DIRECT TAX

13 January, 2020

Principles/canons of taxation
(By Adam Smith, 5th is International compatibility-added later based on needs of Modern
economy)
1. Ability to pay-progressive/regressive- can be in case of both-direct/indirect.
2. Benefit approach
3. Certainty.
4. Administrative Convenience
5. International compatibility (separate cell, systems, cross border issues, SC/HC cases
also for cross border issues)

Principle 1- Ability to pay

Tax should be proportionate to income/ability to pay-progressive income tax.
In case of companies, there is no progressive tax kind of slab-rate is same. Progressive
system not available for companies and is based only on ability to pay. Trying to maintain
horizontal and vertical equity. Super rich concept comes from vertical equity. In Britain, this
is there with 45% tax- was criticised-led to tax distortions.

There are many types of taxes so essentially a person in a higher income bracket is paying
40-50% of his income as tax. Earning high, pay tax more-tax distortion and also tax
neutrality. Super rich tax in India is 35%. Super rich is also for individuals only and not cos.
Like progressive tax.

Principle 2- Benefit approach

Arthashastra is the first book on public finance. It is the public money that gives power to the
govt. -“from treasury comes the power of the govt”. he also said this money helps to provide
the services to his population. Tax was not a compulsory contribution as per him. The
relationship was based on dharma and it was King’s sacred duty to protect his subjects and
the subjects could stop paying tax if the services were not rendered. You could claim refund
also then. Now, this is not possible. Tax is not quid pro quo like fees. Adam Smith has
however compared tax with fees that you should get benefits on paying it. Honest tax payers
must get some kind of privilege as per this theory. This is a debate.
Raghuvansha-Kalidas-why should King collect tax? For good of the subjects. Just like sun
absorb the moisture from Earth to give it back-bee sucks honey from flower-both happy
basically (benefit theory). Can’t absorb say 45% then no one will want to pay tax- this sounds
more like evasion of tax. USA only 14% tax evasion rate, in India it is around 70%.

Benefit approach-Adam Smith wanting to equate tax with fees-to gain some kind of quid pro
quo from the payment. New def. says tax is for public purpose and what is public purpose is
decided by the govt. The tax collected not being spent on public works and needs causes
evasion of the taxes as well (no returns). That is why they want to equate tax with fees.

There is no equity in tax.

It is said that Consolidated Fund should not be in hands of central govt. but under an
independent committee.

Principle 3- Certainty.
Taxes should be certain.
Direct taxes are largely certain (like fin year/assessment year defined) and indirect taxes are
no certain.
You can’t amend the IT Act, w/o passing a Finance Act.
Law applied only in 1961, though amended before.
Law can be applied retrospectively.
In the name of clarificatory amendment, they are making amendments.
None of them have been held to be invalid though. Tussle b/w legislature and judiciary.
To nullify the effect of so and so.. is also written.
Kautilya said tax law cannot be simple. More simple law will lead to evasion. This is because
of the different interpretations that could be possible.
From 1960-2010-no. of amendments-19k around. Amendments are making the law uncertain.
Power to make it from retrospective effect.

You cannot claim refund of the money if paid tax incorrectly. Doctrine of promissory
estoppel under tax law? No. Palkiwala has criticised in his budget speech-this attempt of the
govt. Budget of 1986. Withdrawal of investment from exemptions was done. If you’re
providing relief to tax payer via amendment, person makes investment based on your
promise, now sudden change of law in a way constitutes a breach of the promise the govt.
made. You can’t really distinguish b/w a promise evading govt. and a tax evading individual.

Indirect taxes-highly uncertain due to their nature. Can’t wait for too long. Power under the
indirect taxes is given to executive (govt.) which makes it uncertain. E.g. GST. 36 times it
has been amended-systems/procedures/rates.

14 January, 2020
Frequent change in substantive law in Direct Tax. This does not happen in case of indirect
tax.

Principle 4-Administrative Convenience

From both tax payer (Adam Smith task from this perspective and says this would reduce tax
evasion) and revenue dept.’s perspective. Tax payers should know who and when to pay and
should feel happy paying the tax. Little human interface-digital filing (e-filing), assessment is
online, notice is sent online and replies can also be online. TDS is at source and dept. does
not wait for the end of the year to levy tax. This liability is fixed on the payer. If you say
you’ve paid excess taxes, then you can claim a refund. TDS brought in, in 1992 so as to
ensure convenience in terms of waiting and going from person to person to pay tax. Deemed
assessee by default is the liability of the payer and not the assessee. Advance Tax-if liability
exceeds a limit, then you’re supposed to pay tax on a presumptive basis in advance.
Vodafone case-purchased Hutch. So liability to pay tax was on Vodafone as they failed to
pay TDS.
Not deducting/depositing tax-penal consequences follow.
Taxing of windfall gains is done at the time of the gain. Because person could go elsewhere
after the gain.
Even rates and methods of taxation should be easy.
Comparison of levying tax to sheep. Don’t shave it to reach skin-you can’t take the skin,
don’t harass taxpayers similarly. “Tax terrorism”
SSS-simple, same, stable-Seltavad Committee gave this.
Numerous committees have been formed to ask for reduction of tax terrorism.
Reduction of human interface would reduce harassment. Reduces corruption also.
Now we have single window clearance system also which ensures admin convenience.
Tax effectiveness/tax efficiency/tax neutrality- there should not be non-neutral taxes. It
should not alter the behaviour of the payer. E.g. Making a shell co in Mauritius to invest in
India.
Tax efficiency-cost of collection of taxes.
Taxpayers’ money only goes to pay compensation, and in unnecessary litigation, etc.
Now they are making person like CIT, etc. also liable because if they are liable, then money
comes from them.

Principle 5-International compatibility.

How Income tax is applied in a cross border transaction.
International treaties in this regard.
Double Tax Avoidance Agreement- DTAA.
Transit Pricing.
Treaty Shopping.
Advance pricing agreements.
UN -source based taxation-more favourable to India.
OECD-Residence based taxation- from where money is coming.
2003 DTAA prevails over IT Act-in case of Azadi Bachao Andolan v. UOI. Delegated
legislation has more power over the main one. They say DTAA should not provide relief in
terms of non-taxation, only avoid double taxation.
TIEA-Tax information exchange agreements.

15 January, 2020
First time IT Act was passed in 1860. The reason behind it was Sepoy Mutiny of 1857. There
was loss of money in that and hence to raise money, IT Act was passed. Earlier, there was no
exemption on agricultural income. It continued till 1866. Later deductions and exemptions
came into being. Then till 1890. Later a comprehensive Act came into being. 1922 Act then
replaced the previous one. This 1922 Act was replaced by 1960 Act. Setlavad and Tyagi
committees were constituted to for the 1960 Act. The 3Ss were one of its recommendations.
War tax -1799 it was not called income tax, it was called war tax. There were certain things
that were part of income tax Act but were not in the nature of income. Eg. Gift tax still.
Taxon. Income is within the Union List. Taxes could be on transactions and expenditures and
not income but they would still be falling if not within the IT Act, they would still be part of
Union list Entry 97 (Taxes).
Fringe Benefits Tax
Cash transaction tax abolished.
Security transaction tax-there under IT Act in a separate chapter. It is basically however a tax
on the transaction and not on income.
Equalisation levy introduced in 2016-on e-commerce entities, even Google types service
providers. Total transaction is taxable, without deduction of the expenditures.

