Basic Concepts of Income Tax under the Income-tax Act, 1961

Understanding the foundational terms of the Income-tax Act, 1961 is essential for every taxpayer, student, and finance professional. Terms like Assessment Year, Previous Year, Person, Assessee, and Income form the backbone of income tax computation and compliance. This article breaks down these key concepts with relevant legal references to help you grasp their meaning, application, and importance with ease.

Table of Contents

1. Assessment Year [Sec. 2(9)]
2. Previous Year [Sec. 3]
3. Person [Sec. 2(31)]
4. Assessee [Sec. 2(7)]
5. Charge of Income Tax [Sec. 4]
6. Income [Sec. 2(24)]

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1. Assessment Year [Sec. 2(9)]

Assessment year means the period of twelve months starting from April 1 of every year and ending on March 31 of the next year. For instance, the assessment year 2025-26 (which will commence on April 1, 2025) will end on March 31, 2026. The period of assessment year is fixed by statute.

Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed for such assessment year by the relevant Finance Act.

2. Previous Year [Sec. 3]

Income earned in a 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 assessment year.  In other words, it can be said that income earned during the previous year 2024-25 is taxable in the immediately following assessment year (i.e., 2025-26) [see para 2.2 for exception to this rule].

2.1 Uniform Previous Year – From the assessment year 1989-90 onwards, all assessees are required to follow financial year (i.e., April 1 to March 31) as the previous year.  This uniform previous year has to be followed for all sources of income.

2.1.1 Previous Year in the Case of Newly Set-Up Business/Profession – In the case of a newly set-up business/profession or in the case of a new source of income, the previous year is determined as follows –

On the basis of the above table, the following broad conclusions can be drawn —

1. The first previous year commences on the date of setting up of the business/profession (or, as the case may be, the date on which the source of income newly comes into existence) and ends on the immediately following March 31. Thus, in the case of a newly set-up business/profession or new source of income, the first previous year is a period of 12 months or less than 12 months. It can never exceed 12 months.
2. The second and subsequent previous years are always financial years. The second and subsequent previous years are always of 12 months each (i.e., April to March).

2.1.2 Previous year as defined in section 3 – Except in the case mentioned in para 2.1.1, previous year is the financial year immediately preceding the assessment year. For instance, for the assessment year 2025-26, the immediately preceding financial year (i.e., 2024-25) is the previous year.

2.2 When income of previous year is not taxable in the immediate­ly following assessment year – The rule that the income of the previous year is assessable as the income of immediately  follow­ing assessment year has certain exceptions which are given in paras 2.2.1 to 2.2.5. These exceptions have been incorporated in order to ensure smooth collection of income tax from these taxpayers who may not be traceable if tax assessment procedure is postponed till the commencement of the normal assessment.

2.2.1 Shipping business of non-residents [Sec. 172] – Section 172 is applicable if the following conditions are satisfied –

Condition 1 – There is a non-resident.

Condition 2 – He owns a ship or ship is chartered by the non-resident.

Condition 3  – The ship carries passengers, livestock, mail or goods shipped at a port in India.

Condition 4 – The non-resident may (or may not) have an agent/representative in India.

If all the aforesaid conditions are satisfied, 7.5 per cent of amount paid (or payable) on account of such carriage (including demurrage charge or handling charge or similar amount) to the non-resident shall be deemed to be the income of the non-resident. For this purpose, the master of the ship shall submit a return of income before the departure of the ship from the Indian port (such return may be submitted within 30 days of the depar­ture of the ship, if the Assessing Officer is satisfied that it will be difficult to submit the return before departure and if satisfactory arrangement for payment of tax has been made)¹. Unless the tax has been paid (or satisfactory arrangements have been made for payment thereof), a port clearance shall not be granted by the Collector of Customs². Under the above noted provisions of section 172, 7.5 per cent of amount of freight, fare, etc., is deemed as income of the non-resident taxpayer and tax is payable at the rate applicable to a foreign company. Income is, thus, taxa­ble in the same year in which freight, fare, etc., is collected and not in the immediately following assessment year.

2.2.2 Persons leaving India [Sec. 174] – Section 174 is applicable as follows –

1. It appears to the Assessing Officer that an individual may leave India during the current assessment year or shortly thereafter.
2. He has no present intention of returning to India.
3. The total income of such individual up to the probable date of his departure from India shall be chargeable to tax in that assessment year.

