1 - Introduction to Taxation

What Is Taxation?
• Taxation is an ancient and ubiquitous concept that forms one of the central pillars around which
civilisation has been built.
• Justice Homes of the US Supreme Court – "Taxes are the price for civilisation”.
• Despite considerable efforts for widening the tax base, still the number of taxpayers in our
country, is about 82.7 million people which is 6.25 percent of the over 132 crore population,
which is too small for our country.
• In contrast, in the U.S., about 45 percent of the population pays taxes.
• Oxford English Dictionary defines a ‘tax’ as - ‘A compulsory contribution to the support of
government, levied on persons, property, income, commodities, transactions, etc’.
• R v Barger (1908) 6 CLR 41, court said (at 68): ‘The primary meaning of “taxation” is raising
money for the purposes of government by means of contributions from individual persons.
• Nomenclature - Taxes come in a variety of forms and are also known by different names, such as
duties, levies, tariffs and charges.
• The etymology of the word ‘tax’ can be traced to the Latin word taxare, meaning evaluate,
estimate, or assess.
• A tax (also known as a "duty") is a financial charge or other levy imposed on an individual or a
legal entity by a state or a functional equivalent of a state.

Tax Planning
• Taking maximum advantage of the exemptions , deductions, rebates, relief’s and other tax
concessions allowed by taxing statutes leading to the reduction of the tax liability of the tax payer.
• Objectives of Tax Planning -:
1. Having maximum tax payer units
2. Legally avoiding unwarranted additions to the income
3. Avoidance of tax worries and tensions through voluntary tax compliance and tax
management.

Case Law - Mc Dowell & Company Limited vs The Commercial Tax Officer on 17 April, 1985
Tax planning may be legitimate provided it is within the framework of law. Colorable devices
cannot be part of tax planning and it is wrong to encourage or entertain the
belief that it is honourable to avoid the payment of tax resorting to dubious methods.
It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

FUNCTIONS OF TAX- 4 R’S

• Revenue - Taxes raise money to spend on roads, schools and hospitals, and on more indirect
government functions like market regulation or justice systems.
• Redistribution- means transferring wealth from the richer sections of society to poorer sections.
This function is widely accepted in most democracies, although the extent to which this should
happen is always controversial.
• Repricing - Taxes are levied to address externalities: tobacco is taxed, for example, to discourage
smoking, and many people advocate policies such as implementing a carbon tax.
• Representation - "no taxation without representation”. Rulers tax citizens, and citizens demand
accountability from their rulers as the other part of this bargain.

Why Do Governments Collect Taxes?

• Military, defense,
• Enforcement of law and public order
• Protection of property
• Redistribution of wealth
• Economic infrastructure — roads, legal tender, enforcement of contracts, etc.,
• Public works, the operation of government itself.

Modern Governments - Most modern governments also use taxes to fund welfare and public
services, such as: education systems, health care systems, pensions for the elderly, unemployment
benefits energy, water and waste management systems, public transportation.

TAX SYSTEMS
• Tax Base - A tax base is the total value of all of the assets, income, and economic activity that can
be taxed by a taxing authority, usually a government. It is used to calculate tax liabilities. Tax
liabilities come in many forms, including income, property, capital gains, and sales taxes.
• Tax Rate - In a tax system, the tax rate is the ratio at which a business or person is taxed. There
are several methods used to present a tax rate: statutory, average, marginal, and effective.
TYPES OF TAXATION
• Proportional Tax - The tax as a percentage of income is constant over all income levels; A
proportional tax is the same for low, middle, and high-income taxpayers. Proportional taxes are
sometimes referred to as flat taxes.
• Progressive Tax - The tax as a percentage of income rises as income increases. Lower the income,
lesser the Tax.
• Regressive Tax - The tax as a percentage of income falls as income rises. Progressive taxes reduce
the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to
those with higher incomes.

TYPES OF TAXES
• Income tax - An income tax is a tax levied on the financial income of persons, corporations or
other legal entities. Various income tax systems exist, ranging from a flat tax to a progressive tax
or graduated income tax system. A tax levied on the income of companies is often called a
corporate tax, corporate income tax or corporation tax. Individual income taxes generally tax the
total income of the individual (with some deductions permitted), while corporate income taxes
often tax net income, the difference between gross receipts, expenses and additional write-offs.

• Retirement tax - Some countries with social security systems, which provide income to retired
workers, fund those systems with specific dedicated taxes. These often differ from comprehensive
income taxes in that they are levied only on specific sources of income, generally wages and
salary (in which case they are called payroll taxes).

• Capital Gain Tax - A capital gains tax is the tax levied of the profit realised upon the sale of an
asset. In many cases, the amount of a capital gain is treated as income and subject to the marginal
rate of income tax. In some jurisdictions, such as India and United States, a favorable capital
gains rate is given based on the length of holding. European jurisdictions have a similar rate
reduction to nil on certain property transactions that qualify for the participation exemption.

• Corporation tax - Corporation tax is a tax on corporate earnings (and often includes capital gains)
of a company. Earnings are generally considered gross revenue less expenses. Corporate expenses
that relate to capital expenditures are rarely deducted in full (such as the entire cost of a company
 truck) and are often deducted over the useful life of the asset purchase. Generally, industrialized
countries also use a regressive rate of tax upon corporate income.

• Poll tax - A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount
per individual.

• Excise - Unlike an ad valorem tax, an excise is not a function of the value of the product being
taxed. Excise taxes are based on the quantity, not the value of product purchased.

• Sales Tax - Sales taxes are a form of excise levied when a commodity is sold to its final
consumer. Retail organizations contend that such taxes discourage retail sales. The question of
whether they are generally progressive or regressive is a subject of much current debate.

• Tariff - An import or export tariff (also called customs duty or import) is a charge for the
movement of goods through a international border.

• Toll Tax - A Toll Tax is a tax that has been often used historically on roads and bridges to pay for
state bridge and road projects.

• Gift Tax - A gift tax is the tax on money or property that one living person or corporate entity
gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something
of value to someone else.

• Value Added Taxes - A sheet steel is imported by a machine manufacturer. That manufacturer will
pay the VAT on the purchase price, remitting that amount to the government. The manufacturer
will then transform the steel into a machine, selling the machine for a higher price to a wholesale
distributor. The manufacturer will collect the VAT on the higher price, but will remit to the
government only the excess related to the "value added" (the price over the cost of the sheet
steel).

• Input versus output Tax Property Taxes - When a company that is registered for VAT, buys goods
or services from another supplier, VAT is charged based on the purchase cost. This is known as
input tax. Similarly, when the company sells its own goods or services it charges its customers
 VAT at the same rate. This is output tax. A property tax is usually levied on the value of property
owned, usually real estate. Property taxes may be charged on a recurrent basis, or upon a certain
event. Two most common type of event driven property taxes are stamp duty, charged upon
change of ownership, and inheritance tax, which is imposed in many countries on the estates of
the deceased.

• Transfer Taxes - A property tax is usually levied on the value of property owned, usually real
estate. Property taxes may be charged on a recurrent basis, or upon a certain event. Two most
common type of event driven property taxes are stamp duty, charged upon change of ownership,
and inheritance tax, which is imposed in many countries on the estates of the deceased.

• Wealth Tax - Some countries' governments will require declaration of the tax payers' balance
sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a
percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is
in place for both "natural" and in some cases legal “persons".

TAX AND FEE

• Tax and Fee – imposed by the State and are different. Fee is for the service rendered by
Government.
• The Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar
of Sri Shirur Mutt ( SC, 1963) - The traditional view that there must be actual quid pro quo for a
fee has undergone a sea change. The distinction between a tax and a fee lies primarily in the fact
that a tax is levied as part of a common burden, while a fee is for payment of a specific benefit or
privilege although the special advantage is secondary to the primary motive of regulation in
public interest. If the, element of revenue for general purpose of the State predominates, the levy
becomes a tax. In regard to fees there is, and must always be,correlation between the fee collected
and the service intended to be rendered. In determining whether a levy is a fee or a tax, the true
test must be whether its primary and essential purpose is to render specific services to a specified
area or class; it may be of on consequence that the State may ultimately and indirectly be
benefited by it.
CHARACTERISTICS OF TAXES
• Tax is compulsory
• Tax is contribution
• Tax is for public Benefit
• No direct benefit to payer
• Tax is paid out of the Income of Tax Payer
• Government has ower to levy tax
• Tax is for the economic growth and public welfare
• Tax is not the cost of benefit

HISTORY OF TAXATION
• Records of taxation date back in antiquity to the times of the earliest civilizations.
• Evidence of taxation can be found on an inscription on an ancient Sumerian tablet from the city of
Lagash (located in what is now Iraq).