IT Act has a very wide ambit and it is a self-contained Code. The methods of
taxation/Accounting standards are not binding under the IT Act. They are prescribed under
the Act. That’s why 2 Sets of Accounts have to be prepared-one for purposes of IT and the
other for book keeping/book profit.

Definitions:

 Who is person under IT Act?

Section 2(31)

 Who is assessee under the IT Act?

Section 2(7)

 What is income?
Section 2(24)

 What is previous year and assessment year?

Previous year-Section 2(34)/3
Assessment year-Section 2(9)

 Charging Section
Section 4
Person is important for being “liable to tax” (may not actually be taxed). But you have to be
assessee for being “subject to tax”.

Section 2(31) gives an inclusive definition. Clause vii is a residuary provision. Finance Act
2002 added the explanation to the Section. Under Clause vii-Eg. Idol/University, charitable
trusts, NGOs, political parties etc. are liable to tax under the IT Act and fall under the
definition of “person”.

Under Article 289 of the Constitution, govt. authorities are exempt from tax. But say if a state
is earning the income from a business activity, then that would be taxable. But if the income
is earned under the sovereign powers, then no taxable.

Liable to tax and subject to tax are very important w.r.t DTAAs.

ASSESSEE
1. You have to be a person.
2. 3 categories under Section 2(7).
3. (a)-original assessee.
4. (b)- An NRI/Businessman appoints an agent who will be liable to tax under IT Act as
deemed assessee.
5. (c) Say if the registrar does not pay tax that I have deposited, then the registrar will be
deemed assessee in default.

Every financial year is a previous and financial year.

E.g-Previous Year: April 2019-March 2020
Assessment Year: April 2020-March 2021
Previous year is year of earning and payment of tax. Assessment year is for filing of return
and the deptt. also uses it to assess your returns.

Exceptions to these general rules are in Section 172, 174, 174A, 175 and 176- means same
year as previous year and assessment year.
  Continued business-Section 176. This occurs in cases for example of shut down of
business. They won’t wait for the assessment year since the party may leave the
country by then.
 Section 172-Non-resident shipping business. Before leaving Indian Port you have to
pay tax. You might not come again, that’s why have to pay before leaving.
Presumptive tax. Whatever freight and fare collected-7.5% has to be paid as tax.

16 January, 2020
 In case of raid/search/seizure-they don’t wait for assessment year, in such cases, same
year is AY and PY-file return.
 Another exception is co. in liquidation.
 Section 174-
 Why non obstante clause in these sections? You can say S4 is not charging provision
for them, Section 172, or 174 would be the charging Section in that case.
 Section 174A-here same year becomes PY and AY because the juridical body comes
to an end since the purpose for which it was formed is over.
 Any person-all categories not just individuals.

INCOME
 What is income? Not defined because they want to tax even capital under income’s
purview. Besides sources of revenue cannot be predicted for the future. This allows
taxation of anything at any point of time in the future. Court has upheld the validity of
such taxability on everything.
 Entry 82 of Union List says tax on income except agricultural income.
 It is a myth that agricultural income is not taxable.
 What is income is an inclusive list-Section 2(24).
 Capital is income? Yes.
 Revenue receipts are income
 Capital receipts are not income.
 Notional income concept. E.g.-tax is payable on notional value of property-so what if
I had let out property-what would be earning-that is taxable-tax on notional
income/rent. This is paying tax on expected value as no income is actually being
earned.
 There are some Privy Council decisions to define income but cannot be accepted for
tax purposes.
1. CIT v. Shaw Wallice and Co. AIR 1932 PC 138-“Income connotes a periodical
return which comes in with some sort of regularity or expected regularities
from a definite source.” But this is not suitable for IT Act because periodical
return, regularity and recurring nature or definite source- are not necessary for
qualifying as income. E.g. Windfall gains are also considered income to tax.

There is no difference b/w illegal and legal income. Still taxable!

2. Kamakhya Narayan Singh v CIT 1943 11 ITR 758-Privy Council. “Income is a

word difficult and perhaps impossible to define in any general formula. It I a word
of broadest connotation.”
3. “Whatever is taxable under IT Act is income”

17 January, 2020
4. Elel Hotel and Investments Ltd. v. UOI, 1989 3 SCC 698-meaning of income
under Entry 82. Should it be receipt minus expenditure that must be taxed or all the
receipt. Hotel receipt tax in 1989-the hotel receipt was taxable w/o deducting
expenditures. This tax’s validity was challenged under Entry 82. Because income
means receipt minus expenditure. The dept. said that receipt minus expenditure is
profit so don’t equate the 2. Income is not defined under any provision and so you
have interpret it by looking at the whole Act. Like cos. Are being taxed on their
turnovers as well. So they can tax the receipt and not just gross receipt minus
expenditure.
Court said here that wide meaning is to be given to the entries. To understand
income under the entry 82, don’t restrict the meaning, the meaning cannot be
subjected to restrictions/limitations. Under the word income, even capital receipts
can be taxed along with revenue receipts. The term income’s got a wide a
connotation.

5. CIT v. GR Kartikey, AIR 1983 SC1671-The AY was 1974-75. The assessee

Kartikey was assessed as an individual, from salary and business income-both
taxable. During relevant accounting year he participated in the All India Highway
Motor Rally and won around 22,000 Rs. He claimed that this amount should not be
taxed as it is not my income. The length of the rally was around 7k kilometres and
one could start from Delhi, Madras, Calcutta or Bombay. You had to drive through
the region and observe all traffic regulations on the route, lesser the penalties, the
more chance of win. This had to check endurance and reliability of the motor
vehicle. The appeal was dismissed by CIT Appeal. Tribunal said-
1. Rally not race.
2. predominantly test of skill and reliability of vehicle.
3. not a game under Section 2(24)(9)
4. not a revenue receipt.

Went to HC-Held in favour of assessee-not income.

1. expression “winnings” in Section 2(24)(9)-is different from winning. Rally not
race.
2. memo of explanation that added clause (ix) -memo of Finance Act-to see intent
of the legislation-also shows that idea behind sub-clause was to rope in windfall
from games of any sort.
3. Section 74A which was also introduced by Finance Act of 1972-set-off and
carry forward provision brought in. they wanted to restrict the meaning-which was
the intention of the legislature.

Went to SC- Many cases referred to, even those decided by PC.
Applied and relied on case-Bhagwandas Jain v. UOI, 1981 128 ITR 315 SC. At
that time, tax on property was not exempt-notional rent concept was there-had to
pay tax on the notional rent. Now this was challenged that since there is no receipt,
how can you tax? SC however, upheld the validity saying income is more than
receipts and even notional income can be taxed. If no income is also taxable under
notional income, then this should also be taxable.

Accepted this is not a race but a contest. The why must not it be income and
interpreted in the widest sense. The receipt can be viewed as income if it partakes
of the nature of income. The inclusive definition is to widen the meaning of the
term income.
 o All revenue receipts are taxable unless expressly exempted under the Income Tax.
o All capital receipts are exempt from taxation unless expressly taxable under the
Income Tax.
(Because it can be set off against a gain)Loss (negative income), turnover, etc. have
also been interpreted as income.

6. Maharaj Kumar Gopal Saran Narayan Singh v. CIT, 1935 3 ITR 237 PC. Here
the court said everything that is taxable is income and whatever is not, is not income.

 Nature of transaction decides whether a receipt is capital or revenue.

 Section 37 of the IT Act. Capital/revenue expenditure is the controversy in that
section.
 Enduring benefit – capital, day to day-revenue? But not completely true!

Missed for18 January, 2020.

