CONCEPT OF ASSESSMENT YEAR, PREVIOUS YEAR, INCOME,

CAPITAL AND REVENUE RECEIPTS, CAPITAL AND REVENUE

EXPENDITURE.

SUBMITTED BY
KAINAAT MUSHTAQ
SEC ‘A’
VI SEMESTER

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 ACKNOWLEDGEMENT

Firstly, I would like to express my profound sense of gratitude towards the almighty “ALLAH”
for providing me with the authentic circumstances which were mandatory for the completion of
my project.

Secondly, I am highly indebted to Dr. Kehkashan Daniyal at Faculty of Law, Jamia Millia
Islamia University, New Delhi for providing me with constant encouragement and guidance
throughout the preparation of this project.

Thirdly, I thank the Law library staff who liaised with us in searching material relating to the
project.

My cardinal thanks are also for my parents, friends and all teachers of law department in our
college who have always been the source of my inspiration and motivation without which I
would have never been able to unabridged my project.

My father, a lawyer with large access to books of value has been of great help to me.

Without the contribution of the above said people I could have never completed this project.

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 TABLE OF CONTENTS

S. NO. TITLE PAGE NO.

1 4
INTRODUCTION

DEFINITIONS
Assessment Year
Financial Year
2 Previous Year 06-15
Revenue Receipts
Capital Receipts
Capital Expenditure
Revenue Expenditure
Income

3 BIBLIOGRAPHY 16

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INTRODUCTION

Tax is a fee charged ("levied") by a government on a product, income, or activity. If tax

is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on
the price of a good or service, then it is called an indirect tax. The purpose of taxation is
to finance government expenditure. One of the most important uses of taxes is to finance public
goods and services, such as street lighting and street cleaning. Since public goods and services
do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be
a market in the good or service, and so they need to be provided by the government or a quasi-
government agency, which tend to finance themselves largely through taxes”

The taxes levied by the government form a pool of resources to be used of the collective benefit
of the public. The taxation is an exercise in the collective solution of individual problems. The
state takes upon itself the duty of solving the problems of the underprivileged and need finance
for this purpose. The government can mobilize resources by imposing taxes on the privileged
ones. The taxation structure of the country can play a very important role in the working of our
economy. Some time back the emphasis was on higher rates of tax and more incentives. But
recently the emphasize has shifted to decrease in rates of taxes and withdrawal of incentives.
While designing the taxation structure it has to be seen that it is in conformity with our economic
and social objectives. It should not impair the incentives to personal savings and investment flow
and on the other hand it should not result into decrease in revenue for the state.

In our present day economic structure income tax plays a vital role as source of revenue and a
measure of removal of economic disparity. Our taxation structure provides for two types of taxes
direct and indirect; the income tax, wealth tax and gift tax are direct taxes where as sales tax and
excise duties are indirect taxes.

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HISTORY: The income tax was introduced in India for the first time 1860 by British rulers
following mutiny of 1857. the period between 1860 to 1886 was period of experiments in the
context of income tax. This period ended in 1886 when first income tax act came into existence.
The pattern laid down in it for levying of tax continues to operate even to day though in some
changed form. In 1918 another act income tax act 1918 was passed but it was short lived and was
replaced by income tax act 1922 and it remained in existence and operation till 31st March 1961.

PRESENT ACT: On the recommendation of Law commission and Direct taxes enquiry
committee and in consultation with law ministry a bill was framed. This bill was referred to a
select committee and finally passed in September 1961. This act came into force from 1st April
1962 in whole of the country. Income tax act 1961 is comprehensive act and consists of 298
sections, sub sections running into thousands, schedules, rules and sub rules etc. and is supported
by other acts and rules. This act has been amended by several amending acts since 1961. The
annual finance bills presented to parliament along with budget make far reaching amendments in
this act every year.