Ancient India
• The system of direct taxation has come into force in one form or another since ancient times.
• In both the Manu Smriti and the Arthasastra, references have been made to a variety of tax
measures.
• Manu Smriti and the Arthasastra has clearly shown the existence of a judicious system of taxation
even in ancient times.
• Taxes were levied on various classes of individuals such as actors, dancers, singers, and every
stratum.
• Taxes in ancient times were payable in the form of gold coins, livestock, grain, raw materials, and
also personal service.
• Manusmrti is the oldest and predominant source of income tax provisions. Manusmrti emphasizes
the strategic imposition and regulation of corporate income tax.
• Taxation must not be a painful experience for subjects.
• Taxation must be right enough to meet a reasonable revenue target and also feel right to the
masses.
• Arthashastra is one of the more prominent sources of tax laws and regulations in India.
• The Arthashastra could be considered the primary Indian text mentioning public finance, financial
administration, and financial laws in a structured manner.
• Farmers would pay 1/6 of production flat rate for land taxation.
• The rich would pay higher taxes and the less privileged would be levied lower taxes.
• Book rule with limited flexibility to tax collectors.
• “ Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with
indirect taxes secured elasticity in the tax system, although more emphasis was laid on direct tax.
• The tax structure was a broad based one and covered most people within its fold. The taxes were
varied and large variety of taxes reflected the life of a large and composite population.”

Income Tax in Recorded History

• The first records of organized records come from Egypt around 3000 B.C. It is mentioned in
many historical sources, including the Bible.
• Britain first levied income tax on movable property in 1798 to cover the costs of the war against
Napoleon.
• It was first imposed in India in 1860 by the then British Indian government.

Income taxation by Legislation in India

• Income Tax of Act of 1860
• Lasted for 5 years
• Between 1880-1886 there were 23 tax enactments

Salient features of the Income Tax Act, of 1860

• Exemption of income from agricultural production from taxation.
• Life insurance premiums were exempt from tax.
• Hindu undivided family was approached as a separate taxable unit.

Income Tax Act, 1918

• Some major changes were made by the Income Tax Act of 1918 in the income tax system.
• For the very first time, income and deductions of a contingent or non-recurring nature were also
included in the calculation of taxable income. Salient features of the Income Tax Act, 1918 -;
1. Non-recurring income in the course of business or professional activity was also included in
the calculation of net profit.
2. Non-recurring deductions have been included in the calculation of taxable income.
Income Tax Act, 1922
• Most notable milestone in the history of the Income Tax system in India.
• Primarily organized income tax structure in India.
• 1922 Act provided much-needed flexibility in India’s income tax system.
• In addition, it established a proper system of tax administration in India, which continued to
function for the next 40 years.
• Income Tax Act, of 1922 features -:
3. The tax rate was determined according to the budget requirements of the given period.
4. Changes in the law were no longer necessary for changes in the tax rate.
2 - CONSTITUTIONAL PROVISIONS
• Constitutional provisions of taxation - Articles 265 to 289.
• PART XII - Finance, Property, Contracts and Suits.
• Center-state relation regards to tax- Articles 264 to 291.
• Art. 248(2) Such power shall include the power of making any law imposing a tax not mentioned
in either of those Lists.
• Art.265 – no tax shall be levied or collected except by the “authority of law”
• Art.269- Levy by central govt & assigned to state govt.
• Art.269 A- Levy and collection of goods and services tax in course of inter-state trade or
commerce;
• Constitution amendment Act, 2016
• Art.270- levy by central govt & shared by central and state govt.
• Art.276 - Taxes on professions, trades, callings and employments
• Art.279-A Goods and Services Tax Council.
• Art.285- Exemption of property of the Union from State taxation.
• Art.286 - Restrictions as to imposition of tax on the sale or purchase of goods.
• Art.287 - Exemption from taxes on electricity.
• Art.288 - Exemption from taxation by States in respect of water or electricity in certain cases.
• Art.289 - Exemption of property and income of a State from Union taxation.
• Article 300A of the Constitution states that “no person shall be deprived of its property save by
authority of law”
• Art.366(28) - “taxation” includes the imposition of any tax or impost, whether general or local or
special, and “tax” shall be construed accordingly.
• Art.366(29) - “tax on income” includes a tax in the nature of an excess profits tax.
• Excess-profit Tax - Excess-profits tax- a tax levied on profits inexcess of a stipulated standard of
“normal” income. 1) war-profits principle, is designed to recapture wartime increases in income
over normal peacetime profits of the taxpayer. 2) high-profits principle, is based on income in
excess of some statutory rate of return on invested capital.
• Art.366(29A) - (29A) “tax on the sale or purchase of goods” includes—
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods
for cash, deferred payment or other valuable consideration
(b) a tax on the transfer of property in goods (whether as goods or in some other form)
involved in the execution of a works contract
 (c) a tax on the delivery of goods on hire-purchase or any system of payment by
installments.
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a
specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a
member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner
whatsoever, of goods, being food or any other article for human consumption or any drink
(whether or not intoxicating), where such supply or service, is for cash, deferred payment or
other valuable consideration, and such transfer, delivery or supply of any goods shall be
deemed to be a sale of those goods by the person making the transfer, delivery or supply and
a purchase of those goods by the person to whom such transfer, delivery or supply is made.

Art.19(1)(g) & Taxing - A taxing statute is not, per se, a restriction of the freedom under Art.19(1)
(g). The policy of a tax, in its effectuation, might, of course, bring in some hardship in some
individual cases. But that is inevitable… Every cause, it is said, has its martyrs. Then again, the
mere excessiveness of tax or even the circumstances that its imposition might tend towards the
diminution of the earnings or profits of the persons of incidence does not, per se, and without more,
constitute violation of the rights under Art.19(1)(g).

Kunnathat Thathunni Moopil Nair Vs. The State Of Kerala And (SC, 1960)
• Travancore-Cochin Land Tax Act, 1955
• Act imposed land tax uniformly,
• Petitioner contend that Act was invalid on the grounds of discrimination
• Issue - Whether Art. 265 Of the Constitution of India, which was not subject to the provisions of
Part Ill of the Constitution and that, therefore violates Arts. 14, 19 and 31? Whether Entry 49 of
List Il, Sch. 7, of the Constitution, includes "land on which a forest stands?
• Decision - Therefore, necessary to consider the scope and effect of that Article. Article 265
imposes a limitation on the taxing power of the State in so far as it provides that the State shall
not levy or collect a tax, except by authority of law, that is to say, a tax cannot be levied or
collected by a mere executive fiat. It has to be done by authority of law, which must mean valid
law.
Money Bill
• Art.110. (1) For the purposes of this Chapter, a Bill shall be deemed to be a Money Bill if it
contains only provisions dealing with all or any of the following matters, namely:—
• (a) the imposition, abolition, remission, alteration or regulation of any tax.
• Art.199

Financial Bills
• Art.117- Special provisions as to financial Bills
• Provided that no recommendation shall be required under this clause for the moving of an
amendment making provision for the reduction or abolition of any tax.

Supreme Law of Land

• Constitution of India is the Supreme law of the land, all other laws, including the Income-tax Act,
are subordinate to the Constitution and must be read and interpreted in the light of the
Constitutional Provisions;
• [ CIT v Harijan Nigam 226 ITR 696]

SC on Taxation
• Taxation serves not only the purpose of raising revenues but is also a powerful instrument of
social control.
• The states and the Union in the exercise of their legislative powers, utilise taxation not only as a
means of raising revenues to support their developmental activities but also as a measure of
achieving social objects.
• Whether the pursuit of those social objects or the pursuit of social regulation infringes upon the
area of free trade and commerce cannot be decided a priori.
• The power of taxation is capable of being used in a manner which can constitute, in a given case,
a restraint or impediment on the freedom of trade and commerce.
• [Jindal Stainless Ltd.& Anr vs State Of Haryana & Ors on 11 November, 2016]
• It is for the legislature to determine the objects on which tax shall be levied, and the rates thereof.
• Courts will not strike down an Act as denying the equal protection of laws merely because other
objects could have been, but are not, taxed by the legislature; for a state does not have to tax
everything in order to tax something.
• Legislature is competent to classify persons or properties into different categories and tax them
differently, and if the classification thus made is rational, the taxing statute cannot be challenged
merely because different rates of taxation are prescribed for different categories of persons or
objects