(check with someone’s notes for this day) 21 January, 2020

CIT v. Sunil J Kinariwala, 1 SCC 660- K was a partner in a partnership firm-10% share he
had in it. He created a trust and by deed of settlement he gave 50% of his right, title and
interest from that 10% in that trust. There are 3 beneficiaries of the trust. In AY 1974-75-50%
of the income attributable to the trust. Diversion of income claimed by an overriding title.

The ITO rejected the claim on the view being it is an application of income.
The Appellate Commission said diversion of income and allowed claim.
ITAT reversed the Order and Q came before HC.
The HC held that an assignment of 50% of the shares becomes an income of the trust, held in
favour of Assessee. Relied on 2 judgements of the SC.

Meaning of diversion and application of income-1961 SC decision. CIT v. Sheetaldas

Tirathdas, 1961 41 ITR 367 -it is not mere obligation to pay that makes it diversion but the
nature of the obligation that makes it either case. Rights of assignee are limited and not equal
to those of the partner. Assignment is mere transfer of income. The trust is not a sub partner
and is only an assignee. The SC ruled it to be an application of income.

Bijoy Singh v. CIT 1933 1 ITR 135 PC and PC Malik v. CIT, 1938 6 ITR 206 PC.
Bijoy Singh v. CIT A compromised decree of maintenance, a charge was created on the
properties in his hand. The PC reversing judgment of Cal HC held that amount of
maintenance recovered by the step-mother.

In PC Malik case- certain payments had to be made to beneficiaries, it was held by PC that
such payment could only be out of income received by -no diversion of income by source.
Here there was no charge created which gave rise to a right in the first place, in the previous
case.

CIT v. Udayan Chinubhai, 222 ITR 456 SC (1997 case)- reversed the judgment of the Guj
HC, if a man incurs a debt, he’ll have to pay it till its paid in full and would have to pay
interest on it. Deductibility of interest depends on the IT Act. No Q of diversion of income by
overriding title can arise. Any interest payable on the income which is used to maintain his
dependents, it will be application of income. Even charge would not make an income
diversion of income (in spite of there being a decree).

1973 SC-CIT v. Travancore Sugars & Chemicals Ltd. 88 ITR 1 SC. The assess co. entered
into an agreement with state govt. to takeover 3 cos. Agmt. Provided that govt. shall be
entitled to a certain % of annual net profit of the co.(kind of license fee to run biz) -claimed
diversion of income through an overriding title in favour of the state. (Co. can claim tax
diversion and states are exempt from taxation, so here both can claim no liability to pay.)
Anti avoidance measures have been taken to prevent states from misusing powers as tax
haven. It is NOT diversion. It is an application of income. Self-imposed obligations.

CIT v. Indramohan Sharma, 1982 138 ITR 696 Bom HC-HUF case-4 members. Held
diversion.

Charandas Haridas and Ors. v. CIT, 1960 39 ITR 202 SC

Partnership-CIT v. Kanchanlal Talsania 1983 141 ITR 284 Bom HC. Some partners had
retired from biz but had reserved their rights in some forward contracts. Any profit earned at
the time of the lifetime of the partner-has to be given to him and the remainder is to be taxed
which is to be paid by the firm (the new partners).

Mad HC-CIT v. Subramniam Bros., 1999 236 ITR 148 Mad HC- diversion of income case.
You had agreed to pay during lifetime of partners-here diversion by overriding title.

L Hansraj Gupta and Ors. v. CIT, 1969 73 ITR 765 Del.

Palkhivala book can be read for diversion of income. Commentary on Section 4.

22 January, 2020
(This one read it) Bhumisudhar Nigam v. CIT, 2005 144 Taxman 94 All HC; Rajkot
District Gopalak Sangh v. CIT, 1993 204 ITR 590 Gu.j HC-Important cases.

In 2005-Courts are now looking at colourable device and tax avoidance devices.

Rajkot Case-assessee (the Sangh)-in 1969, he approached the Guj. govt. to hand over the
milk assessment project which was run by the govt. the project was running into losses. The
govt. agreed to do so on experimental basis, temporarily for a year and it passed a resolution
for it.
T&C- assessee given license for 12 months to set up project for nominal fee Rs. 1/ month.
All the properties and assets of the project continued to belong to govt. but assessee could
add moveable assets to the project. Govt would not take liability for the additions. The assess
had to arrange all working capital and had to fix price for milk products. There was a
managing committee which had people from govt. and the assessee. However whatever govt.
nominee decides would be binding on the society. One T&C said that whatever profit is
earned by the society from the milk project, then the profit would be first set off against the
loss and the remainder would belong to the society. In 1971, the assessee earned Rs. 1, 25,00
as profit. Out of it 78k was given to govt. for set off losses. They wanted to claim this 78k as
diversion of income to seek exemption from tax. The rest he claimed as his own income.
Is this diversion or application of income?
Here court held it to be diversion of income. But in no sense can you call it a diversion of
income as the profit first belongs to the Society and by paying the set off they’re only
fulfilling their obligation. It is a self-imposed obligation. The court never looked at the aspect
of tax avoidance here.

Bhumisudhar case-UP govt. gave some grant in aid to the Nigam (lad reform corp.-state
owned co.). they were to carry out land reform projects. The grants made against stipulation-
that the grant has to be deposited with personal leisure account of govt (treasury), but if
deposited in a commercial bank as fixed deposit, any interest arising on it, would belong to
the govt. In a particular year, the assessee earned some interest and claimed it be a diversion
of income with an overriding title.
Is this diversion or application of income?
Here court held it to be application of income. Interest always accrues to the account holder
which is the assessee and it is only applied in a different way. Income if reaches assessee as
his own income, then it is application of income. It is only by way of obligation that govt. is
receiving the interest. Nature has to be seen.
And if the interest was being deposited in the govt. account-leisure account then it is govt.’s
money because the account is in the name of the govt.

In some cases you can take angle of expenditure while looking at diversion of income (eg. Of
buses-like raj Corp giving buses to a co. to run based on a license fee of the profit they earn
from running the buses. That cannot be said to be diversion of income, but you can say
maybe call it expenditure and see how IT Act deals with it.)

CIT v. Mathubhai C Patel, 1999 238 ITR 403 SC-MCP received/inherited some property
from father due to succession. The father had on the basis of the property, a loan was taken.
This was the property which was inherited. The property was placed as a share in the Bank.
Dividends accrued on the share. (So along with property, the share is also inherited by the
son. The son has to inherit liability of paying interest on the share as well) Son says dividend
accrues on share and interest is paid by me, so first set off the dividend with the interest or
sue the dividend to fully set off the loan amount. He claimed this to be a diversion of income.
Court said- NO. It is NOT diversion of income. Whether interest is deductible or not depends
on the provisions of the IT Act.
CIT v. L Bansidhar, 1968 67 ITR 374 Del HC- assessee succeeded father’s share in a private
co. with a clause in the AoA to the effect that successor has to pay a portion of the dividend
to his sister, which the co. would directly pay to the sister. This is a case of diversion of
income. Even though sister is not successor of share, but since the portion of dividend by
virtue of the clause belongs to her. So son is liable for his own, and sister is liable for her
own. It is not self-imposed as an obligation. The division of the income is taking place at the
source.

CIT v. Tollygunge Club Ltd., 1977 107 ITR 776 SC- SC held that surcharge to be diversion
of income. A society organising horse races. Fees for coming to stadium -there is a surcharge
charged on it. So base 10 plus surcharge of 1-for charity. Whether this Rs. 1 is income of club
or diversion of income? Held Rs. 1 to be diversion of income.