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DEFINITIONS

1.) ASSESSMENT YEAR:1

The term assessment year means the period of 12 months commencing on the first day of April
every year. Thus, the assessment year always begins on 1st April and ends on 31st March every
year. This period is also known as the financial year. Previous Year [sec. 3] The year in which
income is earned is termed as the previous year. Income tax is charged on the total income of the
previous year, and the income earned during the previous year is assessed to tax at the rates and
as per the provisions applicable for the assessment year relevant to the previous year. In other
words, the income chargeable to tax in the assessment year is the one actually earned in the
previous year. Financial year to be the previous year2 It should be noted that financial year is the
previous year for tax purpose only, and the assessee is free to follow an accounting year different
from the financial year. However, is the assessee’s accounting year is different from the financial
year; he will still be required to maintain accounts for every financial year for the purpose of
submitting the income tax returns.

2.) FINANCIAL YEAR

The year in which you earn your income is termed as Financial Year for tax purposes. It is also
the year in which you pay tax on your income. A Financial year lasts from 1st April to 31st
March.3

What is the difference between AY and FY?4

AY is the assessment year and FY is the financial year. From an income tax perspective, FY is
the year in which you earn an income. AY is the year following the financial year in which you
have to evaluate the previous year’s income and pay taxes on it.

1
[Sec.2 (9)] Income-tax Act, 1961.
2
[sec.3 (1)] Income-tax Act, 1961.
3
https://www.hrblock.in/guides/difference-between-fy-and-ay/
4

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For example, if your financial year is from 1 April 2015 to 31 March 2016, then it is known as
FY2015-16. The assessment year for income earned during this period would begin after the
financial year ends–that is on 1 April 2016 till 31 March 2017. Hence, the assessment year would
be AY 2016-17.5

What is assessment year and previous year for income tax?

As mentioned above, assessment year is the year in which income is evaluated and taxed. This
evaluation and taxation is done on income that is earned in the previous year, which is known as
the financial year.

Assessment year6 “ASSESSMENT YEAR” (A.Y.): Assessment Year has been defined by to
mean ‘A Financial Year, which immediately succeeds the relevant Previous Year’. For e.g.: For
Financial Year 2014-2015, Assessment Year will be 2015-2016. Income of one financial year is
taxed in the next year, which is known as ‘Assessment Year’.

Write a note on previous year? (Nov – 2012) Income earned in a particular year is taxable in the
next year. The year in which income is earned is known as previous year and the next year in
which income is taxable is known as Financial Year.

3.) PREVIOUS YEAR :

Previous year7:– It means the financial year immediately preceding the assessment year. The
income earned during the previous year is taxed in the assessment year.

Business or profession newly set up during the financial year – In such a case, the previous year
shall be the period beginning on the date of setting up of the business or profession and ending
with 31st March of the said financial year.

5
https://cleartax.in/s/what-is-financial-year-assessment-year retrieved on 11.04.2018.
6
Section 2 (9).
7
[Section 3] Income Tax Act,1961.

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If a source of income comes into existence in the said financial year, then the previous year will
commence from the date on which the source of income newly comes into existence and will end
with 31st March of the financial year.8

Illustration:

1. A is running a business from 1993 onwards. Determine the previous year for the assessment
year 2016-17.

Ans. The previous year will be 1.4.2015 to 31.3.2016.

2. A chartered accountant sets up his profession on 1st July, 2015. Determine the previous year
for the assessment year 2016-17.

Ans. The previous year will be from 1.7.2015 to 31.3.2016.

8
https://www.taxdose.com/definition-of-previous-year-income-tax/ retrieved on 12.04.2018.

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 4.) REVENUE RECEIPTS

Revenue receipt is an amount which is received from the regular transaction of a business. It is
the amount received from the sale of goods and services. It is the main source of income. It is a
regular type of income. It is shown on the credit side of the trading account and profit and loss
account.9

Items relating to revenue receipts

* Amount received from the sale of goods and services.

* Amount received by way of discount, commission, rent, interest and dividend.

* Amount received from the sale of waste paper and packing cases.

5.) CAPITAL RECEIPTS

An amount received in the form of capital from the owner and as loan from outsiders is known as
capital receipts. Besides, cash received by selling shares, debentures and permanent assets is also
capital receipt. It is of non-recurring type of receipt. It is treated as obligation of the business and
shown on liabilities side of the balance sheet.10

Items relating to capital receipts

* Amount received from the owner as capital.

