The term ‘liable to tax’ was introduced by the Finance Act, 2021, and holds significance especially in the context of determining tax residency and the applicability of Double Taxation Avoidance Agreements (DTAAs). As per Section 2(29A), a person is considered liable to tax in a country if that person is subject to income-tax liability under the law of that country. This definition also includes cases where a person is technically liable under the domestic law of the country but has been subsequently exempted from such liability through legislative provisions or treaty benefits. The implication is that such a person is still considered liable to tax, even if no tax is paid, due to exemption mechanisms.
This term is often used in international taxation, particularly when determining whether a person is a resident of a country and thus eligible for treaty benefits. For example, if a person resides in a country but does not pay tax due to local exemptions for certain types of income, the question of whether they are “liable to tax” under the law of that country becomes relevant.
Definition of Company under Section 2(17)
The term ‘company’ is defined broadly under the Income Tax Act and includes multiple categories of corporate entities. According to Section 2(17), a company includes any Indian company. This covers companies formed and registered under the Companies Act applicable in India. It also includes any body corporate incorporated under the laws of any country outside India. Thus, foreign corporations fall under this definition as well.
In addition to these, the definition includes any institution, association, or body that was assessed as a company for any assessment year under the Income-tax Act, 1922, or under the current Act for any assessment year commencing on or before April 1, 1970. This historical inclusion ensures continuity in treatment across different legislative timelines.
Further, the definition includes any institution, association, or body, whether incorporated or not, and whether Indian or non-Indian, which is declared by a general or special order of the Central Board of Direct Taxes (CBDT) to be a company. This allows administrative flexibility in bringing specific entities within the scope of taxation as companies.
Definition of Company in Which the PublicIse Substantially Interested under Section 2(18)
This term distinguishes between widely held companies and closely held companies. A company in which the public issubstantially interested generally enjoys more relaxed tax provisions compared to closely held companies. Under Section 2(18), such a company includes several categories.
It includes companies owned by the Government or the Reserve Bank of India. If not less than 40 percent of the shares are held by the Government, RBI, or a corporation owned by RBI, the company qualifies under this category.
Companies registered under Section 25 of the Companies Act, 1956, o,r Section 8 of the Companies Act, 20,13 are also included, provided they do not declare dividends. If they do, they lose their status as a company in which the public is substantially interested.
Further, companies declared as such by the CBDT, mutual benefit finance companies that accept deposits from members and are declared as Nidhi or Mutual Benefit Societies by the Central Government, and companies with at least 50 percent of their equity shares held by one or more co-operative societies fall within the scope of this definition.
A public limited company is deemed to be substantially held by the public if it is not a private company as defined by the Companies Act, 2013, and satisfies either of the following two conditions. First, its equity shares were listed on a recognized stock exchange on the last day of the relevant previous year. Second, at least 50 percent of its equity shares carrying voting power were beneficially held by the Government, statutory corporations, companies in which the public is substantially interested, or wholly owned subsidiaries of such companies throughout the relevant previous year.
This classification impacts provisions relating to deemed dividends, transfer pricing, and several other tax implications.
Definition of Person Having Substantial Interest in the Company under Section 2(32)
This definition is important when identifying related party transactions, applicability of specified domestic transactions, and other special tax rules. A person is considered to have a substantial interest in a company if they are the beneficial owner of shares (excluding shares entitled to a fixed rate of dividend) carrying at least 20 percent of the total voting power. The ownership may be with or without a right to participate in the profits of the company.
This threshold is a decisive factor for determining relationships between entities and individuals, especially for transfer pricing regulations and certain anti-avoidance rules.
Definition of India under Section 2(25A)
The definition of ‘India’ under the Income Tax Act is more extensive than the political boundaries of the country. As per Section 2(25A), India includes the territory of India as per Article 1 of the Constitution. It also includes the territorial waters of India, the seabed and subsoil underlying such waters, the continental shelf, and the exclusive economic zone.