CIT v. Madras Race Club, 1996 219 ITR 39 Madras-similar to above.

Performing Rights Society v. UOI, (1977) -SC judgement. Case on diversion of income v.
business expenditure. Read it.

Court nowadays looks at whether charitable device is a camouflage or genuine device to

check tax avoidance.

CIT v. Jodhpur Co-op Marketing Society, 2004 275 ITR 372 Raj HC-on statutory
obligations.

SC-Asha Vijay Raghavan v. CIT 8 Jan. 2015-on statutory obligations.

If money/fund is in control of assessee- application of income. If not then diversion of

income.

(Read) Amitabh Bachhan v. Deputy CIT, 2005 3 SOT 428 Mum. ITAT- On arbitral awards-
any outgoing as a result of arb award is a diversion of income. Mix of legal and contractual
obligation. Co. he had made-ABCL-running in loss-insolvent-transferred money from ABCL
to KBC. Entered into agreement with co. there was a condition to transfer some money,
Court said have to do it, based on the agreement and arbitration award.

23 January, 2020
Agricultural income

Defined under the IT Act. This definition is followed in other Acts as well. Provided in the
Constitution as well, that you can borrow the definition of agricultural income from the IT
Act. Section 2(1)(a)-there are 3 categories (a), (b), and (c).

Agricultural income-earlier was taxable, now exempt. Changes made in 1972-tried to be

taxed indirectly.

Exemptions from IT Act-Section 10(1)-agricultural income is exempt.

a) Rent/revenue derived from land and land must be located in India. Rent and
revenue is also not defined.
b) Used for agricultural purposes. But agricultural purpose is not defined.
c) Income or revenue that arises from process of agriculture.
d) Income from farmhouse/farm building.

“Ordinary employed process”-limits the scope of the definition. Say making sugar from
jaggery.

Depends on if there is market for the product from which you’re converting. For eg. If I
converts sugarcane to sugar and sugarcane ‘s market exists, then not ordinary employed
process.

“Agriculture”-coming from the field.

“Agricultural purpose” defined in one SC case which has limited the meaning of agricultural
income. CIT v. Raja Binay Kumar Sahas Rao, AIR 1957 SC 768 (Jus. Bhagwati)-appeal
from Cal HC, the court reversed finding of Cal HC as agricultural income.

There were spontaneously grown trees, some planted on 6k acres. Have done irrigation,
pesticides, etc.-done things to preserve them but did not plant them. There was sale of these
trees. There was earning through this sale which was claimed as agricultural income.
(because since 1918 agricultural income was exempt). Cal HC held it to be agricultural
income. But SC said no it is not.

Cal HC said agriculture and agriculture purpose not being defined in the Indian Income Tax
so they used general sense or the understanding in general parlance. Cultivation of field-
meaning. Use of skill and labour on land as well. Discussed dictionary meaning as well.
Relied on numerous cases as well. Such as-1949 case of Cal HC only Comm. of Agricultural
Income WB v. Raja Jagdish-where exemption is provided by the Act, the same must be read
liberally and in favour of the assessee. In another case D Mohd. Mian v. Hulas Narayan
Singh where orchard was held to be an agricultural land and sale of it was agricultural
income. 1930-CIT Madras v. Mana Vedan Tirumalapad, - sale of spontaneous grown trees
was held to be agricultural income as wide interpretation was to be given.

Mustafa Ali Khan v. CIT of UP 1945-Awadh Court-cases in favour of revenue where

spontaneous grown trees were NOT held to be agricultural income.

 Basic Operation -expenditure of human skill and labour on land-preparing land-sow

seeds, etc.
 Subsequent Operation-when produce sprouts after performing Basic Operation, then
there is need to preserve the growth.
 Harvesting, pruning and sale.

Jus Bhagwati said Basic Operation is must for agricultural purpose. Performance of there two
w/o Basic Operation, it cannot be said to be agricultural income.

E.g.-A-owner and B is lessee-rent of 5k/month. A has done Basic Operation on the land and
land is given to B to take care and B can sell produce grown on it. B’s earnings would be
agricultural income and same with A. But if you apply case of Jus. Bhagwati, then B is not
earning agricultural income and only A is, since he performed the Basic Operation.

E.g.-A gives land to be B after performing Basic and Subsequent Operation. And B only does
Harvesting, pruning and sale in the market. For A it is agricultural income and for B it is not,
as per Jus. Bhagwati’s test.

E.g.-A rents land to B on a rent basis. B uses land for dairy farming/aquaculture. And B pays
rent to A for land. For A- agricultural income? No. Because no Basic Operation performed on
the land.

E.g.-You have piece of land and you let out the land for grazing of cattle and you charge
money for it since you grew grass on it. Is this agricultural income? Yes, since Basic
Operation performed on the land. But say if spontaneous grass was grown and you charge,
then not agricultural income since no agricultural purpose present here. Hence, we see that
there is a limitation of the term agricultural purpose. Earlier this term was not defined to
ensure widening of the scope of the definition. But this position stands changed now with
strict meaning of agricultural purpose.

However, agricultural land is not defined. It can be “any land”. Any land used for agricultural
purpose would make it become agricultural income.

Whether it is rent or revenue derived from agricultural purpose would become agricultural
income. The purpose has to be agricultural.

E.g.-spontaneously grown flowers-and they are sold. This is not agricultural income since no
basic operation has been performed.

Once basic operation is performed, it will always be agricultural income. Need not perform it
repeatedly.

24 January, 2020

CIT v. Kamakhya Narayan Singh, 1948 16 ITR 325-

Owner of land, leasing land and collecting rent. Rent has been defaulted on, paid later with
arrears and interest. Arrears of rent would also be agricultural income. But can interest on
such arrears also be seen as agricultural income? No. Not derived from land but on from
agreement that says you have to pay the money with interest.

CIT v. Bachha F Guzdar, AIR 1955 SC 74- Have a look at this case. Hr dividends were
taxable in the hands of SH and now it is taxable in the hands of the co. Right now, also govt
is planning to change it back to SH as it is more beneficial to small cos.

If I receive dividend from a company if it is coming from agricultural income? No. Because
source of dividend is SH-ing and not the land. “Not derived from land”.

CIT v. RM Chidambaram Pillai, AIR 1977 SC 489- If you are a partner in a partnership
firm. The firm’s work is only agricultural, so income of firm is agricultural. If partner is
receiving salary or any profit, will it be agricultural income? Yes. Because firm and partner
same entity.

In UK partners are taxable and firms are not, now it is firm’s liability in India, unlike earlier
position.

Sub-Section B- Any income derives from such land (land used for agricultural purpose)
by any agriculture or by the cultivator or receiver …..

“Ordinary employed process”-If I change the produce itself say, convert wheat to wheat
flour, then can I say it is Ordinary employed process and claim it be to be agricultural
income?

If there is a market which means that which available in the nearby region/within reach (this
will depend on the nature of the produce-e.g.- for flowers which are perishable in a day, from
Jodh even Jaipur cannot be a market, but say if shelf life is 3-4 days then even Maharashtra
can be a market). Even 1 person is a market. Market is very subjective and there is no
particular definition for it.

Even 1 person is a market. Cases says that-

 Brihan Maharashtra Sugar Syndicate v. CIT, 1946 14 ITR 611 Bom.

 Thiruarooran Sugar Ltd. v. CIT, 1997 227 ITR 432 SC.