Constitutional Validity
• In order that the law imposing the tax is regarded as constitutionally valid, it must firstly be
examined whether the legislature that passed the law was competent to pass it or not.
• Secondly, since a taxing statute is law for the purpose of Art.13, its validity can also be challenged
on the ground that it contravenes any of the fundamental rights.
• [Jagannath Baksh Singh v State of UP 46 ITR 169(SC) ]
• Unless and until the SC or a HC declares any provision to be ultra vires, it must be taken to be
constitutionally valid and treated as such.
• [CIT v Shah Elec 207 ITR 350]
• There is always a presumption in favor of the constitutionality of a statute and the burden is upon
who attacks it show that there has been a clear transgression of the constitutional principle
• [Kunhammed v UOI 176 ITR 481]

Allocation of Taxing Power

1. Central Taxes [Entries 82 – 97]
• Taxes on income other than agricultural income
• Duties of customs including export duties
• Duties of excise on tobacco & other goods manufactured or produced in India
• Corporation Tax
• Taxes on capital values of assets; taxes on the capital of companies
• Estate duty in respect of property other than agricultural land
• Duties in respect of succession of property
• Terminal taxes on goods or passengers carried by railway, sea, or air; taxes on railway fares and
freights
• Taxes other than stamp duties on transactions in stock exchanges and future markets
• Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bill of lading,
letter of credit , policies of insurance, transfer of share, debentures, proxies and receipts
• Taxes on the sale or purchase of newspapers and advertisements published therein.
 • Taxes on the sale of or purchase of goods other than newspapers where such sale or purchase
takes place in the course of inter-state trade or commerce.
• Taxes on consignment of goods, where such consignment takes place in the course of inter-state
trade or commerce.

2. States’ Tax – List II

• Land Revenue
• Taxes on agricultural income
• Duties in respect of succession to agricultural land
• Estate duty in respect of agricultural land
• Taxes on land and buildings
• Taxes on mineral rights subject to any limitations imposed by Parliament
• Duties on alcoholic liquors for human consumption, drugs, opium etc.
• Taxes on the entry of goods into a local area for consumption, use or sale therein
• Taxes on the consumption or sale of electricity
• Taxes on purchase of goods other than newspapers
• Taxes on advertisement
• Taxes on goods and passengers.
• Taxes on vehicles
• Taxes on animals and boats.
• Taxes on professions, trades, callings and employment.
• Capitation tax.
• Taxes on luxuries including taxes on entertainments, amusements, betting and gambling
• Rates of stamp duty in respect of documents other than those specified in the provisions of List
I.

3. Concurrent Taxes
• Taxes on mechanically propelled vehicles are to be levied.
• Stamp duties other than duties or fees collected by means of judicial stamps, but not including
rates of stamp duty.

Constitutional remedies - Art.32 and Art.226

Writs – Mandamus, Quo Warranto, Prohibition, Certiorari, Habeus Corpus.
3 INCOME TAX LAW - BASIC CONCEPTS
Sources of Income Tax Law
• Income Tax Act, 1961
i) The Income Tax Act, 1961 is an Act to levy, administer, collect, and recover income tax in
India.
ii) Act is effective from 1 April 1962.
iii) It consists of 23 Chapters, over 298 sections and 14 schedules.
iv) The Act determines a taxpayer’s taxable income, tax liability, assessment, returns, appeals,
penalties, and prosecution.
v) Parliament has been making amendments to the act from time to time.

• Income Tax Rules, 1962

i) Administration of direct taxes - Central Board of Direct Taxes (CBDT).
ii) Empowered to make rules for carrying out the purposes of the Act.
iii) CBDT frames rules from time to time.
iv) These rules are collectively called Income-tax Rules, 1962.

• Annual Financial Acts

i) Every year, the Finance Minister of the Government of India introduces the Finance Bill in
the Parliament’s Budget Session.
ii) When the Finance Bill is passed by both the houses of the Parliament and gets the assent of
the President, it becomes the Finance Act.
iii) Amendments are made every year to the Income-tax Act, 1961 and other tax laws by the
Finance Act.
iv) First Schedule to the Finance Act contains four parts which specify the rates of tax.
v) Part I - specifies the rates of tax applicable for the current Assessment Year.
vi) Part II specifies the rates at which tax is deductible at source for the current Financial Year.
vii) Part III -gives the rates for calculating income-tax for deducting tax from income chargeable
under the head “Salaries” and computation of advance tax.
viii) Part IV gives the rules for computing net agricultural income.x

• Circulars, Notifications, Clarifications issued from time to time by the CBDT

 i) Circulars are issued by the CBDT from time to time to deal with certain specific problems
and to clarify doubts regarding the scope and meaning of certain provisions of the Act.
ii) Circulars are issued for the guidance of the officers and/or assessees.
iii) Department is bound by the circulars.
iv) While such circulars are not binding on the assessees, they can take advantage of beneficial
circulars.
v) Notifications are issued by the Central Government to give effect to the provisions of the
Act.
vi) The CBDT is also empowered to make and amend rules for the purposes of the Act by issue
of notifications.

• Judicial decisions
i) Interpretation and application of Act, rules etc.

What is Income-Tax?
• Annual tax- once in a financial year.
• It is a financial charge on a ‘PERSON’(S.2(31).
• Charge in respect of ‘TOTAL INCOME’-(S.2(45)).
• Charge in respect of income from PREVIOUS YEAR.
• ASSESSMENT YEAR is the year in which Tax is paid.
• Section 2 gives definitions of the various terms and expressions used therein.
• If a particular definition is given in the Act itself, it must be followed.
• Terms not defined under the Act: If a particular definition is not given in the Act, reference can be
made to the General Clauses Act or dictionaries.

Provisions
1. Section 2(7) - “Assessee” means a person by whom any tax or any other sum of money is
payable under this Act.
In addition, it includes – Every person in respect of whom any proceeding under this Act has
been taken for the assessment of his income; or assessment of fringe benefits; or the income
of any other person in respect of which he is assessable; or the loss sustained by him or by
such other person; or the amount of refund due to him or by such other person. Every person
 who is deemed to be an assessee under any provision of this Act. Every person who is
deemed to be an assessee-in-default under any provision of this Act.

• A person by whom income-tax or any other sum of money is payable under the Income Tax Act
• Every person against whom proceedings has been taken
• Representative Assessee
• Deemed Assessee
• Every assessee is a person, but every person need not be an assessee;
• Ex: ‘X’ an individual has earned income of Rs.90,000 in the previous year. ‘X’ is person but not
assessee.

2. Section 2(8) - Assessment - This is the procedure by which the income of an assessee is
determined ;It may be by way of a normal assessment or by way of reassessment of an income
previously assessed.

• Process of computation of the total income of an assessee in the previous year.

• Determination of tax liability of assessee

Types of Assessment
• Self Assessment.
• Summary Assessment.
• Regular Assessment.
• Scrutiny Assessment.
• Best Judgement Assessment.
• Income Escaping Assessment.
• Accelerated Assessment - Income is taxed in the same year in which it is earned.
(1) Non-resident shipping business
(2) Assessment of persons leaving India
(3) Assessment of AOP or BOI or artificial juridical person constituted for particular event
or purpose
(4) Assessment of person trying to alienate assets with a view to avoid tax
(5) Discontinued business
3. Section 2(9) - Assessment Year - Period starting from April 1st and ending on March 31 of the
next year. E.g. Assessment year 2005-06 Income of an assessee is taxed following assessment year.

4. Section 3 - Previous Year - Financial yr immediately preceding assessment year. 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.

5. Section 4 - Charge of Income Tax

(1) Where any Central Act enacts that income-tax shall be charged for any assessment year
at any rate or rates, income-tax at that rate or those rates shall be charged for that year in
accordance with, and 3[subject to the provisions (including provisions for the levy of
additional income-tax) of, this Act] in respect of the total income of the previous year
4***of every person: Provided that where by virtue of any provision of this Act income-tax
is to be charged in respect of the income of a period other than the previous year, income-tax
shall be charged accordingly.
(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at
the source or paid in advance, where it is so deductible or payable under any provision of
this Act.

6. Section 2(45) - Total Income - means the total amount of income referred to in section 5,
computed in the manner laid down in this Act; Total Income earned in the Previous Year is assessed
and Taxed in the Assessment Year.

7. Section 5 - Scope of total income

(1) Subject to the provisions of this Act, the total income of any previous year of a person
who is a resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such
person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of
sub-section (6) of section 6, the income which accrues or arises to him outside India shall
 not be so included unless it is derived from a business controlled in or a profession set up in
India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person
who is a non-resident includes all income from whatever source derived which— (a) is
received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

8. Section 2(31) - Person

(i) An individual
(ii) A HUF
(iii) A company
(iv) A firm
(v) An association of persons or a body of individuals , whether incorporated or not;
(vi) A local authority
(vii) Every artificial juridical person not falling within any of the preceding categories.