2.2.3 Bodies formed for short duration [Sec. 174A] – Section 174A is applicable as follows –

1. There is an association of persons or a body of individuals or an artificial juridical person, formed or established or incorporated for a particular event or purpose.
2. It appears to the Assessing Officer that the abovementioned association, body, etc., is likely to be dissolved in the assess­ment year (i.e., April to March) in which such association of persons or body of individuals or artificial juridical person was formed or established or incorporated or immediately after such assessment year.
3. The total income of such association or body or juridical person for the period from the expiry of the previous year for that assessment year up to the date of its dissolution shall be chargeable to tax in that assessment year.

2.2.4 Person likely to transfer property to avoid tax [Sec. 175] – The salient features of section 175 are given below –

1. It appears to the Assessing Officer during any current assess­ment year that a person is likely to charge, sell, transfer, dispose of (or otherwise part with) any of his asset.
2. Such asset may be movable or immovable.
3. The taxpayer is likely to part with the asset with a view to avoiding payment of any liability under the Income-tax Act.
4. The total income of such person from the first day of the assessment year to the date when proceeding is started under section 175 is taxable in that assessment year.

2.2.5 Discontinued business [Sec. 176] – The salient features of section 176 are as follows –

1. A business or profession is discontinued in any assessment year.
2. Income of the business/profession from April 1 of the assess­ment year (in which the business/profession is discontinued) to the date of discontinuation may be taxable in the assessment year in which the business/profession is discontinued.
3. The above income is taxable at the discretion of the Assessing Officer in the assessment year in which business is discontinued or it may be taxed in the normal assessment year (i.e., assess­ment year immediately following the previous year).
4. If it is taxable in the assessment year in which the business/profession is discontinued, then it is chargeable to tax at the rate applicable to that assessment year.

It may be noted that in the first four exceptions discussed earlier (i.e., shipping business of non-residents, persons leav­ing India, bodies formed for short duration and transfer of property) tax shall be charged in the previous year itself (it is mandatory on the part of the Assess­ing Officer). But in the case of discontinued business, it is at the discretion of the Assessing Officer.

3. Person [Sec. 2(31)]

The term “person” includes :

1. an individual;
2. a Hindu undivided family;
3. a company;
4. a firm;
5. an association of persons or a body of individuals, whether incorporated or not;
6. a local authority; and
7. every artificial juridical person, not falling within any of the preceding categories.

These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive, and not exclusive. Therefore, any person, not falling in the abovementioned catego­ries, may still fall in the four corners of the term “person” and accordingly may be liable to tax under section 4.

3.1 An individual – Under the present Act, the word “individual” means only a natural person, i.e., a human being.  Deities and statutory corporations are assessable as “juridical person”. “Individual” includes a minor or a person of unsound mind—Shridhar Uday Narayan v. CIT [1962] 45 ITR 577 (All.), or a group of individuals—WTO  v. C.K. Mammed Kayi  [1981] 129 ITR 307 (SC).

• Trustees of a discretionary trust have to be assessed in status of “individual” and not in status of “association of persons”—CIT v. Deepak Family Trust (No. 1) [1994] 72 Taxman 406 (Guj.).

3.2 A Hindu undivided family – A Hindu undivided family consists of all persons lineally descended from a common ancestor and in­cludes their wives and unmarried daughters.  Profits made by a joint Hindu family are chargeable to tax as income of the Hindu undivided family as a distinct entity or unit of assessment. Once a family is assessed as a Hindu undivided family, it will contin­ue to be assessed as such till a finding of partition is given by the Assessing Officer under section 171.

3.3 A firm– A firm is a taxable entity separate and distinct from its partners.

3.4 An association of persons (AOP) or a body of individuals (BOI) – “Association of persons” means an association in which two or more persons join in a common purpose or common action. The term “person” includes any company or association or body of individuals, whether incorporated or not. An association of persons may have companies, firms, joint families as its members—M.M.  Ipoh v. CIT [1968] 67 ITR 106 (SC).