Furthermore, it includes any other specified maritime zone and the airspace above its territory and territorial waters. These maritime zones are defined under the Territorial Waters, Continental Shelf, Exclusive Economic Zone, and Other Maritime Zones Act, 1976. The implication is that income generated from activities in these zones may fall under the ambit of Indian taxation.
This comprehensive definition ensures that India exercises its sovereign rights over resources and income arising from these extended geographical areas for tax purposes.
Definition of Indian Company under Section 2(26)
An Indian company is central to the application of the Income Tax Act, as it determines residency and tax obligations. As per Section 2(26), an Indian company means a company formed and registered under the Companies Act. It also includes companies formed under any earlier laws that were in force in India, other than in the State of Jammu and Kashmir and Union Territories.
The definition also covers corporations established by or under a Central, State, or Provincial Act and any institution, association, or body declared by the CBDT to be a company. Companies formed and registered in Jammu and Kashmir or Union Territories like Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry under laws then in force in those territories are also considered Indian companies, provided their registered or principal office is located in India.
This definition is essential for determining the scope of taxation, availability of tax incentives, applicability of dividend distribution tax, and the rate of income tax applicable.
Definition of Domestic Company under Section 2(22A)
A domestic company is either an Indian company or any other company that, in respect of its income, is liable to tax under the Income Tax Act and has made arrangements for the declaration and payment of dividends within India, including dividends on preference shares. This includes foreign companies that fulfill these criteria and are thus treated as domestic companies for taxation purposes.
Domestic companies are taxed at rates applicable to companies resident in India and may be eligible for concessional tax treatment or incentives under various provisions of the Act. This definition is pivotal for determining whether a company qualifies for certain exemptions, deductions, and lower tax rates under domestic law.
Definition of Foreign Company under Section 2(23A)
A foreign company is defined simply as a company that is not a domestic company. The negative definition implies that if a company fails to meet the conditions of a domestic company, such as registration in India or dividend arrangements within India, it will be considered a foreign company.
This classification has major implications for taxation. Foreign companies are generally taxed at higher rates compared to domestic companies and are subject to additional compliance burdens, especially when repatriating profits or investing in India.
Understanding the Concept of Amalgamation under Section 2(1B)
The concept of amalgamation under the Income Tax Act is not merely the merger of two entities but a merger that satisfies specific statutory conditions. Section 2(1B) provides a detailed definition of amalgamation of companies. It refers to the merger of one or more companies with another company, or the merger of two or more companies to form one new company. The companies that are merged are called amalgamating companies, while the company resulting from the merger is called the amalgamated company.
For a transaction to qualify as an amalgamation under the Income Tax Act, the following conditions must be fulfilled.
Transfer of Assets and Liabilities to the Amalgamated Company
All properties and liabilities of the amalgamating company or companies, immediately before the amalgamation, must become the property and liabilities of the amalgamated company. This transfer must take place by the amalgamation itself and not through sale, purchase, or liquidation processes. The rationale is to ensure continuity of the business and preservation of the financial and operational identity of the undertaking, now integrated into the amalgamated company.
Shareholding Requirements for Amalgamation
Shareholders holding not less than seventy-five percent in value of the shares in the amalgamating company or companies (excluding the shares already held therein by the amalgamated company or its nominee or its subsidiary) must become shareholders of the amalgamated company by the amalgamation.
This requirement ensures that a significant portion of ownership from the amalgamating company is carried forward to the amalgamated company. It prevents transactions from being structured as amalgamations purely for tax avoidance if there is no continuity of ownership or interest.
Amalgamation Must Not Be a Sale or Distribution
The transfer of properties and liabilities in amalgamation must not result from an acquisition of property by another company through purchase or the distribution of assets in a winding-up process. This condition is vital to distinguish between genuine amalgamations intended for business consolidation and mere asset purchases or liquidations designed for tax optimization.
Tax Implications and Importance of Amalgamation Definition
If a merger qualifies as an amalgamation under Section 2(1B), several tax benefits are available. For instance, Section 47 exempts certain capital gains arising out of such amalgamation. Losses and unabsorbed depreciation of the amalgamating company may also be carried forward to the amalgamated company under Section 72A, subject to the fulfillment of prescribed conditions.