9. Section 2(31)(i) - Individual

• The expression ‘individual’ can only mean one of the human kind, a man or a woman. [CWT
v. Puthiya Ponmanichintakam Wakf]
• Individual : An individual is a natural human being i.e. male, female, minor or a person of
sound or unsound mind.
• ‘Individual’ where first used, must be human being, because it is used as something distinct
from a joint family, firm and company. One cannot give to the word ‘individuals’ in the
expression ‘association of individuals’ a different meaning to that which the word
‘individuals’ bears where it appears in the same phrase. [CIT v. Ahmedabad Millowners’
Association 1939]
• The expression ‘individual’ is now a unit of assessment and referable only to a natural person,
i.e., a human being, a situation different from that in the Indian Income-tax Act, 1922.
[Udham Singh v. CIT[1987] 35 Taxman 275 (Ori.)]
• It is now well-settled that the word ‘individual’ does not necessarily and invariably always
refer to a single natural person. A group of individuals may as well come in for treatment as
an individual under the tax laws if the context so requires. [CIT v. Shri Krishna Bandar Trust
[1993]
 • The word ‘individuals’ in Entry 86 of List I of the Seventh Schedule to the Constitution takes
within its sweep groups of individuals like HUFs. [Banarsi Dass v. WTO[1965]

10. Section (31)(ii) - HUF

• A Hindu Undivided Family (HUF) is treated as separate entity for the purposes of assessment.
• It consists of all persons lineally descended from a common ancestor and includes their wives
and unmarried daughters and also a stranger who has been adopted by the family.
• Members of the HUF are called as co-parceners which includes the head of the HUF who is
called as Karta.
• A Hindu Coparcenary includes those persons who acquire an interest in joint family property
by birth.
• ‘Hindu undivided family’ is a legal expression which has been employed in taxation laws.
• It has a definite connotation and embodies the meaning ascribed to the expression ‘Hindu
joint family’.
• The words ‘Hindu undivided family’ are used in the income-tax statutes with reference not to
one school of Hindu law but to all schools. [CWT v. Smt. Champa Kumari Singhi [1972]
• The expression ‘Hindu undivided family’ finds reference in the provisions of the 1961 Act but
that expression is not defined in the said Act.
• The reason of the omission evidently is that the expression has a well-known connotation
under the Hindu Law and being aware of it, the Legislature did not want to define the
expression separately in the Act.
• Therefore, the expression ‘Hindu undivided family’ must be construed in the sense in which it
is understood under the Hindu Law. [Surjit Lal Chhabda v. CIT [1975]
• The word ‘Hindu’ preceding the words ‘undivided family’ signifies that the undivided family
should be of those to whom Hindu law applies. [CWT v. Smt. Champa Kumari Singhi[1972].
• The word ‘family’ always signifies a group. Plurality of persons is an essential attribute of a
family. A single person, male or female, does not constitute a family. He or she would remain,
what is inherent in the very nature of things, an individual, a lonely wayfarer till per chance he
or she finds a mate.
• A family consisting of a single individual is a contradiction in terms. Section 2(31) of the
1961 Act treats a HUF as an entity distinct and different from an individual and it would be
wrong not to keep that difference in view. [C. Krishna Prasad v. CIT [1974] 97 ITR 493 (SC)].
11. Section 2(23) - Firm
i. "firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932 and
shall include a limited liability partnership as defined in the Limited Liability
Partnership Act, 2008 (6 of 2009);
ii. "partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and
shall include,— minor, and partner of LLP.
iii. "partnership" shall have the meaning assigned to it in the Indian Partnership Act, 1932
(9 of 1932), and shall include a limited liability partnership as defined in the Limited
Liability Partnership Act, 2008 (6 of 2009);]
iv. [CIT v. R.M. Chidambaram Pillai[1977]

12. Section 2(31(v)) - Association of Person

• An association of persons or a body of individuals , whether incorporated or not.
• The word ‘associate’ means, according to the Oxford Dictionary, ‘to join in common
purpose or to join in an action’.
• Therefore, an association of persons must be one in which two or more persons join in a
common purpose or common action, and as the word occurs in section 3 of the 1922 Act,
which imposes a tax on income, profits or gains, the association must be one the object of
which is to produce income, profits or gains. [CIT v. Indira Balkrishna [1960] 39 ITR 546
(SC)]
• ‘Association of persons’ as used in section 3 of the 1922 Act [corresponding to section 2(31)
of the 1961 Act ] means an association in which two or more persons join in a common
purpose or common action, and as the words occur in a section which imposes a tax on
income, the association must be one, the object of which is to produce income, profits or
gains. [N.V. Shanmugham & Co. v. CIT[1971] 81 ITR 310 (SC)]
• For forming an ‘association of persons’, the members of the association must join together
for the purpose of producing an income.
• An ‘association of persons’ can be formed only when two or more individuals voluntarily
combine together for a certain purpose.
• Hence, volition on the part of the members of the association is an essential ingredient.
• Even a minor can join an ‘association of persons’ if his lawful guardian gives his consent.
• In the case of receiving dividends from shares, where there is no question of any
management, it is difficult to draw an inference that two or more shareholders function as an
 ‘association of persons’ from the mere fact that they jointly own one or more shares, and
jointly receive the dividends declared.
• Those circumstances do not by themselves go to show that they acted as an ‘association of
persons’.
• The expression ‘body of individuals’ should receive a wide interpretation, perhaps not wide
enough to include a combination of individuals who merely receive income jointly without
anything further as in the case of co-heirs inheriting shares or securities, but certainly wide
enough to include a combination of individuals who have a unity of interest but who are not
actuated by a common design, and one or more of whose members producer or help to
produce income for the benefit of all. [DECCAN WINE & GENERAL STORES v. CIT
[1976] 105 ITR 111 (AP)]
• The words ‘body of individuals’ occurring in the Income-tax Act in the definition of the
word ‘person’ in section 2(31), therefore, could only mean a conglomeration of individuals
who carry on some activity with the object of earning income.[CIT v. Harivadan
Tribhovandas[1977] 106 ITR 494 (Guj.)]

13. Section 2(31 (vi)) - Local Authority

14. Section 2 (31(vii)) - Artificial Jurdical Persons
• Entities which are not natural persons but are separate entities in the eyes of law;
• Sued through agents
• All juristic personality fall under this category if they do not follow in the above category

15. Section 2(17) - Company

• Indian company
• Incorporated under the laws of a country outside India
• Any institution, association or body assessed as Company under IT Act,1922;
• Declared by Board as company

16. Section 2(26) - Indian Company

• “Indian company” means a company formed and registered under the Companies Act,
• 1956 (1 of 1956), and includes—
 • (i) a company formed and registered under any law relating to companies formerly in force
in any part of India 12[other than the State of Jammu and Kashmir and the Union territories
specified in sub-clause (iii) of this clause]

17. Section 2(22A) - Domestic Company - “domestic company” means an Indian company, or any
other company which, in respect of its income liable to tax under this Act, has made the prescribed
arrangements for the declaration and payment, within India, of the dividends (including dividends
on preference shares) payable out of such income;]

18. What is Income? - Liability to pay tax under the Act arises on the income accruing to an
assessee in a year. The word ‘income’, ordinarily in normal sense, connotes any earning of profit or
gain periodically, regularly or even daily in whatever manner and from whatever source

Universal Radiators v. CIT [1993] - Clause (24) of section 2 is legislative recognition of its
elasticity. Its scope has been widened from time-to-time by extending it to varied nature of
income. Even before it was defined as including profits, gains, dividends and contributions received
by a trust, it was held to be a words ‘of broadest connotation’ which could not be ‘understood in
restricted or technical sense’.