• CBDT has decided that a consortium arrangement for executing engineering procurement and construction contracts/turnkey contracts which has certain specified attributes (i.e. there is a clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work, each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work, the men and materials used for any area of work are under the risk and control of respective consortium members, the control and management of the consortium is not unified and common management is only for the inter se co-ordination between the consortium members for administrative convenience), may not be treated as an AOP – Circular No. 7/2016, dated March 7, 2016.

3.5 Local authority – Local authority is a separate unit of assess­ment. As per section 3(31) of the General Clauses Act, 1897, a local authority means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the Government with the control and management of a municipal or local fund. The definition was examined by the Apex Court in various cases and the first important decision on the point was Union of India  v. R.C. Jain  AIR 1981 SC 951, indicating certain tests therein. The major tests which can be carved out from the above decision and subsequent decisions, are essentially, that

(i) the authorities must have separate legal existence as corporate bodies and autonomous status;

(ii) it must function in a defined area and must ordinarily, wholly or partly, directly or indirectly be elected by the inhabitants of the area;

(iii) it performs Governmental functions such as running market, providing civic amenities, etc.;

(iv) it must have power to raise funds for the furtherance of its activities and the fulfilment of its projects by levying taxes/fees—this may be in addition to money provided by the Government and control and management of the fund must vest with the authority.

3.6  Every artificial juridical person – It covers not only deities—Jogendra Nath Naskar  v. CIT [1969] 74 ITR 33 (SC) but also all artificial persons with a juridical personality such as a Bar Council—Bar Council of Uttar Pradesh v. CIT [1983] 143 ITR 584 (All.).  Guru Granth Sahib is to be regarded as a juristic person—Shiromani Gurudwara Prabandhak Committee, Asr.  v. Som Nath Das [2000] 160 CTR (SC) 61. This is residuary classification and, there­fore, it does not cover those falling within any of the preceding classifications.

3.7  Profit motive is not essential – An association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a “person”, whether or not, such person or body or authority or juridical person, is formed or established or incor­porated with the object of deriving income, profits or gains.

4. Assessee [Sec.  2(7)]

Assessee means a person by whom any tax or any other sum of money (i.e., penalty or interest) is payable under the Act. The term includes the following persons:

4.1 First category – A person (i.e., 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) by whom any tax or any other sum of money (including interest and penalty) is pay­able under the Act (irrespective of the fact whether any proceed­ing under the Act has been taken against him or not).

4.2 Second category – A person in respect of whom any proceeding under the Act has been taken (whether or not he is liable for any tax, interest or penalty). Proceeding may be taken:

1. either for the assessment of the amount of his income or of the loss sustained by him; or
2. of the income (or loss) of any other person in respect of whom he is assessable; or
3. of the amount of refund due to him or to such other person.

4.3 Third category – Every person who is deemed to be an assessee.  For instance, a representative assessee is deemed to be an asses­see by virtue of section 160(2).

4.4 Fourth category – Every person who is deemed to be an assessee in default under any provision of the Act. For instance, under section 201(1), any person who does not deduct tax at source, or after deducting fails to pay such tax, is deemed to be an asses­see in default. Likewise, under section 218, if a person does not pay advance tax, then he shall be deemed to be an assessee in default.

5. Charge of Income Tax [Sec. 4]

The following basic principles are followed while charging tax:

5.1 Annual tax – Income tax is an annual tax on income.

5.2 Tax rate of assessment year – Income of previous year is chargeable  in the next following assessment year at the tax rates applicable for the assessment year. This rule is, however, subject to some exceptions.

5.3 Rates fixed by Finance Act – Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. If, however, on the first day of April of the assessment year, the new Finance Bill has not been placed on the statute books, the provisions in force in the preceding assessment year or the provisions proposed in the Finance Bill before Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become effective.

5.4 Tax on person – Tax is charged on every person.

5.5 Tax on total income – The tax is levied on the “total income” of every assessee computed in accordance with the provisions of the Act.

5.6 Provisions as on April 1 of the assessment year applicable for computing income for the assessment year – The legal position is summarized below –

• Rule one – For computing income – Total income is calculated in accordance with the provisions of the Income-tax Act, as they stand on the first day of April of the assessment year.
• Rule two – For other purposes – The above rule is applicable only for the purpose of computing taxable income. To put it differently, it can be said that the provisions applicable on April 1 of the assessment year are relevant only for determining the taxable income for that assessment year. If, however, an amendment is made which is purely procedural (not for computing taxable income), then it is applicable from the date of the amendment.