Amalgamation is particularly relevant in corporate restructuring, consolidation of group companies, and in situations where businesses seek to achieve economies of scale, synergy, or strategic advantages. The precise legal definition ensures that only transactions meeting genuine business criteria benefit from the tax-neutral treatment provided under the Act.
Illustration of Amalgamation Conditions
Consider a scenario where Company X merges into Company Y. Company X transfers all its assets and liabilities to Company Y. In addition, shareholders of Company X holding more than seventy-five percent of its shares become shareholders of Company Y. If these conditions are fulfilled, the merger qualifies as an amalgamation under Section 2(1B). Consequently, no capital gains tax is levied on Company X for the transfer of its assets, and Company Y may carry forward losses of Company X if it satisfies other provisions.
If, however, Company Y merely purchases the assets of Company X, and shareholders of Company X do not become shareholders in Company Y, the transaction would not qualify as an amalgamation. Instead, it would be treated as a sale and would attract capital gains tax.
Regulatory Approvals for Amalgamation
Amalgamations must be approved by the National Company Law Tribunal under applicable provisions of the Companies Act. Additionally, approval of shareholders, creditors, and sometimes sectoral regulators is required, depending on the nature of the industry. For example, in banking or insurance sectors, Reserve Bank of India or Insurance Regulatory and Development Authority approval may be needed.
Such regulatory scrutiny ensures that amalgamations are not undertaken in a manner that is prejudicial to the interests of shareholders, creditors, or the public. It also ensures legal compliance and transparency in the restructuring process.
Accounting Standards in Amalgamation
The method of accounting adopted for amalgamation is governed by applicable accounting standards. Generally, there are two methods of accounting for amalgamations: the pooling of interest method and the purchase method. The choice of method impacts the way assets, liabilities, and reserves are recorded in the books of the amalgamated company.
The pooling of interest method is generally used where the amalgamation is like a merger. The purchase method is used when it is more in the nature of an acquisition. The Income Tax Act, however, is not directly concerned with the accounting method unless it affects compliance with the specified conditions for amalgamation.
Definition and Meaning of Demerger under Section 2(19AA)
Demerger is another critical corporate restructuring process, where a part of a company’s undertaking is transferred to another company. Section 2(19AA) defines demerger about companies and lays down specific conditions that must be fulfilled for the transaction to qualify as a demerger under the Act.
The basic premise is that a company transfers one or more of its undertakings to another company under a scheme of arrangement as per the provisions of the Companies Act. The receiving company is known as the resulting company, and the company whose undertaking is transferred is known as the demerged company.
Transfer of Assets and Liabilities of the Undertaking
All the property and liabilities of the undertaking being transferred must become the property and liabilities of the resulting company by the demerger. This condition ensures a seamless transfer of business functions and continuity of operations in the resulting company.
The transfer must occur at the book values appearing in the books of the demerged company immediately before the demerger. However, this condition is relaxed in cases where the resulting company adopts Indian Accounting Standards, which may require a different valuation basis.
Issue of Shares to Shareholders of the Demerged Company
In consideration of the demerger, the resulting company must issue its shares to the shareholders of the demerged company on a proportionate basis. This ensures continuity of ownership and provides a clear legal and economic trail of interest in the demerged business.
However, if the resulting company already holds shares in the demerged company, then it is not required to issue further shares to itself. This avoids duplication of ownership and maintains clarity in the shareholding structure.
Minimum Shareholder Continuity in the Resulting Company
Shareholders holding at least seventy-five percent in value of shares in the demerged company (excluding shares held by the resulting company or its nominee or its subsidiary) must become shareholders of the resulting company. This ensures that the existing ownership continues in the new structure, thereby supporting the rationale of restructuring for business efficiency rather than tax evasion.
Transfer on Going Concern Basis
The transfer of the undertaking must be on a going-concern basis. This means that the business is not being wound up, liquidated, or closed down. Instead, it is being transferred as an active business unit that is expected to continue operations in the hands of the resulting company.