“Ordinary employed process”-defined in case below-what in that society is followed. For

e.g. Producing rice out of paddy will be ordinary process, but polishing it would not be
ordinary process. This ordinary process term has been used to restrict the meaning else there
is no end to what is agricultural income. But if you can prove there is no market, then you can
say ordinary process. The term is sued with “fit to be taken to market”-meaning if I say
mulberry leaves has no market and I need to convert it to a certain form for taking it to
market, then that could be said to be ordinary process, because mulberry leaves cannot be
consumed as it is. These days it is very difficult to prove that there is no market for anything.
Also, people do not produce things for which there is no market (usually). Agriculture is not
at all a business which is why it is exempted. When you show a business intention, then there
is imposition of tax.

In a commercial crops -partly agricultural and no-agricultural

Rules, 7 (general rule-if particular process does not amount to ordinary process, value
addition is business), 7A (covers Rubber which is converted to latex, then 65% is agricultural
income (exempt from tax) -from sale and rest is no agricultural income), 7B (coffee grown,
cewed and roasted or any other process-65% and 35%. Coffee grown and cewed075% and
25%-non-agricultural income), and 8 (tea-60& agricultural income and 40% non-agricultural
income) of Income Tax Rules

K Lakshmanan v. CIT, 1999 239 ITR 597 SC-here he was produces Mulberry leaves
(agricultural income-the production of the plant) and selling the silk from that. Will this be
ordinary process? No, it is not ordinary process. Not ordinary process, it is a technical
process with business intention.

Say if I am producing Eucalyptus, but producing oil and selling it- will that be ordinary
process? Not ordinary process, it is a technical process with business intention.

Income from farmhouse/ farm building

Use of farm house-Cultivator/tenant can be used as residence. Another use can be storage. Or
use as an outbuilding. Where is income coming here then? Or cultivator or landlord in kind-
and Assessed to any land revenue/local rates then it should be situated outside of urban areas
-it is within 8 km jurisdiction of urban authorities (development authorities’ jurisdiction)-
exempt.

1. Rent or revenue from land via cultivator. (this is covered under Clause a which is
exempt)

2. Rent of land.

3.If third party is using building, not my income at all or letting out farmhouse for
shooting of film, etc. not a person’s income.

4. This farmhouse should be in immediate vicinity of the land.

5. Assessed to any land revenue/local rates then it should be situated outside of urban
areas -it is within 8 km jurisdiction of urban authorities (development authorities’
jurisdiction)

Integration of agricultural income with non-agricultural income. -As per Finance Act, 1972-
scheme given. (also-Rates on which Income tax is charged are under Finance Act)
49th Report of LC of India-read. Whether constitutional or unconstitutional?
 27 January, 2020

Controversy regarding income from nursery business as agricultural income or not?

Bibhuti Narayan Singh v. State of UP, 1967, 65 ITR 364 All. HC-decided income from
nursery business is NOT agricultural income- no use of land or agricultural purpose.

CIT. Saundarya Nursery 2000 241 ITR 530 (Mad HC)- decided income from nursery
business is agricultural income. This is because there is no definition of agricultural land in
the Act so we can’t take the general meaning of it. So say if you perform basic operation on
pot why not construe it as land only?
Section 2(1)(a)-Explanation 3-“deemed to be agricultural income”-increased scope of the
definition.

In 1972-Raj Committee-constituted and even 2002 Kelkar Committee-taxability of

agricultural income under IT Act-gave recommendations on it. State subject matter-to tax
agriculture but because Central govt. has infrastructure with a department, that’s why may it
should be put in Concurrent list and then should be apportioned b/w state and centre. Centre
could essentially help to collect. This was not accepted.

Partial integration of agricultural income with non-agricultural income was again spoken
about by Raj Committee. 49th LC Report. -there is no need of amendment, integrate
agricultural income with non-agricultural income and this would be within the constitution.
Start with talking about tax evasions and how black money is hidden in the name of
agricultural income. 60% black money as agricultural income. So bring this within the tax
slate.

Integration scheme:
1. Applies to individuals, HUF, association of persons (AOP), and artificial juridical persons-
4 categories covered. Local authorities, firms (LLP) and companies are exempted.
2. Non-agricultural income must exceed exemption limit (Right now it is 2.5 lakhs) and Net
agricultural income must exceed Rs. 5000 per year. (this amount continues even today).

CALCULATION:
1. First add Non-agricultural income with your net agricultural income and then calculate tax
liability.
2. Net agricultural income add this with total exemption limit.
E.g.-
Salary-8 lakh-taxable. Net agricultural income is 2 lakhs.
Scheme will be applicable as individual, limit exceed and NAI is also within the prescribed
limited.
Add 8 lakh with 2-10 lakh-1, 25,000 is liability.
Add 2 lakh with 2.5.=4.5 lakh and the calculate tax liability -Rs. 10, 000
Total liability would be 1,25,000-10,000=1,02,500.

This is a case of colourable legislation. They try to increase income to bring it to a higher slab
and then reduce the exemption to show that they have reduced the tax liability.

Upheld the validity of the formula in these cases:

K J Joseph v. ITO, 1980 121 ITR 178 (Ker HC)
KV Abdullah v. ITO, 1986 161 ITR 589 (Karnataka HC)
Union Home Products Ltd. v UOI, 1995 215 ITR 758 (Karnataka HC)

Problems with the taxability: No one maintains receipts and expenditures so which why there
is barely any filing of returns. The returns are only filed in cases where there are large areas
of land under agriculture and the same is known. Joint family concept-only 1 source of
income-so then this scheme would not be applicable. For it, you need to have other sources of
income. Thus, no one declares and no one is really paying tax.

Kelkar Committee raised this and said not a proper way to tax, so create an exemption limit
like 2.5 lakhs is there for income or create land quantity wise restrictions so as to exempt
small farmers from taxability. Don’t exempt companies and farms-co-operative farming.
These have not been accepted by the government and till now there is no tax on agricultural
income.

RESIDENTIAL STATUS AND TAX LIABILITY

Tax liability depends on status. We do not follow nationality or citizenship status. It
depends on no. of days of stay in India. Suppose there is a company resident in India but the
Place of Business is outside India-they are taxable for their worldwide income in India
because it is an Indian co.

3 Conflicts:
Residence v. Residence
Dual residency-then taxable for world-wide income in both countries where you are resident.
Thus, DTAA comes into picture here.

Source v. Source
If in 2 countries, then liable to tax in both countries.

Residence v. Source (Most controversial)

Resident of India on the pay roll of a British co. (basically foreign co.-they are paying salary)
Also on deputation in Singapore. Just because you are rendering your services in the foreign
country, then source is there. But resident in India. Which DTAA will apply.

28 January, 2020
Section 5 defines scope of income and liability of tax on the income. Section 5 can be
divided into 2 categories-

Resident (Individual/HUF)
 Ordinary
 Not ordinary
Non-Resident –
Under Non-resident, only 2 categories of income are taxable.
 Income received/deemed to be received.
 Income which accrue or arises or is deemed to accrue or arise in India.

Also, Firm, AOP, Co., etc. -Either Non-Resident or Resident (not Ordinary or not ordinary)

Which incomes are taxable?

 Income received/deemed to be received.
  Income which accrue or arises or is deemed to accrue or arise in India.
 Any income which accrue or arises outside India. Note that this category only says
which “accrues or arises” outside India. So even if receipt has occurred, before
accrual, it is not taxable.

Also Note: Source is immaterial-receipt which is income is important.

So even if source is outside India, then also income is taxable.
Rarely does receipt come before accrual.
Even if right to accrue arises, you are taxable. E.g.-Advance payment. Your right was not
there but you’ve received it still.