Section 2(24) - “income” includes—

• (i) profits and gains; -
- ‘Profits’ implies a comparison between the state of a business at two specific dates usually
separated by an interval of a year. (E.D. Sassoon & Co. Ltd. v. CIT , 1954)
- (CIT v. Harprasad & Co. (P.) Ltd.1975) - ‘Gains’ is really the equivalent of ‘profits’. The
profit of a trade or business is the surplus by which the receipts from the trade or business
exceed the expenditure necessary for the purpose of earning those receipts. The tax is upon
income, profits or gains; it is not a tax on the gross receipts. The expression ‘profits’ or
‘gains’ is not limited to business only, but is used in the Act with reference to other sources
of income as well.
- Profit = Total Revenue- Total Expenditure
- Any profit from any business/profession comes under income from PGBP (Profit & Gains
from business & profession)
 - Any perquisite/benefit arising from a business comes under income from PGBP (Profit &
Gains from business & profession)
- Interest/Salary/Remuneration/Commission/Bonus received by Partner of a firm comes under
income from PGBP (Profit & Gains from business & profession)
- Sums received under an agreement for forbearance, i.e., agreement for not doing something
(eg: Non- Compete Agreement), comes under income from PGBP (Profit & Gains from
business & profession)
- Sums received under Keyman Insurance Policy comes under income from the charging
provisions of the Act, it is discernible that the words ‘income’ or ‘profits and gains’ should
be understood as including losses also, so that, in one sense ‘profits and gains’ represent
‘plus income’ whereas losses represent ‘minus income’.
- In other words, loss is negative profit. Both positive and negative profits are of a revenue
character. Both must enter into computation, wherever it becomes material, in the same
mode of the taxable income of the assessee.
• (ii) dividend; -
- Distributive share of the profits or income of a company given to its shareholders
- Dividend declared/paid by a Domestic. company to shareholder is exempted under sec
10(34) ;
- But company has to pay Dividend Distribution Tax unde4 Sec 115-o
- Finance Act 2020 shifted the taxability on dividend income from the hands of then dividend
declaring the company to the individual investors.
- All dividend received on or after 1 April 2020 is taxable in the hands of the investor/
shareholder
- TDS on dividend distribution by companies and mutual funds on or after 1 April 2020.
• [(iia) voluntary contributions received by a trust created wholly or partly for charitable or
religious purposes or by an institution established wholly or partly for such purposes [or by an
association or institution referred to in clause (21) or clause (23), or by a fund or trust or
institution referred to in sub-clause (iv) or sub-clause (v) [or by any university or other
educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or
other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C), of section
10] [or by an electoral trust].]
- Voluntary contributions received by charitable or religious trust; Received by scientific
research association;
• (iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of
section 17;
- Any profits in lieu of salary is treated as income
- E.g.- X is employed by A Ltd. Apart from salary, he has been provided a rent-free house
by the employer. The value of benefit in respect of rent-free house is taxable income.
• [(iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii),
specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the
performance of the duties of an office or employment of profit;
- specifically granted to the assessee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office or employment is treated as
income.
- E.g: X is employed by A Ltd. He gets Rs.3000 per month as conveyance allowance
apart from salary. This amount is treated as income.
• (iiib) any allowance granted to the assessee either to meet his personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the increased cost of living;]
• (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from
a company either by a director or by a person who has a substantial interest in the company, or
by a relative of the director or such person, and any sum paid by any such company in respect
of any obligation which, but for such payment, would have been payable by the director or
other person aforesaid;
- E.g. X is a director of company. The company provides a car for private purposes. The
perquisite value of car is treated as income to X.
• [(iva) the value of any benefit or perquisite, whether convertible into money or not, Obtained by
any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section
160 or by any person on whose behalf or for whose benefit any income is receivable by the
representative assessee (such person being hereafter in this sub-clause referred to as the
“beneficiary”) and any sum paid by the representative assessee in respect of any obligation
which, but for such payment, would have been payable by the beneficiary;]
- any non-monetary benefit to a representative assessee, like a trustee appointed under
trust, is treated as income.
• (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or
section 59;
 - Capital Gains
- Profits from mutual insurance
- Profits from Banking business
- Winning from lottery
- Card games, crossword, puzzles, gambling, betting, horse race, car race/rally.
- Employee’s/ Employer contribution towards PF, superannuation, ESI fund etc
- Amount received under key man insurance policy
- Gift of an amount exceeding Rs.50,000
• [(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver
or concession or reimbursement (by whatever name called) by the Central Government or a
State Government or any authority or body or agency in cash or kind to the assessee 9[other
than,—
(a) the subsidy or grant or reimbursement which is taken into account for determination of the
actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of
section 43; or
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or
institution established by the Central Government or a State Government, as the case may
be];]

Case Law - Bhagwan Dass Jain v. Union of India [1981] 128 ITR 315 (SC)
The expression ‘income’, according to the dictionary, means ‘a thing that comes in’. Income may
also be defined as the gain derived from land, capital or labour or any two or more of them.
Even in its ordinary economic sense, the expression ‘income’ includes not merely what is received
or what comes in by exploiting the use of a property but also what one saves by using it oneself.
That which can be converted into income can be reasonably regarded as giving rise to income.

Case Law - Navnit Lal C. Javeri v. K.K. Sen, AAC[1965]

The word ‘income’ in Entry 82, List I of the Seventh Schedule to the Constitution, must receive a
wide interpretation; how wide it should be is unnecessary to consider, because such an enquiry
would be hypothetical. The question must be decided on the facts of each case. There must no doubt
be some rational connection between the item taxed and the concept of income liberally construed.
Case law - CIT v Central India Industries Ltd.
Income received by the assessee need not be in the shape of cash only. It may also be some
‘property’ or ‘right’ which has monetary value

SC on Income
• Word ‘income’ should be given its ordinary, natural & grammatical meaning;
• It should be given widest connotations in view of the fact that it occurs in a legislative head
conferring legislative power. [CIT v Karthikeyan (1993)]
• Income’, for purposes of taxation, has an element of gain or profit as distinguished from corpus or
• principal. It is sometimes called fruit born of capital, but mere conceivability or facility of fruition
is not income. An important distinguishing feature which, however, cannot be overlooked is that
income in the sense of tax laws is distinct from the capital or the stock. It is an increase of wealth
out of which money may be taken to satisfy the tax demands of the Government. (Punjab
Distilling Industries Ltd. v. CIT [1963])

Application of Income Vs. Diversion

• Where an assessee applies income to discharge an obligation after the income reaches the hands
of the assessee, it would be an application of income & results in taxation
• Where there is a diversion of income before it reaches the hands of the assessee, it cannot be
treated as income of the assessee
• CIT V Sitaldas Tirathdas
a) “obligations, no doubt, there are in every case, but it is the nature of the obligations
which is the decisive fact.
b) There is a difference between an amount which a person is obliged to apply out of his
income and an amount which by the nature of the obligation cannot be said to be a part
of the income of the assesee.
c) Where by the obligation income is diverted before it reaches the assessee, it is
deductible; but where the income is required to be applied to discharge an obligation
(self-imposed & gratuitous) after such income reaches the assessee , the same
consequence, in law, does not follow”.
d) Taxpayer is assessable on income which is accruing or arising or received by him.
e) The character of the amount received by him should be the income of the recipient.
 f) If the assessee received the sum on behalf of someone else , such receipt cannot be his
income.

• Muralidhar Himatsingka v CIT

- If a third person becomes entitled to receive an amount under an obligation of an assessee
even before he could lay claim to receive it as his income, there would be a diversion of
income by overriding title but when after receipt of the income by the assessee , the same is
passed on to third person in discharge of the obligation of the assessee, it will be a case of
application of income by the assessee and not of diversion of income by overriding title.

• KC Bose & Co. Vs CIT

- In determining whether there has been diversion of income by overriding title, it is the
nature of the obligation which is the decisive fact. There is a difference between an amount
which a person is obliged to apply out of this income and an amount which by the nature of
the obligation cannot be said to be a part of the income of the assessee. Where by an
obligation, income is diverted before it reached the assessee, it is deductible; but where 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. It is the first kind of payment
which can truly be excused and not the second. The second payment is merely an obligation
to pay another a portion of one’s income, which has been received and is since applied. The
first is a 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.
• Commissioner Of Income Tax Vs. J.H. Gotla
- Assessee suffered huge business losses
- His income was clubbed with Wife & Minor Children
- [S.64. Income of individual to include income of spouse, minor child, etc.]
- Held, assesse can set-off his business losses from the income of wife and children

Disputed Income - Any dispute regarding the title of the income cannot hold up the assessment of
the income in the hands of the recipient. Recipient chargeable to tax though there may be rival to
the source of income.
Contingent income - Not income. Until contingency has happened, it cannot be postulated that
income has accrued or has arisen to the assessee. [Fraklin v IRC 15 ITC 464]

Composite Income - Income-tax is a composite tax on all incomes received by or arising to a tax
during a year. Tax will be imposed on the aggregate of all income earned/received by the assessee
during the year.