This condition reinforces the commercial intent behind the demerger and ensures that tax benefits are available only for genuine business reorganizations.
Compliance with Conditions Notified under Section 72A(5)
The demerger must be notified under Section 72A(5) by the Central Government. This enables the government to prescribe further conditions to ensure that the tax benefits associated with demergers are not misused and that the transaction achieves its stated economic and commercial objectives.
Deemed Demerger for Public Sector Companies
The Act provides that the reconstruction or splitting up of a public sector company into separate companies shall be deemed to be a demerger, provided certain conditions are met. These conditions include that the resulting company is a public sector company on the appointed date and that the scheme has been approved by the Central Government or any other competent authority.
This provision enables smoother restructuring of public sector undertakings in line with economic policies and administrative reforms, while ensuring continuity of business and proper tax treatment.
Tax Implications and Benefits of Demerger
Demerger transactions that satisfy the conditions laid down under Section 2(19AA) are eligible for tax-neutral treatment. This means no capital gains tax is levied on the transfer of assets. Further, accumulated losses and unabsorbed depreciation of the demerged undertaking can be transferred to the resulting company, subject to compliance with Section 72A and related rules.
Additionally, shareholders of the demerged company are not liable to pay tax on receipt of shares from the resulting company, provided the shares are allotted as per the approved scheme of demerger.
Legal and Procedural Aspects of Demerger
Demerger requires approval of the National Company Law Tribunal under the Companies Act. The process also includes approval from shareholders, creditors, and sectoral regulators wherever applicable. The Income Tax Department may also examine the transaction for eligibility of exemptions and compliance with prescribed conditions.
In practice, demergers are used for spinning off non-core businesses, separating financial services from manufacturing operations, or reorganizing family-owned conglomerates. These reorganizations help improve focus, transparency, and efficiency.
Definition and Scope of Assessee under Section 2(7)
The term assessee is one of the most frequently used and fundamental concepts under the Income Tax Act. As defined in Section 2(7), an assessee means a person by whom any tax or any other sum of money is payable under the Act. However, the scope of the term is broader and includes a range of situations where a person may not directly be liable to pay tax, but is still considered an assessee for assessment, compliance, or penalty.
The definition includes every person in respect of whom any proceeding under the Act has been initiated for the assessment of his income or loss or the income or loss of another person in respect of whom he is assessable. It also includes a person who is deemed to be an assessee under any provision of the Act, or an assessee in default.
For instance, a person who deducts tax at source but fails to deposit it to the government within the stipulated time is deemed to be an assessee in default and is liable for penal consequences. Likewise, a legal representative of a deceased taxpayer may become an assessee for the income earned by the deceased up to the date of death.
Understanding the scope of the term is essential, as most of the compliance and penal provisions under the Act operate about the term assessee.
Definition of Assessment Year under Section 2(9)
Assessment year is defined in Section 2(9) and refers to the period of twelve months starting from the first day of April every year. It is the year in which the income of the previous year is assessed and taxed. For example, for income earned during the previous year from 1 April 2024 to 31 March 2025, the assessment year would be 2025–26.
The assessment year is crucial for identifying the year in which income is taxed, returns are filed, and various compliance deadlines are set. All rates of tax, deductions, exemptions, and procedural requirements are framed and implemented about the assessment year.
Definition of Previous Year under Section 3
Although not within Section 2, the definition of the previous year under Section 3 is essential to understanding the assessment framework. The previous year refers to the financial year immediately preceding the assessment year. Income earned in a previous year is assessed to tax in the corresponding assessment year.
The concept of the previous year is important for computing total income, determining the applicability of tax provisions, and filing income tax returns. In certain cases, such as the newly incorporated businesses or new sources of income, the previous year may be shorter than twelve months, but in general,, it corresponds to the financial year running from April to March.
Definition of Income under Section 2(24)
The term income has a wide and inclusive meaning under Section 2(24). Income includes not only monetary receipts but also non-monetary and deemed incomes. It covers profits and gains, dividends, voluntary contributions received by charitable trusts, value of perquisites, capital gains, and winnings from lotteries, crossword puzzles, races, card games, and other gambling activities.