(given in Proviso) For Not Ordinary Resident-income is taxable only when

 Income received/deemed to be received.

 Income which accrue or arises or is deemed to accrue or arise in India.
 Any income which accrue or arises outside India. But only when the income which
arises from a business or profession that is set up in India.

2 Explanations which further explain receipt.

Also, you cannot tax both accrual and receipt. If accrual has been taxed, you cannot tax
receipt.

PERSONS:
1. Individual
2. HUF
3. Co.
4. Firm (including LLP)
5. Association/body of individuals
6. Local authorities
7. Artificial/juridical person not falling in any of the above categories

For these 7 categories there are rule of taxation.

INDIVIDUALS:
Section 6 (1) read with Section 6(6)
 Has been in India for at least 182 days or more in a relevant previous year.
In aggregate has to be 182 days, anywhere within India. So can be divided across
months. Even if you stay as tourist for more than 182 days or 182 you will be viewed
as resident. Intention of stay is not important.
 Or, In the relevant previous year-has to be in India for 60 days and more plus in
preceding 4 years of that relevant year for 365 days or more.
365 days is in aggregate in the preceding 4 years.

E.g. 1 April 2019 -31 March 2020-PY-For tax purpose-this is important.

1 April 2020-31 March 2021-AY

Exceptions:
1. Citizen of India leave India (in a relevant previous year) as a crew member of a merchant
ship-60 days will be replaced by 182 days -stay has to be larger in India essentially, so
beneficial. Leaving India for “purposes of employment”- means you are in employment in
India but in relation to the employment, you are leaving the country. That employment could
be business/profession/govt. job/private job).
2. Citizen of India or PIO -who visits India -182 days instead of 60 days.

In sub-clause (c) of Section 6, when exception applies, only (a) part applies and not (c)-
language is not correct. Because when you say substitute the sub-clause (c), essentially
you’re requiring only fulfilment of sub-clause (a) of Section 6.

182 days is a Question of Fact. Stay in India is a matter of tax-planning.

Suppose a person came to India on 1 Jan 2020-stayed till 31 Aug, 2020. He will not be
considered a Resident -because the stay is divide b/w 2 financial years.

Person specific status and not source based status. Resident for one source, resident for other
sources too.
In cases where you’ve stayed for 181 days 3 hours-non-resident. Have to prove did not stay
for 182 days.

British Gas India In Re, 2006 155 Taxmann 326 Authority for Advance Ruling (AAR),
New Delhi. Here it was said-for purposes of employment, your employment is in India and
you’re going out for purpose of the employment and not to seek employment.
AAR is now under GST.
AAR only decides on a pure Q of law -whether liable in India or not. You can seek ruling
before or after the transaction. The AAR rulings are binding on the Depptt. and assessee who
sought the ruling. It is also binding only for the transaction for which the ruling was sought.
Not binding on quasi-judicial and judicial authorities such HC/ITAT. There is no appellate
body under the authority. You can seek writ or SLP.

Anurag Chowdhary In Re, 2010 190 Taxmann AAR 2006- 365 days rule is not essential of
exception is applied. Only first rule of 182 days is applicable then.
Vijay Mallaya v. A CIT, 2003, 131 Taxmann 477 Cal ITAT-Even when the Assessing
officer accepts the claim of the assessee and decided that assessee is non-resident then he is
duty bound to record reason for why he is not holding him a non-resident. Dept. usually
presumes a person to be resident. Presumption is always in favour of residence unless proven
otherwise.

When Non-Ordinary Resident-Section 6(6)-

(reading the definition in a positive wording) Resident and ordinary resident -you are in India
for at least 2 PY put of 10 PY as resident or 730 days or more in 7 previous years.

Remember:
 Basic condition and additional condition-ordinary resident.
 No basic condition-not resident.
 No additional condition-not ordinary resident.

29 January, 2020

Tie breaker Rule-how DTAA comes into picture-when you are resident of 2 places/states.
Under DTAA there is an Article 4 : OECD or UN Convention-take Article 4 of it
To claim under 2 countries’ DTAA you need to be a resident (could be any of these:
national/citizen/domiciled) of either countries.

Tie-Breaker Rule-follow the sequence: He shall be deemed to be resident of contracting

state where he has a permanent home available to him. If he has permanent home available in
both countries then deemed to be resident of the state where he has his centre of vital interest-
closer personal and economic relations. Permanent home means fixed place, not necessarily
have to own it. Basically wherever you reside for longer period of time. If suppose your
economic relations are said to be closer to US but social relations are closer to India then
third test applies which says that-deemed to be resident of contracting state in which he has
habitual abode. But if habitual award is in neither or both then he is deemed to be a resident
of where he is a national and if he is national of both or neither, then MAP-mutual agreement
procedure settles the conflict.
Note: this Rule applies for Individuals.
Section 6(2)-HUF and Firm (check this once)

Management and control should be in India. Even if partly controlled in India, resident of
India. Presumption is in favour of residence in case of HUF, Firm and AOP.

Look at Karta’s position as an individual.

Section 6(3)-Company as resident.

Indian Co. or Place of effective management in that year is in India. Why change from
control and management?-to comply with OECD obligations. Tie breaker earlier we used to
apply place of effective management in that year . 3 tier control of any co-policy,
management and admin decisions. Policy decisions-from where you get? If that’s in India
then you’re Indian resident in that year. Control and management caused problems which is
why this was changed in 2016.

OECD Commentary (2010) on “place of effective management”(POEM) – is the place where

the key management and decisions that are necessary for the entity’s conduct of business or
in substance made. The place will. Ordinarily be the place where the most senior person or
group of persons takes decisions. However, no definite rule can be given and all relevant
facts and circumstances must be examined. There is always only one place of effective
management while there can be more than one place of management-so to limit the def. this
provision was changed.

See also -Draft guiding principles for determination of place of effective.. Dec. 2015 circular
of govt. Para 5
Active income-income from biz/main activity
Passive income-income from capital gains/royalty/dividends/interest, etc.
If passive income is not more than 50% then resident in India.
Determination of POEM is a question of facts.

Cases:
 Suvayya Chettiar v. CIT, 1951 19 ITR 168-Test of Control and Management
discussed by SC. -basically where is the head and brain (Board-de facto control not de
jure (as that is with SHs) of the co. (this is related to HUF)
 Erin Estate v. CIT, 1960 34 ITR 1 SC-This case is in relation to Partnership firm.
 Brazillian Railway Co. Ltd. v. Cartor, 3 TC 407 House of Lords.

Section 6(4)-every other person-residuary provision. This will include Local Authorities
and artificial juridical person. Presumption of being resident of India unless rebutted.

By virtue of residence- “liable to taxation therein”-what is the meaning of this phrase?

DTAA does not create liability-it is only an agreement. Liability has to arise under a statute
only. You can only claim benefits or relief under the DTAA. It saves you from taxation itself
and not just double taxation. DTAA also saves from non-taxation. Suppose you are resident
in UAE where there is no tax on individuals but you earn in India-so DTAA benefit would
cause you to not pay tax anywhere as for paying tax in India you need to be resident and that
you are only in UAE. Similar thing happened in Vodafone case. UOI v. Azadi Bachao
Andolan, 2003 263 ITR 706 SC-a case referred to in Vodafone decision also. Here govt. is
pleading to save the circular. Revenue authorities challenged its own circular. Circulars are
binding on the Dept. and they cannot challenge own circulars. No quasi-judicial or judicial
authority is bound by them. This case took a different opinion from McDowell’s case (tax
avoidance (legal unless done by a colourable device) and evasion (illegal) case-discussed
colourable device). Substance (conduct) over form (place of incorporation) -colourable
device. The SC declared treaty shopping to be legal.

