| In Default | TDS defaulter | Employer failing to deposit TDS | Fails statutory duty |
👥 (B) PERSON – Section 2(31)
📜 Bare Act Provision
"Person" includes—
- Individual
- Hindu Undivided Family (HUF)
- Company
- Firm
- Association of Persons (AOP) or Body of Individuals (BOI)
- Local Authority
- Every Artificial Juridical Person
💡 Simple Meaning
- Person is not only a human being
- Company, Trust, Municipality, Temple, Partnership — all are "Person" under Income Tax
- Tax law sees economic entity, not just the human
🔢 Explanation of Each Category
| Category | Meaning | Example |
|---|---|---|
| Individual | Single human being | Any natural person |
| HUF | Hindu family with common ancestor | Joint family with coparceners |
| Company | Registered under Companies Act | Tata Ltd., Infosys Ltd. |
| Firm | Partnership firm | Law firm, CA firm |
| AOP / BOI | Group joining for common purpose | Co-owners of property |
| Local Authority | Government body | Municipality, Panchayat |
| Artificial Juridical Person | Entity recognized by law, not natural | Deity in temple, Universities |
💰 (C) INCOME – Section 2(24)
📜 Bare Act Provision (Inclusive Definition)
"Income" includes—
- Profits and gains
- Dividend
- Voluntary contributions
- Capital gains
- Perquisites
- Winnings from lottery
- Compensation
- Gifts (subject to conditions)
Important: It is NOT exhaustive. It is inclusive.
💡 Simple Meaning
- Income = Any gain or profit that increases wealth
- It can be regular or irregular, legal or illegal
- Yes — illegal income is also taxable
✅ Essential Characteristics of Income
| Characteristic | Explanation |
|---|---|
| Monetary Value | Must be capable of being expressed in money |
| Real Income | Must be actual receipt, not notional |
| Source | May arise from a definite source (business, salary, etc.) |
| Recurring or Non-recurring | Both types can be income |
| Legal or Illegal | IT Act does not distinguish |
📌 Examples
- Salary ₹5,00,000 → Income ✅
- Rent ₹2,00,000 → Income ✅
- Lottery ₹1,00,000 → Income ✅
- Illegal bribe → Income (taxable) ✅
- Capital repayment → NOT income ❌ (unless specifically included)
⚖️ Important Case Laws
Facts: Question arose whether the word "assessee" includes a female person.
Issue: Does "assessee" include women?
Decision: Yes. The term "person" includes female unless specifically excluded.
Legal Principle: Definition of assessee is wide and inclusive.
Facts: Three widows inherited property and received income jointly.
Issue: Whether they form an AOP?
Decision: No. There must be voluntary association for common purpose.
Legal Principle: AOP requires voluntary combination with common objective to earn income.
Facts: Shaw Wallace & Co. received compensation for termination of managing agency.
Issue: Whether compensation received for termination of agency is "income"?
Decision: Income must arise from a definite source. Capital receipt is not income unless included by statute.
Legal Principle: Income connotes a periodical monetary return coming in with some regularity from a definite source.
Facts: Smuggler's confiscated currency was in question.
Issue: Is illegal income taxable?
Decision: Yes. Illegal income is also taxable.
Legal Principle: Income Tax Act does not distinguish between legal and illegal income.
Facts: After amalgamation, AO issued notice in name of non-existent (amalgamated) company.
Issue: Whether assessment in name of non-existent company is valid?
Decision: Assessment is void ab initio. Non-existent entity cannot be an "assessee."
Legal Principle: Assessee must be a legally existing person. Jurisdictional defects cannot be cured under Section 292B.
Facts: Reassessment notice issued in name of deceased person.
Issue: Whether notice issued to deceased person is valid?
Decision: Notice issued to dead person is void. Proceedings must be under Section 159 against legal representative.
Legal Principle: Upon death, legal heir becomes deemed assessee (Sec 159). Sec 292B cannot cure jurisdictional defect.
📊 Comparative: Savita Kapila vs Maruti Suzuki
| Particular | Savita Kapila (2020) | Maruti Suzuki (2019) |
|---|---|---|
| Nature of Non-existence | Death of individual | Amalgamation of company |
| Relevant Section | Sec 159 | Sec 2(7), 2(31) |
| Curable under 292B? | No | No |
| Type of Defect | Jurisdictional | Jurisdictional |
| Core Principle | Legal heir must be addressed | Only existing entity can be assessed |
📊 Master Comparison Table
| Concept | Section | Meaning | Type | Key Point | Leading Case |
|---|---|---|---|---|---|
| Assessee | 2(7) | Person liable for tax or sum | Inclusive | Includes Normal, Deemed, In Default | Sodra Devi (1957) |
| Person | 2(31) | Taxable entity (7 categories) | Inclusive | Includes companies, HUF, AOP etc. | Indira Balkrishna (1960) |
| Income | 2(24) | Gains or profits taxable | Inclusive (not exhaustive) | Legal & illegal both taxable | Shaw Wallace (1932), Piara Singh (1980) |
🔄 Concept Flow – How the Definitions Connect
Individual / HUF / Company / Firm / AOP / Local Authority / AJP
🗺️ Study Roadmap – Section 2 Definitions
Stage 1: Basics
- Understand what Section 2 is — the definitional clause
- Read the bare act text of Sec 2(7), 2(31), 2(24)
- Know the difference between exhaustive vs inclusive definitions
Stage 2: Core Provisions
- Memorize 3 types of assessee with examples
- Memorize 7 categories of Person
- Understand characteristics of income (monetary, real, legal/illegal)
Stage 3: Applications & Procedures
- Apply definitions to practical scenarios (e.g., TDS default, legal heir)
- Understand when a person becomes assessee in default
- Know AOP formation rules (voluntary + common purpose)
Stage 4: Case Law Linkage
- Sodra Devi → Assessee is wide, includes women
- Indira Balkrishna → AOP requires voluntary combination
- Shaw Wallace → Income must come from source
- Piara Singh → Illegal income taxable
- Maruti Suzuki + Savita Kapila → Assessee must legally exist
Stage 5: Exam Revision Checklist
- ✅ Know the section numbers: 2(7), 2(24), 2(31)
- ✅ Write bare act + simple meaning + 1 example
- ✅ Attach at least 1 case law to each definition
- ✅ Use comparison table in answers
- ✅ Mention "inclusive definition" for each term
- ✅ Remember: Illegal income IS taxable
- ✅ AOP = voluntary + common objective
| Stage | Goal | Output |
|---|---|---|
| Stage 1: Basics | Read bare act and understand inclusive definitions | Conceptual clarity on Sec 2 |
| Stage 2: Core Provisions | Memorize types, categories, characteristics | Structured notes ready |
| Stage 3: Applications | Apply to real scenarios and problems | Problem-solving ability |
| Stage 4: Case Laws | Learn 5–6 key judgments with principles | Case-law ready answer sheet |
| Stage 5: Revision | Checklist-based revision before exam | Full exam readiness |