* Amount received through the sale of shares and debentures.

* Amount of loan received

* Amount received from the sale of old assets.

* Other receipts of non-recurring nature.

9
https://accountlearning.blogspot.in/2010/07/concept-of-capital-receipts-and-revenue.html retrieved on 15.04.2018.
10
Ibid.

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Distinguish between capital receipts and revenue receipts.11

S.NO. Revenue Receipt Capital Receipt

It has short-term effect. The benefit is It has long-term effect. The benefit is
1
enjoyed within one accounting period enjoyed for many years in future.
It occurs repeatedly. It is recurring and It does not occur again and again. It is
2
Regular in nature. nonrecurring and irregular in nature.
It is shown in profit and loss account on It is shown in the Balance Sheet on the
3
the credit side. liability side.
Capital receipt, when invested, produces
revenue receipt e.g. when capital is
4 It does not produce capital receipt invested by the owner, business gets
revenue receipt (i.e. sale proceeds of goods
etc.).
The capital receipt decreases the value of
This does not increase or decrease the
5 asset or increases the value of liability e.g.
value of asset or liability.
sale of a fixed asset, loan from bank etc.
Sometimes, expenses of capital nature are Sometimes expenses of revenue nature are
to be incurred for revenue receipt, e.g. to be incurred for such receipt e.g. on
6 purchase of shares of a company is obtaining loan (a capital receipt) interest is
capital expenditure but dividend received paid until its repayment.
on shares is a revenue receipt.

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 6.) CAPITAL EXPENDITURE:

Capital Expenses or Expenditures are payments by a business for fixed assets, like buildings and
equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a
business, like rent, utilities, and insurance. Another way to consider capital expenses is that they
are used to buy assets that have a useful life of more than one year.

The expenditures which generates revenue or income is called capital expenditure. Capital
expenditure incurred either for buying permanent assets or for improving their exiting working
capacity. Capital expenditure helps in increasing production volume or decreasing cost of
production. Such expenditures are shown on the asset side of balance sheet.12

Items relating to capital expenditure

* Expenditure incurred in buying transporting and installing a permanent asset.

* Expenditure incurred in overhauling and installing an old asset to put it in production process.

* Cost of registration and legal charges incurred in buying or constructing a permanent assets.

* Expenditure incurred in improving or extending the working capacity of an existing asset.

* Expenditure incurred in getting benefits over a number of years.

* Expenditure incurred in raising capital like brokerage and commission for underwriting shares
and debentures.

7.) REVENUE EXPENDITURE

Any expenditure incurred in connection with the operation and administration of daily activities
of the business is called revenue expenditure. Revenue expenditure is incurred for maintaining
earning capacity and working efficiency of the fixed assets. Revenue expenditure is incurred for
acquiring merchandise for resale either in its original or improved form. Its benefit expires

12
http://in.taxes.yahoo.com/taxcentre/ninstax.html retrieved on 12.04.2018.

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within a year. Revenue expenditure is shown on debit side of the trading and profit and loss
accounts.13

Items relating to revenue expenditure

* Expenditure incurred in acquiring raw materials for manufacturing process or finished goods
for resale.

* Wages and all other items of manufacturing expenses

* All items of office, administration, selling and distribution expenses

* Repair, maintenance, and depreciation of all the fixed assets.

* Interest on loan and other financial expenses.

13
https://cleartax.in/s/what-is-financial-year-assessment-year retrieved on 12.04.2018.