30 January, 2020
UOI v. Azadi Bachao Andolan, 2003 263 ITR 706 SC
Section 119 empowers CBDT to clarify circulars. Only administrative things they can
challenge and not procedural.
Circular No. 682-issued on 30 March, 1994-the GOI clarified that capital gain of any
resident of Mauritius by transfer of shares of an Indian co. would be taxable only in Mauritius
and not in India. Due to this a lot of FII in India. Why no tax? Because we exempted tax in
India and in Mauritius there is no capital gains tax. They claimed to be resident of Mauritius
to claim benefits.
In 2000, IT authorities issued notice to these FIIs which were functioning in India on the
basis that these cos. Are shell cos. And they are not resident of Mauritius-so this is a use of a
colourable device to avoid payment of tax.

April 4, 2000 Press note issued that IT Dept.’s view on show-cause notice is not that of
GOI.

Another circular was issued-789-13 April, 2000- to clarify previous circular and to clarify
the govt’s position. It was notified in official gazette. “the provisions of Indo-Mauritius
DTAA apply to residents of both India and Mauritius’s residents…”- this circular was
challenged by Azadi bachao saying it is ultra vires to Section 119. Power to tax and exempt is
with the legislature and the executive cannot take this away. If govt. wanted to exempt they
could have amended the Act and executive by circular cannot exempt. Writ petition was
filed.

HC quashed the circular:

1. Prima facie by reason of circular-no direction has been issued.
2. CBDT cannot issue any instructions that would be ultra vires IT Act. Cannot interfere in
assessment procedure. They are saying you accept condition of resident. Criteria is fixed
under Act-it is exclusive.
3. It officer can lift corp. veil to see if co. is resident of Mauritius or not and. Any attempt by
CBDT of this quasi-judicial power is against IT Act.
4. Conclusiveness of the resident as a criteria certificate is not contemplated either under
DTAA nor under IT Act to determine status of person-whether statement is conclusive or not
should be provided in a legislative instrument such as the Evidence Act. DTAA is an
agreement only. Executive cannot decide what doc is conclusive proof.
5. Treaty Shopping is illegal-colourable device and is forbidden. (McDowell and Co. Ltd. v
CTO, 1985 154 ITR 148 Sc- case looked) this case was distinguished from Mc Dowell which
allowed IT dept. to life corp. veil to uncover use of colourable device. Colourable device
principle was also developed in this case (Mc Dowell). Here again court reiterated that it’s a
function of assessing officer to see there is no conscious avoidance of tax and uncovering of
colourable device by lifting corp. veil.

Circular cannot decide something and is not binding on court. Anything conclusive must
come from legislature basically! Shell cos. Were tax avoidance-colourable devices.

SC reversed judgement of HC-

Revenue/IT dept/GOI is pleading enforcement of Circular-they can enjoy such exemption
even if they are treaty shopping or opening shell cos.

Assessee- side- Prashant Bhushan’s NGO-said circular was unconstitutional.

 Resident of a contracting state can claim benefit under DTAA-Article 4.

 Section 4 (charging provision) and Section 5 (incidence of tax/scope of total income-
what is taxable)-start with “subject to provisions of this Act…” -there is limitation of
power under the IT Act.
 Section 90-which is an enabling provision which is delegated legislation allowed
Executive to enter into DTAA with other countries-limits the power of IT Act-Special
(DTAA) provisions override general (IT Act) provision. DTAA provides relief- and if
that relief is granted then IT Act cannot take the relief.
 Article 4 of DTAA-resident of a contracting state-resident of either and liable to tax
therein. To claim benefit you need to be resident-and you have to liable to tax by
virtue of being resident-you are not fulfilling either-as not resident and not liable to
tax in Mauritius-that was the argument of Azadi Bachao Andolan. But authority said
that issue of certificate is a valid criteria under Article 4’s language (…“any other
criteria”).
“Liable to tax”-legal ground but not fiscal facts. Subject to tax and actually paying tax
are fiscal facts. Exemption means you are not subject to the tax and not that you are
not liable to tax. They discussed many cases for that.
SC said enjoyment of no tax does not mean that you are not liable to tax. Only you are
not subject to tax because of some enjoyments in that country.

Ingmer Johanson’s et al. v. USA-heavy reliance by Respondent on this case but SC

distinguished this case.
Johanson-citizen of Switzerland and was a boxer. Had earned money in US and was
called to pay tax. He started a co. in Swiz and became and employee and said all of
his receipts were those of the co. and as an employee that he received. The co.
received all earnings and co. gave them to me-he said-so earning arose in Swiz.
Sought to claim benefit of DTAA b/w 2 countries. Under it any income of labour etc.
was exempt and was taxable only in US. There was no doubt that Johanson was not
present in US for 183 days. Rev Authority said residence is not defined under DTAA.
So that’s why either you go to US/Swiz IT provisions. You are earning income in US-
source and you float co. in Swiz and become resident of Swiz. US Court said-this is
creation of colourable device to minimize tax liability. No def. of resident in DTAA
so that’s why cannot rely on it.
Court said this case cannot be applied as def. of resident is there in India’s DTAA.

In Re Mohasin Ali Mohd. Rafi, 1995 213 ITR 317 Authority for advance ruling-
India UAE DTAA was in issue-he was a professional resident of UAE and has some
income from India. Resident of UAE is taxable only in UAE as per DTAA. Indian
authority said he is not taxable in UAE as he is not liable to tax there as there is no
personal income tax in UAE and he is liable therefore under IT Act of India and liable
based on source in India. Authority for advance ruling-liable to tax does not mean
 subject/payment of tax-if you are resident of a country-you are just enjoying
exemption-you are liable even then by virtue of being a resident.

Book quoted by Court-called-Lord McNair The law of treaties-Oxford Publication-

1961 published. In this case of Azadi Bachao case-in case of inconsistency b/w
DTAA and IT Act-DTAA will prevail. If there is no def. under DTAA, then domestic
law will be used for that purpose.

As for Treaty shopping-Court said-if govt wanted to limit power of DTAA then it
would have been mentioned in the DTAA-so a third country resident is not limited
from claiming benefits then this is allowed even if it is a colourable device. Also see
that this judgement came at a time (2000) when there was need of investment which is
why the dept. was pleading for treaty shopping and now in the Vodafone case there
was a discussion on Azadi Bachao is bad law and going back to Mc Dowell’s case.
Pranab Mukherjee himself said that India is not a tax haven in his speech.

MLI-is a kind of multilateral amendment to the DTAA. You can amend it to amend
the DTAA. Every country creates its own tax havens to gain benefits of them.

31 January, 2020
Take for this day.

ITO v. Ramesh Kumar Goenka, 2010 5 Taxmann 17 Mumbai ITAT-ITAT judgements are
binding on all ITATs in India. Discussion of “liable to tax” as done in Azadi Bachao
Andolan

Mohasin Ali Mohd. Rafi case- meaning of-permanent home and centre of vital interest.