Tainted/illegal Income - For income-Tax purpose there is no difference between legal and tainted
income. [Mann v. Nash [1932]

Pin Money - Pin money received by a woman for her dress or private expenditure. Small savings
effected by a housewife out of moneys given to her by her husband for running the expenses of the
kitchen would not be income. [Naidu v CIT]

Case law - Maheshwari Devi of Pratapgarh v. CIT

• Whether, alimony received by the assessee under section 25 of the Hindu Marriage Act, 1955, on
nullity of marriage, is income in her hands and liable to tax?
• The Court held: No.
• The reasons were as under - In our view, from the point of view of taxability, the decree must be
regarded as a transaction in which the right of the assessee to get maintenance from her ex
husband was recognized and given effect to. That right was undoubtedly a capital asset.
• By the decree that right has been diminished or partly extinguished by the payment of the lump
sum of Rs. 25,000 and balance of that right has been worked out in the shape of monthly
payments of alimony of Rs. 750 which, as we have pointed out, could be regarded as income.
• It is, in our view, beyond doubt that, had the amount of Rs. 25,000 not been awarded in a lump
sum under the decree to the assessee, a larger monthly sum would have been awarded to her on
account of alimony.
• It is not as if the payment of Rs. 25,000 can be looked upon as a commutation of any future
monthly or annual payments because there was no pre existing right in the assessee to obtain any
monthly payment at all.
• Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any
right to any periodic payment.
• In these circumstances, in our view, the receipt of that amount must be looked upon as a capital
receipt.

RECEIPTS, EXPENDITURE AND LOSS

1. Receipts
• Two Types – Capital and Revenue.
• Revenue Receipts are TAXED
• Capital Receipts EXEMPTED.
• In actual practice there is a good deal of difference of opinion as to whether a particular
payment is capital or revenue expenditure.
• Sometimes, the distinction between capital and revenue creates a considerable litigation.
• Regular v Casual - Income, in general, means a periodic monetary return which accrues or is
expected to accrue regularly from definite sources. Under the Income-tax Act, 1961, even
certain income which do not arise regularly are treated as income for tax purposes e.g.
Winnings from lotteries, crossword puzzles.
• Revenue v Capital - Income normally refers to revenue receipts. Capital receipts are generally
not included within the scope of income in general parlance. Income-tax Act, 1961 has
specifically included certain capital receipts within the definition of income e.g., Capital gains
i.e. gains on sale of a capital assets like land.
• Net v Gross - Income means net receipts and not gross receipts. Net receipts are arrived at
after deducting the expenditure incurred in connection with earning such receipts. The
expenditure which can be deducted while computing income under each head is prescribed
under the Income-tax Act, 1961. Income from certain eligible businesses/professions is also
determined on presumptive basis i.e. as a certain percentage of gross receipts.
• Due-basis v Receipt basis - Income is taxable either on due basis or receipt basis. For
computing income under the heads “Profits and gains of business or profession” and “Income
from other sources”, the method of accounting regularly employed by the assessee should be
considered, which can be either cash system or mercantile system. Some receipts are taxable
only on receipt basis, like, income by way of interest received on compensation or enhanced
compensation.
Capital Asset - An asset that is not easily sold in the regular course of business’s operations for cash
and is generally owned for its role in contributing to business’s ability to generate profits. Ex:
buildings, machinery etc. Sec 2(14) Means property of any kind held by an assessee , whether or not
connected with his business or profession. All movable or immovable property including
leasehold rights, partner’s share in a firm, manufacturing right, raw materials are treated as capital
assets.

Fixed & Circulating Capital - Fixed capital is what the owner turns to profit by keeping it in his
own possession. Circulating capital is what he makes profit by parting with it and letting it change
masters. (John Smith & Sons V Moore). A receipt referable to fixed capital would be a capital
receipt(not taxable) whereas a receipt referable to circulating capital would be a revenue receipt
(taxable). Tangible and intangible assets which the owner keeps in his possession for making profits
are in the nature of fixed capital. The circulating capital is one which is turned over and yields
income or loss in the process.

Capital & Revenue Receipts - Income tax is charged on revenue receipts or income , not on capital
receipts. Revenue receipt - Revenue expenditure = income. Capital receipt - capital expenditure =
capital gain

Capital Receipts vis-a-vis Revenue Receipts: Tests to be applied

1) Transaction entered in the course of business - Profits arising from transactions which are
entered into in the course of the business regularly carried on by the assessee, or are
incidental to, or associated with the business of the assessee would be revenue receipts
chargeable to tax. For eg., A banker’s or financier’s dealings in foreign exchange
or sale of shares and securities, a shipbroker’s purchases of ship in his own name, a share
broker’s purchase of shares on his own account would constitute transactions entered and
yielding income in the ordinary course of their business. Whereas building and land would
constitute capital assets in the hands of a trader in shares, the same would constitute stock-
in-trade in the hands of a property dealer.

2) Profit arising from sale of shares and securities - In the case of profit arising from the sale
of shares and securities the nature of the profit has to be ascertained from the motive,
intention or purpose with which they were bought. If the shares were acquired as an investor
or with a view to acquiring controlling interest or for obtaining a managing or selling
agency or a directorship the profit or loss on their sale would be of a capital nature. But if
the shares were acquired in the ordinary course of business as a dealer in shares, it would
constitute his stock-in-trade. If the shares were acquired with speculative motive the profit
or loss (although of a revenue nature) would have to be dealt with separately from other
business.

3) A single transaction - Can it constitute business? - Even a single transaction may

constitute a business or an adventure in the nature of trade even if it is outside the normal
course of the assessee’s business. Repetition of such transactions is not necessary. Thus, a
bulk purchase followed by a bulk sale or a series of retail sales or bulk sale followed by a
series of retail purchases would constitute an adventure in the nature of trade and
consequently the income arising therefrom would be taxable.

4) Liquidated damages - Receipt of liquidated damages directly and intimately linked with
the procurement of a capital asset, which lead to delay in coming into existence of the profit-
making apparatus, is a capital receipt. The amount received by the assessee towards
compensation for sterilization of the profit earning source is not in the ordinary course of
business. Hence, it is a capital receipt in the hands of the assessee.

5) Compensation on termination of agency - Where an assessee receives compensation on

termination of the agency business being the only source of income, the receipt is a capital
nature, but taxable under section 28(ii)(c). However, where the assessee has a number of
agencies and one of them is terminated and compensation received therefore, the receipt
would be of a revenue nature since taking agencies and exploiting the same for earning
income is the ordinary course of business and the loss of one agency would be made good
by taking another. Compensation received from the employer for premature termination of
the service contract is a capital receipt, but is taxable as profit in lieu of salary under
section 17(3).

6) Gifts - Normally, gifts constitute capital receipts in the hands of the recipient. However,
certain gifts are brought within the purview of income-tax, for example, receipt of property
without consideration is brought to tax under section 56(2). For example, any sum of money
or value of property received without consideration or for inadequate consideration by any
person, other than a relative, is chargeable under the head “Income from Other Sources”

7) Treatment under Company Law - Treatment of a receipt under the company law is not
relevant while deciding whether a receipt is a capital receipt or revenue receipt
under the Income Tax Act. [Punjab Distilling Industries v CIT].

8) Motive - Motive of pay is not relevant to decide whether receipt is Capital or revenue;.
Whereas motive of receiver may be relevant in deciding whether receipt is Capital or
Revenue. For eg., If shares of a company is held as an investment to earn profit, profit from
sale of such receipt, Capital. If Shares are purchased with the motive of selling it at profit,
receipt from such sale is revenue.

9) Appreciation of Currency - If, on account of devaluation or appreciation of currency,

profit is made by a person, when he holds foreign currencies as investment (or capital
account) , profit will be capital receipt. [EID Parry Ltd v CIT(Mad, 1988)].

10) Subsidy by government - Subsidies or grants given by Governments for specific capital
purposes such as , setting up a business, for completing project for development scheme or
modernization scheme are capital receipts. Subsidies received for meeting foreign
competition or after commencement of business is revenue receipt. [Sahney Steel & Press
Works Lts v CIT (SC, 1997).

11) Changing character - Amount initially not received as a trading receipt or revenue
receipt become a revenue receipt subsequently. [CIT v Karam Chand Thapar & Others
(SC,1996)]

12) Magnitude of amount - Amount of the receipt is immaterial for the purpose of
determining the nature of receipt. [P H Divecha v CIT 1959)]

13) Quality of Receipt - Quality of receipt, whether it is received voluntarily or under

legal obligations is immaterial for the purpose of determining its nature.
Distinction b/w Capital expenditure and Revenue expenditure

Capital expenditure Revenue expenditure

• Capital expenditure is not allowable • Revenue expenditure is an allowable deduction.
deduction. • purchase of goods bought for resale & the
• Cost of acquisition and installation of a expenses incurred regarding their purchases are a
fixed asset is a capital expenditure. revenue expenditure.
• Any expenditure incurred by a person to • Any expenditure incurred by a person to free
free himself from a capital liability is a himself from a revenue liability is a revenue
capital expenditure. expenditure.
• Any expenditure incurred for acquisition of • Any expenditure incurred for the purpose of
a source of income is a capital expenditure. earning an income is a revenue expenditure.
• Any expenditure incurred for increasing • Any expenditure incurred just for maintaining a
capacity of a business, by improving fixed fixed asset in good working condition is a revenue
assets is capital expenditure expenditure.