6. Income [Sec.  2(24)]

The definition of the term “income” in section 2(24) is inclu­sive and not exclusive. Therefore, the term “income” not only includes those things which are included in section 2(24), but also includes such things which the term signifies according to its general and natural meaning. Before discussing the definition of income given under section 2(24) it is imperative to know meaning of “income” as generally understood.

6.1 Income as generally understood for tax purposes – Entry 82 of List I of the Seventh Schedule to the Constitution empowers Parliament to levy “taxes on income other than agricultural income”. Entries in the Lists in the Seventh Schedule to the Constitution should not be read in a narrow or restricted sense—Bhagwan Dass Jain v. Union of India [1981] 5 Taxman 7 (SC). It, therefore, follows that in addition to receipts mentioned in section 2(24) (which does not define the term “income” but merely describes the various receipts as income), any other receipt is taxable under the Act, if it comes within the general and natural meaning of the term “income”.

• According to the Shorter Oxford English Dictionary, “income” means “that which comes in as the periodical product of one’s work, business, lands, or investments (commonly expressed in terms of money); annual or periodical receipts accruing to a person or a corporation”.

In CIT v. Shaw Wallace & Co. 6 ITC 178 (PC), Sir George Lowndes defined “income” as follows:

“Income connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall.”

Anything which can be properly described as income is taxable under the Act, unless expressly exempted—Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 (PC). Income may not necessarily be recurring in nature, though it is generally of that character—Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC).

Though there are different concepts of “income” for the purpose of taxation, income is broadly defined as the true increase in the amount of wealth which comes to a person during a stated period of time—Comm. of Corporation and Taxation v. Filoon 38 NE 2d 693, 700.

A study of the following judicial principles will be helpful to under­stand the concept of income.

6.1-1 Regular and definite source – The term “income” connotes a periodical monetary return coming in with some sort of regularity—CIT v. Shaw Wallace & Co. 6 ITC 178 (PC). However, it must be read with reference to facts of each case—Raghuvanshi Mills Ltd. v. CIT  [1952] 22 ITR 484 (SC). It is now well settled that income-tax cannot be levied on hypothetical income—CIT v. Excel Industries Ltd. [2013] 219 Taxman 379 (SC).

6.1.2 Different forms of income – Income may be received in cash or kind. When income is received in kind, its valuation is to be made according to the rules prescribed in the Income-tax Rules. If, however, there is no prescribed rule, valuation thereof is made on the basis of market value.

6.1.3 Receipt vs. Accrual – Income arises either on receipt basis or on accrual basis.  Income may accrue to a taxpayer without its actual receipt.  Moreover, in some cases, income is deemed to accrue or arise to a person without its actual accrual or receipt. Tax incidence arises either on “accrual” basis or on “receipt” basis.

6.1.4 Illegal income – The income-tax law does not make any distinction between income accrued or arisen from a legal source and income tainted with illegality. By bringing the profits of an illegal business to tax, the State does not condone it or take part in crime, nor does it become a party to the illegality.  The assessee might be prosecuted for the offence and yet be taxed upon profits arising out of its commission—Mann v. Nash [1932] 1 KB 752.  However, any expense incurred by an assessee in carrying on such business is not deductible. Explanation to section 37(1) provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. However, Explanation to section 37(1) is applicable only in case expenditure pertaining to illegal business and not in the case of business loss—T.A. Quereshi v. CIT [2006] 157 Taxman 514 (SC).

6.1.5 Disputed title – Income-tax assessment cannot be held up or postponed merely because of existence of a dispute regarding the title of income. The recipient is, therefore, chargeable to tax, though there may be rival claims to the source of the income—Franklin v. IRC [1930] 15 TC 464. A mere claim, on the other hand, by a person against the recipient of income is not sufficient to make income accrue to the claimant and render him liable for tax.

6.1.6 Relief or reimbursement of expenses not treated as income – Mere relief or reimbursement of expenses is not treated as income.  For instance, reimbursement of actual travel­ling expenses for official purposes to an employee is not an income. Similarly, when the assessee is relieved of his obligation of a certain sum to a party by an order of court, the amount so relieved cannot be treated as income of the assessee.