Deemed has extended the scope of received. Section 9-1972 it came. Deeming provision
extended the word receipt and created a legal fiction. It makes something taxable. If place of
receipt is outside India, then cannot be taxable in India-but under deeming provision you
become taxable in India. It brings a lot within scope of taxation. Removal of Section 9 from
IT Act then there is no need of agreements with other countries (such as DTAA). Majority
cases are also Section 9 cases where things are brought in to be taxed under Section 9.
E.g.-can you tax income given to HSF where accrual and receipt has taken place outside
India?- Yes under Section 9-if services are utilised in India. But HSF is not resident? The
constitutional validity of Section 9 was challenged saying how can you tax a person with no
correlation to IT Act. They want to shift the place of receipt through deeming provision. It is
not just receipt but constructive receipt.

Keshav Mills Ltd. v. CIT, 1953 23 ITR 230-first occasion means-first place of receipt, after
which whatever is transferred or used is remittance.

Turner Morrison & Co. Ltd. v. CIT, 1953 23 ITR 152 (SC)-received by an agent

Azam Jahi Mills v. CIT, 1976 103 ITR 449 SC- Negotiable Instruments cases-criticised by
Palkhiwala also. Post office works as agent.

Date of receipt is immaterial and place is immaterial-Raja Mohan v. CIT, 1967 66 ITR 378
SC. Received or deemed to be received in India. Section 5 is always subject to DTAA-section
90.

Trinibad Lake Asphault Operating v. CIT, 1944 13 ITR 14 Privy Council-there is. SH
which owed some money to a co. that had supplied goods to it. There was an agreement b/w
two persons-that don’t pay dividend (co.)-adjust it with my loan-he said to co. then SH said
he did not receive any dividend so not liable to pay income tax-but it was held he has to pay
even if he did not receive the money.

Raghav v. CIT, 1962 44 ITR 720 (SC)-5 bench decision-resident had to pay commission
which to a non-resident – treat it in your account as credit and I will collect whenever I come
to India. Receipt is taking place in India and he would be taxable in India. Place of accrual
was outside India and receipt was in India.

Toragulboi v. CIT, AIR 1927 Lahore 512-An agent whose terms of commission were not
settled and he sent some goods in Europe and received proceeds in Europe on behalf of his
principal. He then transferred the whole money to the principal in India. Then he was
supposed to receive commission. So receipt was in India as terms were not settled and the
decree of settlement was passed in India and he had also did not deduct any proceeds. He was
thus liable in India. Now it would be subject to DTAA as there was no DTAA earlier.
Accrual arose outside India. but if he had deducted money outside India, then he would be
liable outside India.

Deemed to be received-Section 7
Interest accrual on PF is also considered as income-deemed to be received. Same in NPS. In
addition to this.

1 February, 2020
Received and deemed to be received-important!

Section 9- Income deemed to accrue or arise in India

Creation of legal fiction has extended scope of taxing to even outside India as well. Section 9
has been subject to multiple amendments and explanations and provisos have been added
multiple times.

Section 9 (1)(i)-4 categories of income covered under it-

1. through or from business connections in India.
2. through or from any property in India.
3. through or from any asset or source in India.
4. through transfer of capital asset situate in India.

Assets-includes movable assets. Property mainly refers to immovable property.

“Through or from”
Through or from means- Added by explanation 4 “For the removal of doubts, it is hereby
clarified that the transfer of all or any rights in respect of any right, property or information
includes and has always included transfer of all or any right for use or right to use a
computer software (including granting of a licence) irrespective of the medium through
which such right is transferred.”

Amendment made in 2012 with retrospective effect after Vodafone case.

The comma after directly or indirectly-will be applicable to all 4 categories? Yes. But SC
took a different view in Vodafone case.

Neither tenant’s location nor landlord’s location are important. But even then property is
taxable as the property is situate in India. income from any kind of property would always be
taxable in India if such property is situated in India.

“Source of income” is a wide term and can be anything-dividends, interest, royalty, etc.
resident may be outside but if source is in India, taxable in India.

Lastly, transfer of capital assets clause-means any income which arises directly or indirectly
from transfer of capital assets -there has to be a transfer as per the def. of it as per IT Act-
defined under Section 2(57) of the IT Act + there has to be a capital asset and thirdly, it has to
be situate in India (within Indian territory-a location which could be fixed)-assets could mean
to be movable/immovable/corporeal/incorporeal/tangible/intangible, etc. Transfer has a wide
def.-sale/relinquishment/exchange/conversion/acquisition by govt.. Also note that def. of
transfer under TP Act is not applicable here as IT Act defines transfer separately.

Vodafone case-main issue was where was the capital asset? Here there was transfer of share
and with that underlying assets-the control of which was also transferred. It was an indirect
transfer as the transfer of rights gave you assets and business. SC said share is not in India so
there is no question of underlying assets. Court also said that if you look at legislative intent,
whether the word directly and indirectly is applicable on it or not?- they would not have used
word “situate” which employs a fixed location and since that was not in India-therefore, the
word indirect was held to be not applicable to 4th category as the fixed location of the assets
was important.

(2012 case) Para 57 of Judgement- Azadi Bachao needs to be overruled- Revenue’s

arguments- SC discussed Section 9 here in the context that Section 9 has to be looked at by a
“look through” approach (substance) and not “look at” approach (form). Before explanation
that was added in the bare provisions, to explain “through”-it was discussed in this case. SC
did not find merit with submissions of revenue and said that (para 71)-Section 9(1)(i) broadly
there are 4 items of income which are distinct and independent of others and hence it’s not
necessary that income falling in one sub clause needs to fall in others too.
A legal fiction has a limited scope and cannot be expanded by giving a purposive
interpretation.
SC said asset has to be located in India for it to be taxable.

Explanation 5 added after Vodafone case- which basically drew from whatever the
judgement had said.
Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and
has always included consideration in respect of any right, property or information, whether
or not—
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.

Explanation 6 added in 2015-deriving substantial value.

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression
"process" includes and shall be deemed to have always included transmission by satellite
(including up-linking, amplification, conversion for down-linking of any signal), cable, optic
fibre or by any other similar technology, whether or not such process is secret;]

Remember-Investment always capital and trading always revenue

Section 9 was challenged before Guj. HC-but it has ruled to uphold its validity.

If there is a DTAA b/w countries, then you can use amendments in domestic legislations to
override the DTAA. After this amendment in 2013, there is a case -Sanofi Pharmaceuticals.
-court reiterated this. However if there is no DTAA, then co. is taxable in India.

In case of assets such as IPR-

Suppose there is a US co. which owns trademark, technical know, etc. type of rights and they
have given exclusive license to use the patent/TM to their Indian subsidy w/o any license fee-
the TM is registered in India. the Indian co. is manufacturing the drugs and have created a
market inside India. but after 4-5 years, the US co. wants to sell the rights to another co.
outside India (say it is Co. Y - Mauritius based)-through an SPA-Co. Y paid 5M to US co.
and paid 7 M to Indian co-to extinguish the right- this 7M will be covered under Section 5 of
the IT Act.

Question of 5M to be taxed in India because the assets for which it is paid are based in India-
whether it taxable in India?- This is a transfer of capital assets. In this case owner is in USA-
the asset is in US as the right is with the owner always.

Transfer of trademark-market is in India-that’s why payment of 7M to Indian co.-as they

want to purchase the whole market where the brand has gained popularity. “Impact” of
transaction is in India and therefore, the taxation should be done in India.

In Re Phizer Corporation, 2004 271 ITR 101 (Authority for Advance Ruling). Similar case-
Foster’s Australia Ltd. v. CIT, 2006 302 ITR 289 (Authority for Advance Ruling). The
amendment cannot be applied to intangible assets -only applicable to shares/beneficial
ownership. That’s why these case still remain relevant.