It also includes any sum received under a Keyman Insurance Policy, any sum of money or property received without consideration by certain persons more than a specified amount, and income deemed under provisions such as Section 41 or Section 56.
The definition being inclusive rather than exhaustive means that any receipt which satisfies the ordinary meaning of income and is not explicitly excluded may be considered income for taxation. This wide interpretation allows the tax authorities to bring varied forms of economic gain within the scope of taxation.
Definition of Total Income under Section 2(45)
Total income is defined in Section 2(45) as the total amount of income referred to in Section 5, computed in the manner laid down in the Act. It is the aggregate of income from all sources and under all heads of income, after applying permissible deductions, exemptions, and set-offs.
Section 5 lays down the scope of total income for residents, non-residents, and not ordinarily residents, determining which incomes are included or excluded from taxation. Once income is classified and computed under various heads like salary, house property, business and profession, capital gains, and other sources, deductions under Chapter VI-A are allowed to arrive at the total income.
Total income is used as the base for calculating the tax liability of the assessee. It is the amount on which tax is computed as per applicable rates or slab structures.
Definition of Dividend under Section 2(22)
Section 2(22) inclusively defines the term dividend. Apart from the ordinary meaning of dividend, it includes various distributions and payments made by a company to its shareholders out of its accumulated profits. The section is divided into several clauses, each targeting specific kinds of corporate distributions that are treated as deemed dividends for tax purposes.
Clause (a) includes any distribution of accumulated profits by a company to its shareholders entailing the release of assets of the company. Clause (b) includes the distribution of debentures, debenture stock, or deposit certificates to shareholders out of accumulated profits.
Clause (c) includes any distribution made to shareholders on liquidation of the company to the extent that it represents accumulated profits. Clause (d) includes the distribution to shareholders on the reduction of capital, again to the extent it represents accumulated profits.
Clause (e) is one of the most litigated provisions. It deems loans or advances made by a closely held company to certain shareholders holding a substantial interest to be dividends, to the extent of accumulated profits, unless the company is engaged in a money-lending business and the loan is made in the ordinary course of business.
The wide scope of the definition prevents tax avoidance through disguised distributions of profit and ensures that corporate earnings reaching shareholders in any form are subject to tax.
Definition of Charitable Purpose under Section 2(15)
Charitable purpose is a key term used in the context of tax exemptions under Section 11 and Section 12 of the Act. Section 2(15) defines charitable purpose to include relief of the poor, education, yoga, medical relief, preservation of the environment,, including watersheds, forests, and wildlife, and preservation of monuments or places of historical importance.
It also includes the advancement of any other object of general public utility, provided that if such activity involves carrying on any trade, commerce, or business, the receipts from such activities do not exceed the prescribed limit and the purpose is not profit-oriented.
This definition has evolved through judicial decisions and legislative amendments. It draws a balance between granting tax exemptions to genuine non-profit organizations and preventing misuse by entities engaged in commercial activities under the garb of charitable purposes.
Definition of Relative under Section 2(41)
The term relative is used in various contexts under the Income Tax Act, especially when dealing with gifts, perquisites, or related party transactions. As per Section 2(41), relative about an individual means the spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, any lineal ascendant or descendant of the spouse, and the spouse of any of these persons.
The definition is relevant while computing the taxability of gifts received without consideration. Under Section 56, gifts received from relatives are exempt from tax, but gifts from non-relatives above a specified threshold are taxable as income from other sources.
This provision helps track transactions between family members and prevent evasion of tax through artificial gifts or income transfers.
Definition of Specified Employee under Section 17(2)(iii)
Although this provision falls under the salary head and not Section 2, it is relevant in the context of perquisites taxation. A specified employee is a director in the employer company, or has a substantial interest in the company, or whose salary income exceeds the prescribed threshold.