6.1.7 Diversion of income by overriding title vs. application of income – There is a thin dividing line between diversion of income and application of income.

• Diversion of income – Income is received by a person other than the person who is actually entitled for it. The recipient later on diverts the income under a pre-existing title to the person who is actually entitled for it. It is diversion of income by overriding title. Income is not taxable in the hands of the person who first receives it. Tax is payable by the person to whom income is diverted by overriding title.
• Application of income – Income is received by the person who is actually entitled for it. He is chargeable to tax. Post-tax income is utilised for different purposes (like payment of sal­ary). It is application of income. Likewise, salary/pension is accrued to a member of religious congregations in his individual capacity. Subsequent diversion of such income to the religious congregations is only a case of application of that income and not diversion by overriding title—Fr. Sunny Jose v. Union of India [2015] 60 taxmann.com 386 (Ker.).
• How to find out whether it is diversion or application – In order to decide whether a particular payment is a diversion of income or application of income, it has to be deter­mined whether amount sought to be diverted reaches the asses­see as his own income or not. To put it differently, it has to be seen whether the disbursement of income made by the assessee is a result of fulfilment of an obligation on him or whether income has been applied to discharge an obligation after it reaches the assessee. Where by an obligation income is diverted before it reaches the assessee, it is not taxable. Where, however, the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow and it is taxable. It is the first kind of payment which can truly be excused and not the second one. The second payment is merely an obligation to pay another portion of one’s income, which has been received and is since applied. The first is the case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable—CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC).

6.1.8 Surplus from mutual activity – A person cannot make a taxable profit out of a transaction with himself—Dublin Corpora­tion  v. M’Adam 2 TC 387. Income must, therefore, come from out­side.  A surplus arising to a mutual concern cannot be regarded as income chargeable to tax. A body of individuals, raising contribution to a common fund for the mutual benefits of members, cannot be said to have earned an income when it finds that it has overcharged members and some portion of contribution raised may safely be refunded. The fact whether such body of individuals is incorporated or not, is wholly irrelevant, so long as there is a complete identity between the contributors as a class and the participants of the benefits and surplus as a class. In other words, all the participators in the surplus/benefits must be contributors to the common fund—CIT v. Bankipur Club Ltd. [1981] 6 Taxman 47 (Pat.). But that does not mean that each member should contribute to common fund or that each member should participate in surplus or get back from surplus precisely what he has paid; what is re­quired is that members as a class should contribute to common fund and participators as a class must be able to participate in surplus—U.P. State Nagariya Sahkari Bank Ltd. v. ITO [2007] 108 ITD 332 (Luck.).

Where the members of the assessee association of cement manufacturers were contributors to a common fund and had the right to partici­pate in surplus, the surplus would not be assessable as the assessee’s income on the ground of mutuality—CIT  v. Cement Allocation & Co-ordinating Org. [1999] 236 ITR 553 (Bom.). Rent receipts from the members to whom the rooms were let out by the assessee-club, along with other facilities, would not be assessa­ble to income tax on the doctrine of mutuality—Chelmsford Club v. CIT [2000] 109 Taxman 215 (SC). Where, however, the assessee fund/trust, created for the benefit of its employees, receives contributions from members, management and donations from others also and the assessee deposits the said amount in a bank and earns interest, such interest income earned by it cannot be said to be exempt on the principle of mutuality—CIT v. I.T.I. Employees Death & Superannuation Relief Fund [1998] 101 Taxman 315/234 ITR 308 (Kar.).

The principle of mutuality can be confined in respect of the income earned by the club out of the contributions received by the club from its members, but it will have no application in respect of the interest earned from the deposits of surplus funds in the banks by way of income—Madras Gymkhana Club v. CIT [2009] 183 Taxman 333 (Mad.), CIT v. Secunderabad Club Picket [2012] 21 taxmann.com 54 (AP), CIT v. Nizam Club [2011] 46 SOT 109 (Hyd.). Contrary ruling is given by the Delhi High Court in the case of CIT v. Delhi Gymkhana Club Ltd. [2011] 198 Taxman 207 (Mag.) and the Bombay High Court in the case of CIT v. Air Cargo Agents Association of India [2016] 68 taxmann.com 335.