Capital Loss & Revenue Loss - Capital losses are not allowable deductions. Set-off is available
against capital gains. Revenue losses are allowable deductions Ex:- loss on sale of capital asset –>
capital loss. Loss of stock in trade by fire, theft etc-> revenue loss.

Section 2(45) - Total Income

• Computed under five heads and then aggregated
• Aggregated amount is known as Gross Total income
• Total Income Taxable = Gross Total Income – deductions under Sec 80C - Sec 80U ( applicable
surcharge and education cess)

Computing Taxable Income - Determine the residential status of the assessee to find out which
income to be included in the computation of his Total Income. Classify the income under five heads
and compute the total income after allowing the deductions for respective heads.
Heads of Income (Sec.14)
1. Salaries (Sec.15 - 17)
2. Income from house property (Sec.22 - 27)
3. Profits and gains of business or profession (Sec 28 - 44D)
4. Capital Gains (Sec 45 - 55)
5. Income from other sources (Sec 56 - 59)
The aggregate income under these heads is termed as “Gross Total Income”
4 - AGRICULTURAL INCOME
• Art 366(1) - “agricultural income” means agricultural income as defined for the purposes of the
enactments relating to Indian income-tax.

• Sec 2(1A) -
(a) any rent or revenue derived from LAND which is situated in India and is used for
agriculture purposes.
(b) any income derived from such land by –
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily
employed by a cultivator or receiver of rent-in-kind to render the produce raised or received
by him fit to be taken to market;
(iii) The sale by a cultivator or receiver of rent-in-kind of the produce raised or received by
him, in respect of which no process has been performed other than a process of the nature
described in paragraph (ii) of this sub-clause
(c) any income derived from any building owned and occupied by the receiver of the rent or
revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of
any land with respect to which, or the produce of which, any mentioned in paragraphs (ii)
and (iii) of sub-clause (b) is carried on, subject to certain conditions and exceptions.

• Agricultural Income - Ingredients

1. There must be a LAND – situated in India; income should be derived from land;
2. The land should be used for agriculture.
3. Land cultivation is necessary.
4. If rent is received on land, the land should be used in agriculture operations only.

• Agriculture includes
1. cultivation such as transplanting, seeding, tilling, burning, pruning, fertilizing, selective
harvesting, crop-rotation, etc.
2. Agriculture would include horticulture, floriculture, arboriculture and sylviculture.
3. Raising of grooves, plantations, raising of grass or pastures.
4. Cultivation of all commodities of food value like sugarcane, coffee, mangoes etc
5. Artistic and decorative value like flowers & creepers.
 6. Housing value like bamboo, timber, Fuel , medicinal and health value.

• Any rent/revenue received on agriculture land - Rent received on agriculture land is included in
agriculture income hence it is tax exempted.
- Rent – payment in money or kind by the person to another in respect of the grant of a right to
use land for agricultural purpose. [CIT v Kamakhya Niran Singh (PC, 1948)]
- Revenue means return, yield or income derived from the land which is the immediate and
effective source of income.
- CIT v Kamakhya Niran Singh (1948) - Where a land owner transfers to anbother person his
agricultural land in consideration of a life annuity payable by transferee which is secured by
charge on that land , the annuity cannot betreated as agriculktural income because in this
condition source of annuity is not land but covenant
- CIT v All India Tea & trading Co. (1977) - There must be a direct link between the agricultural
land and the receipt of income by way of rent or other revenue. Land must be immediate and
effective source of the rent or revenue and not merely secondary or indirect source.
- Land must be situated in India - Land must be situated in India to constitute agricultural
income under the Act. Where agricultural land is situated in a foreign country and the income
from such land is received in India, whole income received in India will be taxed.

• Income from agriculture operations - Any income come from agriculture operations including
processing of agricultural produce, raised or received as rent in kind so as to render it fit for the
market, or sale of such produce.

• Agriculture operations - Produce raised from the land may not have a market in its native form. It
may become necessary to perform a process on the produce to make it marketable or saleable. A
land cannot be treated to have been used for agricultural purposes unless there is some measure of
cultivation of the land, some expenditure of skill and labour upon the land. [Raja Must6afa Ali
Khan v CIT (SC, 1948)]

• Case law - Brihan Maharashtra Sugar Syndicate Ltd v CIT (1946)

Sugarcane can be sold as such, therefore the process of conversion of sugarcane into sugar
shall not be a process necessary to be applied where there is a market for sugarcane being
sold as such.
• Income from Farm House - Income from farm house also considered agriculture income subject
to that building is situated on or in the immediate vicinity of the land and is used as a dwelling
house, store house etc.

• Income from Nursery operation - Income from nursery operations also considered agriculture
income.

SC – Agricultural Income
• SC in CIT v Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 has held that – The land is said to
be used for agricultural purpose where two operations – Basic Operations and Subsequent
operations - are carried out on such land.

• Basic Operations - Involve cultivation of land, tilling of land, sowing of seeds, planting etc; Such
basic operations demand the expenditure of human labour and skill upon the land itself & further
they are directed to make crop sprout from the land.

• Subsequent operations - Weeding, digging the soil around growth, removal of undesirable
growths, prevention of crop from insects and pests etc.

• Sine qua non – Agriculture operation

- Both basic and subsequent operations together form integrated activity of agriculturist.
- Performance of subsequent operations on produce of the land would not be enough to invest
the subsequent operations with agricultural character.
- Basic operation must be performed before any income is called agricultural income.

These includes in agriculture income.

• Sale of replanted trees.
• Sale of flowers & seeds.
• Rent received on agriculture land.
• If the income derived from farm house, the building of the farm house should be situated on that
land only.
• Ownership - The ownership is not necessary while computing income from agriculture as the
assesse can be tenant or sub-tenant.

Not agriculture income.

• Poultry farming.
• Bee hiving.
• Dairy farming.
• Sale of spontaneously grown trees.
• Purchase of ready crop.
• Income from producing the salt on land with sea water.
• Royalty from mines.
• Butter and cheese making.
• In the absence of ownership or leasehold rights, income from plantation companies is either
considered interest or non-agricultural income chargeable to tax.
• Rent of agriculture land or farm house for non agriculture purpose like shooting of films etc.

Income from growing and manufacturing of any product other than tea, rubber & coffee
• Composite business income = income from business + income from agriculture
• Ex: Growing Potatoes to produce wafers.
• Composite income has to be disintegrated and for computing business income the market value of
any agricultural produce raised by the assessee or received by him as rent in kind and utilized as
raw material in his business is deducted. Assessee derived income from sale of tea grown and
manufacture. Income from Agriculture + business. [Anglo-American Direct Tea Trading v CIT
69 ITR 667]

Income from growing and manufacturing of rubber (Rule 7A)

• Income derived from sale of centrifuged latex or technically specified block rubbers from rubber
plants grown by the seller in India shall be computed as if it were income derived from business
and 35% of such income shall be deemed to be income liable to tax.
Income from growing and manufacturing of coffee (Rule 7B)
• Income derived from the sale of coffee grown and cured by the seller in India shall be computed
as if it were income derived from business and 25% of such income shall be deemed to be income
liable to tax.

Income from growing & manufacturing of Tea (Rule 8)

• Where the assesse has a business of growing tea leaves and then processing it, then the procedure
under rule 8 has to be followed;

Dividends received from companies deriving agriculture income

• Dividends received by assessee shareholder in companies deriving agriculture income, whether
agricultureincome in the hands of the assessee shareholder?
• Bacha F Guzdar v CIT - Held No

Annuity received in consideration of transfer of agricultural land

• Assessee transferred his agricultural land to another in consideration inter alia for a life annuity
which charged upon the land.
• Whether annual payment received by the assessee could be considered as Agricultural Income

Case law - CIT Vs. Gopal Sharan Narain Singh

It is impossible to hold that annual payment received by the assessee is agricultural income, it is not
rent or revenue derived from land. It is money payable under a contract imposing a personal
liability on the covenantor, the discharge of which is secured by a charge on land. Covenanter is at
liberty to make the payments out of any of her moneys and is bound to make them whether the land
is sufficiently productive or not.