Specified employees are subject to tax on certain perquisites that are not taxable for other employees. These include the value of amenities such as free education, interest-free loans, and other benefits. This differentiation ensures that high-ranking employees or those with control in the organization do not enjoy undue tax exemptions.
Income
The term “income” has been defined inclusively under section 2(24) of the Income Tax Act. It includes not just the earnings in the conventional sense but also certain receipts that may not ordinarily be considered income. Income includes:
- Profits and gains.
- Dividends.
- Voluntary contributions received by a trust.
- The value of perquisites or profits instead of salary.
- Capital gains.
- Any winnings from lotteries, crossword puzzles, races, card games, etc.
- Income of a non-resident from the sale of any asset in India.
- Gifts exceeding the prescribed limit.
This inclusive definition expands the scope of what constitutes income for taxation purposes.
Total Income
“Total income” refers to the amount on which tax is ultimately charged. It is defined in section 2(45) and is computed under the provisions of the Act after considering all incomes under various heads, applying deductions under Chapter VI-A, and set-offs and carry-forwards of losses. It is the income chargeable to tax.
Assessed Income
Assessed income is the income that the Assessing Officer (AO) determines after scrutiny and assessment. It may differ from the income declared by the assessee. It is used to compute tax liability and is subject to appeals and revisions.
Person
The definition of “person” is critical, as the charge of income tax is on a person’s income. As per section 2(31), it includes:
- An individual
- A Hindu Undivided Family (HUF)
- A company
- A firm
- An Association of Persons (AOP) or Body of Individuals (BOI)
- A local authority
- Every artificial juridical person not covered under any of the above
This broad definition ensures that all entities capable of earning income are brought under the tax net.
Principal Officer
Section 2(35) defines a “principal officer” of a company or an association as:
- The secretary, manager, managing director, or agent of the company, or
- Any person connected with the management or administration of the company or association,, upon whom the Assessing Officer has served a notice of being treated as the principal officer
The principal officer is responsible for compliance with the Income Tax Act.
Resident
The concept of residence is key in determining the scope of income taxable in India. The term “resident” is defined separately for individuals (Section 6(1)) and other entities like HUFs, firms, companies, etc. An individual’s residence status depends on physical presence in India during the financial year and the preceding years. A resident can either be:
- Resident and ordinarily resident (ROR)
- Resident but not ordinarily resident (RNOR)
Non-Resident
A person who does not satisfy the conditions laid down for residency under section 6 is termed a non-resident. Only income received in India or accrued in India is taxable in the hands of a non-resident.
Not Ordinarily Resident (NOR)
This status applies to individuals and HUFs. A person may be resident but not ordinarily resident if:
- They have been non-resident in India in 9 out of 10 previous years preceding that year, or
- They have been in India for 729 days or fewerr in the 7 previous years preceding that year.
This category enjoys some benefits similar to non-residents for tax purposes.
Company
Section 2(17) defines “company” and includes:
- Any Indian company
- Any body corporate incorporated by or under the laws of a foreign country
- Any institution, association, or body declared by the Board as a company
- Any institution, association, or body declared by a general or special order of the Central Board of Direct Taxes (CBDT)
Indian Company
As per section 2(26), an Indian company means a company formed and registered under the Companies Act and includes:
- A company formed under any previous company law
- A corporation established by or under a Central, State or Provincial Act
- An institution declared as a company by notification in the Official Gazette
It is important because Indian companies are taxed differently compared to foreign companies.
Foreign Company
Section 2(23A) defines a foreign company as a company that is not a domestic company. It is incorporated outside India,, and its income is taxed as per special provisions applicable to foreign entities.
Domestic Company
A domestic company is an Indian company or any other company that in respect of its income liable to tax under the Act, has made prescribed arrangements for the declaration and payment of dividends within India.
Conclusion
The Income Tax Act, 19,1 contains a wide range of definitions that form the backbone of income tax compliance, computation, and assessment. Understanding these definitions is vital for accurate tax reporting and avoiding legal consequences. Each term is carefully defined to cover a broad spectrum of entities and income types, ensuring comprehensive coverage of all sources of income and taxpayers.