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Distinguish between capital Expenditure and revenue Expenditure.14

S.NO. Revenue Expenditure Capital Expenditure

Its effect is long-term, i.e. it is not
Its effect is temporary, i.e. the benefit is exhausted within the current accounting
1
received within the accounting year. year-its benefit is received for a number of
years in future.
Neither an asset is acquired nor is the An asset is acquired or the value of an
2
value of an asset increased.. existing asset is increased
It has no physical existence because it is
Generally it has physical existence except
3 incurred on items which are used by the
intangible assets.
business.
It is recurring and regular and it occurs
It is nonrecurring and irregular
4 repeatedly. It does not occur again and
again.
This expenditure helps to maintain the This expenditure improves the position of
5
business. the business.
A portion of this expenditure (depreciation
The whole amount of this expenditure is
on assets) is shown in trading & P & L A/c
6 shown in trading P & L A/c or income
and the balance are shown in the balance
statement.
sheet on asset side.
It appears in the balance sheet until its
7 It does not appear in the balance sheet.
benefit is fully exhausted
It reduces revenue (profit) of the
It does not reduce the revenue of the
8 business
concern.

14
https://www.hrblock.in/guides/difference-between-fy-and-ay/ retrieved on 11.04.2018.

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 8.) “INCOME”:15

The term ‘Income’ has been defined by Section 2 (24) of the act in an illustrative manner.
According to it:
(a.) Profits and Gains,
(b.) Dividend, [Though the term ‘income’ includes ‘dividend’, certain dividends are exempt
from income tax under section 10(34)]
(c.) Voluntary contributions received by Charitable or Religious Trust or Institution,
(d.) Value of any perquisite, Profit in lieu of salary, Special Allowance or any other benefit
received by an employee from his employer,
(e.) Export Incentive (e.g.: Duty Drawback),
(f.) Any Interest, Salary, Bonus, Commission or remuneration received by a partner of a firm
from the firm,
(g.) Capital Gains,
(h.) Winnings from Lotteries, Crossword Puzzles, Card Games, Races including Horse Races,
any other game of any sort or from Gambling or Betting of any nature,
(i.) Any sum received by the assessee from his employees towards Welfare Fund, Provident
Fund, Superannuation Fund, etc.
(j.) Any sum received under KEYMAN INSURANCE POICY including any Bonus if any, on
such policy,
(k.) Non-Compete Fees, Compensation for not sharing any intangible asset such as Know-how,
Patent, Trademark, etc.
(l.) Any sum referred to in section 56 (2) (v).

Income16 The concept of income is very important as it is the income that is taxed under the
income tax act. The definition of income under this act is a very wide and includes profits and
gains, dividends, voluntary contributions, perquisites, allowances, discharge of an obligation,
compensation receipts, profits on sale of license, cash assistance received against exports,
recovery of loss or expenditure, recovery of bad debts, any wins from lottery, cross word
puzzles, races, card games, gambling, betting etc. Heads of Income: [sec.14] For the purpose of

15
Section 2 (24) Income-tax Act, 1961.
16
[Sec.2 (24)] Income-tax Act, 1961.

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charge of income tax, all incomes are classified under five heads of income, namely, Salaries,
House property, profits and gains of business or profession, Capital gains and income from other
sources. Exempted Incomes17. These incomes are either fully or partially exempted from income
tax and therefore, to the extent of exemption, do not form a part of the total income and hence
are not taxable.

Income is the consumption and savings opportunity gained by an entity

within a specified time frame, 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." For firms,
income generally refers to net-profit: what remains of revenue after expenses have been
subtracted. In the field of public economics, it may refer to the accumulation of both monetary
and non-monetary consumption ability, the former being used as a proxy for total income.

17
[Sec.10 and Sec.86] Income-tax Act, 1961.

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 BIBLIOGRAPHY
Books:
 T. N. Manoharan (2007), Direct Tax Laws (7th edition), Snowwhite Publications P.Ltd.,
New Delhi.
 Dr. Vinod K. Singhania (2007), Students Guide to Income Tax, Taxman Publications,
New Delhi
 Income Tax Ready Reckoner – A.Y. 2007-08, TaxMann Publications, New Delhi

Websites:
 http://in.taxes.yahoo.com/taxcentre/ninstax.html
 www.efiling.incometaxofinfia.gov.in
 www.emudra. incometaxindia.gov.in
 http://in.biz.yahoo.com/taxcentre/section80.html
 http://www.bajajcapital.com/financial-planning/tax-planning
 http://www.incometaxindia.gov.in

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