What Constitutes Income?

Income can be constituted by any of the following mentioned items:

• Compensations given for the services and also including with it fees and commissions.
• Gains received from property dealings.
• Interests.
• Royalties.
• Rents.
• Dividends.
• Annuities.
• Pensions.
• Income received from endowment and life-insurance contracts.

We can derive income from capital and labor

Supreme-Court of U.S. in the year 1920 considered 1^st case which addressed income’s concept. In deciding that particular provisions that are in laws of tax which included dividends of stock as a taxable-income was unconstitutional, Supreme-Court announced that “we can define income as gain which we can derive from the labor, from the capital or both together, on the condition that income is understood for including profit that is gained by convention or sale of the capital-asset.” This starting attempt for defining the income means that the income can be formed from 2 sources only i.e. labor and capital.

Income as an increase in wealth

Courts diluted increasingly the requirements of original-judicial that from labor and capital income are derived and also that income’s recognition required realization. Court, thus, adopted much wider income’s concept, “to the wealth undeniable admittance,” as rendition of its "the income derived from any source". Income's notions as increment in the wealth are not at all new or surprising. It has been argued by economist long before that true income’s measure for a particular period, which is considered, is alterations in the wealth. According to the income's definition by economists income is all profits that is received in a particular time, whether has been realized / not realized.

Current view

For income's recognition the condition required is increment in the wealth. Before increase-in-wealth is being taxed, it should be also realized reasonable definition includes following 2 elements:

• Alterations in substance or/and form of property of taxpayer.
• In the process of income 2^nd party's involvement.

Questions:

• What constitutes income?
• How can we derive income and how it increases wealth?