In Bangalore Club v. CIT [2013] 212 Taxman 566 (SC), the assessee-club sought an exemption from payment of tax on interest earned on fixed deposits kept by the club with certain banks, which were corporate members of the assessee, on basis of doctrine of mutuality. The Court, however, did not agree on the ground that in course of banking business, member banks used such deposits to advance loans to their clients and thereby violated one to one identity between contributors and participators. Further, loaning out of funds of club by member banks to outsiders for commercial reasons, snapped link of mutuality. Principle of mutuality will not apply to interest income earned on fixed deposits made by clubs in banks (irrespective whether banks are corporate members of club or not)—Secundrabad Club v. CIT [2023] 153 taxmann.com 441 (SC).

• Society for maintenance of housing complex – Is it governed by the doctrine of mutuality – If the members of an association for maintaining housing complex take the following precautions, the association will be governed by the principle of mutuality –

1. every flat owner should be a member/shareholder of the associations;
2. the association can be in the form of a company, co-operative society, etc.;
3. only the members of the association (their family members) and guests of the members should use common facilities;
4. facilities may be provided on a ‘no profit no loss’ basis; and
5. surplus, if any, should be utilised in order to create new facilities.

Once the principle of mutuality applies to the association, its income connected with mutuality will not be liable to tax.

The concept of mutuality is applicable to group co-operative housing societies, provided contributors and the partici­pators to funds are the same—Maker Tower A&B Co-op. Hsg. Society Ltd. v. ITO [2008] 20 SOT 253 (Mum.). Any part of transfer fees received by co-operative housing socie­ties, whether from outgoing or from incoming members, is not liable to tax on ground of principle of mutuality—Sind Co-op. Hsg. Society v. ITO [2009] 182 Taxman 346 (Bom.), CIT v. Manekbaug Co-operative Housing Society Ltd. [2012] 208 Taxman 54 (Guj.). Non-occupancy charges received by a co-operative society from its members and utilised for mutual benefits towards maintenance of premises, repairs, infrastructure and provision of common amenities, etc., is governed by doctrine of mutuality and not chargeable to tax – ITO v. Venkatesh Premises Co-operative Society Ltd. [2018] 254 Taxman 313 (SC).

6.1.9 Appropriation of payment between capital and interest – Where interest is due on a capital sum and the creditor gets an open payment from the debtor, the creditor is at liberty to appropriate the payment towards principal—CIT v. Pateshwari Prasad Singh [1970] 76 ITR 208 (All.). If, however, neither the debtor nor the creditor makes any appropriation of payment as between capital and interest, the Income-tax Department is enti­tled to treat the payment as applicable to the outstanding inter­est and assess it as income—CIT v. Kameshwar Singh [1933] 1 ITR 94 (PC).

• While allocating a realisation between interest and principal when claim is realised by auction sale of decree, or when a claim is satisfied by executing a fresh mortgage, the following princi­ples are relevant –

1. To give security for a debt is not to pay a debt; execution of a fresh mortgage does not pay a debt.
2. The excess of realisation over the principal sum is to be allocated towards interest.
3. The income represented by interest arises when the sale is confirmed.
4. Payment made to a prior mortgagee by the auction purchaser or to a claimant is not deductible; if the purchaser was aware of the claims, he would have taken that into account when he made a bid.
5. Expenses incurred on completing the title (after the court sanction) are not deductible as he would have taken them into account while making a bid.
6. The value of property to be taken into account is the amount of bid offered and not the value put on it by the court when inviting bids.

• When the interest due on a previous advance is capitalised and a fresh promise is made for payment of the aggregate, there is no payment of the interest. It makes no difference whether the fresh promise takes the form of a promissory note or a bond or a mort­gage, whether simple or usufructuary. Capitalisation of interest is not equal to payment of it —Fakir Chand v. CIT [1963] 49 ITR 842 (All.).

1. No order assessing the income and determining the sum of tax payable thereon under the aforesaid provisions shall be made under section 172(4) by the Assessing Officer after the expiry of 9 months from the end of the financial year in which the return is furnished. Where, however, return is furnished before April 1, 2008, the order assessing the income and determining the sum of tax payable thereon may be made at any time on or before December 31, 2009.
2. For detailed discussion, please refer to Circular No. 30/2016, dated August 26, 2016.
3. Form Nos. 102 and 98 are used above only for illustration purposes.