Case Law - CIT v All India Tea & Trading Co

Land owned by the assessee was taken over by the Government. Refugees carried on agricultural
activities. Whether compensation received by the assessee is agricultural income.
Case Law - Maharajadhiraj Kameshwar Singh v CIT
Assessee received remuneration as a fixed percentage of total estimated income of trust properties
which included agricultural properties. Whether remuneration received by assessee is agricultural
income.

Case Law - Raja Bahadur Singh v CIT

Whether ‘interest’ on arrears of agricultural rent is agricultural income? Land -> Rent -> Interest on
Rent.

Rural Agricultural land

• It is situated in any area which is comprised within the jurisdiction of a municipality ( whether
known as a municipality, municipal corporation, notified area committee, town committee or by
any other name) and its population should be less than 10,000 as per the last published census.
• If situated outside the limit of municipality, etc., it should be situated certain kilometres away
from the local limits of any municipality, etc. as may be specified by the Central government in
the official Gazette.
• The Central government can notifiy urban land up to maximum 8 Kms from the limits of
municipality, etc. in which case the Assets not Taxed under the head Capital Gains.
• Rural Agriculture land is not considered as capital asset as per section 2(14) of the Income Tax.

Clubbing of Agri-income with non-agri income

The clubbing of agricultural income and non-agricultural income as provided by the Finance Act is
not unconstitutional. [Union Home Products Ltd. v. Union of India [1995] 215 ITR 758 (Kar.).]

Feeding mulberry leaves to silkworm constitutes AI?

• Assessee was growing mulberry leaves in his land. He purchased silk worm eggs and fed them
with mulberry leaves.
• He obtained silk worm cocoons from the silk worms and sold them in the market.
• Contended that income derived from silk cocoons is agricultural income. (Dooars Tea Co Ltd Vs.
CIT)
5 - Residential Status for Taxability
• Sec. 6 – Residence in India
(1) An individual is said to be resident in India in any previous year, if he —
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty
two days or more; or
(c) having within the four years preceding that year been in India for a period or periods
amounting in all to three hundred and sixty-five days or more, is in India for a period or
periods amounting in all to sixty days or more in that year.
Explanation 4 [1].—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year 5 [as a member of the
crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act,
1958 (44 of 1958), or] for the purposes of employment outside India, the provisions of sub-
clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring
therein, the words “one hundred and eighty-two days” had been substituted;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation
to clause (e) of section 115C, who, being outside India, comes on a visit to India in any
previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the
words “sixty days”, occurring therein, the words “one hundred and 6 [eighty-two] days” had
been substituted.

Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India
and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in
India shall, in respect of such voyage, be determined in the manner and subject to such conditions
as may be prescribed.]

(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in
any previous year in every case except where during that year the control and management of its
affairs is situated wholly outside India.

(3) A company is said to be a resident in India in any previous year, if—

(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Explanation.—For the purposes of this clause “place of effective management” means a place
where key management and commercial decisions that are necessary for the conduct of business of
an entity as a whole are, in substance made.]

(4) Every other person is said to be resident in India in any previous year in every case, except
where during that year the control and management of his affairs is situated wholly outside India.

(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any
source of income, he shall be deemed to be resident in India in the previous year relevant to the
assessment year in respect of each of his other sources of income.

(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—
(a) an individual who has been a non-resident in India in nine out of the ten previous years
preceding that year, or has during the seven previous years preceding that year been in India
for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less;
or
(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of
the ten previous years preceding that year, or has during the seven previous years preceding
that year been in India for a period of, or periods amounting in all to, seven hundred and
twenty-nine days or less.]

• Sec 7 – Income deemed to be received —The following incomes shall be deemed to be received
in the previous year:—
(i) the annual accretion in the previous year to the balance at the credit of an employee
participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the
Fourth Schedule;
(ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule
(4) of rule 11 of Part A of the Fourth Schedule;
(iii) the contribution made, by the Central Government 4 [or any other employer] in the
previous year, to the account of an employee under a pension scheme referred to in section
80CCD.
• Sec 8 - Dividend income - For the purposes of inclusion in the total income of an assessee,—
(a) any dividend] declared by a company or distributed or paid by it within the meaning of
sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of
clause (22) of section 2 shall be deemed to be the income of the previous year in which it is
so declared, distributed or paid, as the case may be;
(b) any interim dividend shall be deemed to be the income of the previous year in which the
amount of such dividend is unconditionally made available by the company to the member
who is entitled to it.

• Sec 9 – income deemed to accrue or arise in India

• Basis of Tax - Residence and not citizenship is the basis of Taxation. The incidence of Tax varies
with changes in the residential status of the assessee. Residential status is determined wrt to
previous year, not with assessment year. A person may be resident in one previous year but may
not be so in next year.

Determination of residential status

1. Resident and ordinarily resident in India (ROR)
2. Resident but not ordinarily resident in India and ;(RNOR)
3. Non-resident in India (NR)

In case of Individuals and HUF all the above three classification considered but in all other cases
only two divisions – resident or non-resident considered.

Residential Status of Individual

• An individual will be resident in India in any previous year
1) he is in India for the period or periods amounting in all to 182 days or more Or
2) he has been in India for a period or periods amounting in all to 365 days or more during
the 4 years preceding that previous year, and he has been in India for period or periods
amounting in
all to 60 days or more during that previous year
• These two are known as basic conditions.
• Exceptions to Basic conditions
(i) in the case of an Indian Citizen, who leaves India in any previous year for the purpose of
employment outside India , or as a member of the crew of an Indian Ship, his stay in India in
that previous year should be for 182 days or more instead of 60 days referred to in condition.
(ii) in the case of an Indian citizen or a person of Indian origin (PIO) who is living outside
India comes to India in the previous year on a visit for a short spell, his stay in India in that
previous year should be for 182 days or more instead of 60 days referred in condition.

• Additional conditions
1) he has been in India at least 2 out of 10 years preceding relevant previous year
2) he has been in India for period or periods amounting in all to 730 days or more during 7
years preceding the relevant previous year

• 2004 Amendment
A person is said to be "not ordinarily resident" in India in any previous year if such person is—
(a) an individual who has been a non-resident in India in 9 out of the 10 previous years
preceding that year, or has during the 7 previous years preceding that year been in India for
a period of, or periods amounting in all to, 729 or less.
(b) a Hindu undivided family whose manager has been a non-resident in India in 9 out of the
10 previous years preceding that year, or has during the seven previous years preceding that
year been in India for a period of, or periods amounting in all to, 729 or less.

• Resident & Ordinarily Resident

- An individual will be a resident and ordinarily resident in India if he satisfies one or both the
basic conditions and both the additional conditions.
- An individual will be a resident but not ordinarily resident in India if he satisfies one or both of
the basic conditions and one or none of the additional conditions.

• Not Resident
- An individual not satisfying any of the basic conditions will be a non-resident.
- It is not relevant whether or not he satisfies the additional conditions.
• When is HUF said to be Resident in India?
- A HUF is said to be resident in India in any previous year in every case except where during
that year the control and management of its affairs is situated wholly outside India.

• When is HUF said to be a resident and not ordinarily resident in India?

- A HUF, which is resident in India, is said to be resident but not ordinarily resident in India
during the relevant previous year, if the karta of the HUF does not satisfy any one, or both of
the conditions mentioned.

Rules for determining the residence of a person

• Should be applied with reference to previous year but not with reference to the assessment year.
• Physical presence of an individual in India need not be continuous.
• For computing the number of days in India , both the day of entry and the day of exit are to be
included.
• Purpose or motive of visit irrelevant.
• Burden of Proof of stay in India - Onus of proving that the assesse was in India during the year
preceding the previous year, lies on the department. [CIT v Dhote (1967) 66 ITR 457 (SC)].

Meaning of Employment
• “The word ‘employment’ is one of wide significance;
• But the words ‘employer’ and ‘employee’ are much restricted in their meaning;
• Thus , I may be said to employ my time or my talents without being in any proper sense an
employer, and I may also be paid to be employed in some pursuit or activity without being
employee” (Denma J, in Westall Richardson Ltd v Roulson (1954)
• A person merely undertaking tours abroad in connection with his employment in India would not
eligible for the relaxation provided under basic condition. [ITO v Patel (1990)].

Residential Status of a Company

• A company is ‘resident’ in any previous year if
(a) it is an Indian Company
(b) the control and management of its affairs is wholly situated in India during that previous
year
• Other companies are treated as resident, only when the control and management of company is
situated in India