1 ROLL NO : L13/LLB/183031

❖ ROLL NO : L13/LLB/183031

❖ REG. NO: L13-1111-0063-18

❖ NAME OF THE EXAMINATION : 3-YEARS BACHELOR OF

LAWS (LL.B.), 2020 - 2021

❖ SEMESTER : 6 TH SEMESTER, EXTERNAL ASSESSMENT

❖ NAME OF THE SUBJECT : LAW OF TAXATION

❖ NAME OF THE PAPER : 4th PAPER

❖ DATE OF EXAMINATION : 13/08/2021

2 ROLL NO : L13/LLB/183031

Q.2) Define permanent account number (PAN). Who are liable

to apply for allotment of PAN?
Ans.2 )

1. What is PAN (Permanent Account Number)

The provisions of Section 139A of the Income Tax Act, to be read with Rule 114 of the
Income Tax Rules deal with the requirement of application and obtaining of Permanent
Account Number.

PAN is a 10 digit code allotted to each assessee by I.T. Dept.

Quoting of the Permanent Account Number (PAN) has been made mandatory by the I.T.
Department in many instances. An assessee needs to mention his PAN in his return.

A person has to apply in Form 49A to the Assessing Office having jurisdiction to assess
the applicant. In order to improve PAN related services, the Dept. has authorized UTI
Investor Services Ltd.( UTISIL) to manage IT PAN Services Centers in all cities or towns
where there is an Income Tax Office, and National Securities Depository Limited (NSDL)
to dispense PAN services.

The main advantages of having a PAN include, convenience to locate the Assessing
Officer, Faster Assessment , Processing of Refunds, ensuring Tax Compliance, Credit for
Payment of Taxes, and Control over unregulated and Undisclosed Transactions.

The application form should be filled in carefully and completely giving specified
information, including name of the assessee, father’s name , address, date of birth,
sources of income, etc.

2. Persons liable to apply for allotment of PAN.

The following persons are required to obtain a PAN –

• If income Exceeds Exemption Limit or Turnover Exceeds Rs. 5,00,000 (Rs. 5 Lakh) –

Application should be submitted to obtain PAN before May 31 of the assessment

year for which the income exceeds the maximum amount chargeable to tax or
before the end of the accounting year for which the gross turnover or receipts
exceed Rs. 5,00,000.

• Charitable Trust –
3 ROLL NO : L13/LLB/183031

A person who is required to furnish return of income under section 139(4A) (i.e.,
charitable trust) is required to obtain PAN.

• Financial transaction in aggregate of Rs. 2,50,000 or more –

Any resident person (not being an individual) who enters into a financial
transaction of an amount aggregating to Rs. 2,50,000 or more during a financial
year (as well as managing director, director, partner, trustee, author, founder,
karta, chief executive officer, principal officer or office bearer of such person or
any person competent to act on behalf of such person) is required to obtain PAN
with effect from April 1, 2018.

• Person specified by the Central Government –

The Central Government has power to notify (for collection of any information)
any person to apply for PAN. For this purpose, the following persons have been
notified by the Central Government and these persons shall apply to the
Assessing Officer for PAN – exporters/importers, assessees under central
excise/service tax/sales tax.

• Allotment by Assessing Officer of his own –

Besides above cases, the Assessing Officer may also allot a PAN to any other
person by whom tax is payable. Any other person may also apply for a PAN.
4 ROLL NO : L13/LLB/183031

3. Who has to apply for PAN ? [Section 139A(1)]

Every person who has not been allotted a permanent account number shall, within such
time, as may be prescribed, apply to the Assessing Officer for the allotment of a
permanent account number in the following cases:

a. if his total income or the total income of any other person in respect of which he
is assessable under this Act during any previous year exceeded the maximum
amount which is not chargeable to income-tax; or
b. if he is carrying on any business or profession whose total sales, turnover or gross
receipts are or is likely to exceed Rs. 5,00,000 in any previous year; or
c. he is required to furnish a return of income under section 139(4A), i.e., return of
trust and charitable institutions.

4. Application for Allotment of Permanent Account Number (PAN) [Rule 114(1) &
(2)]

1. Form for application [Rule 114(1)]:

An application under section 139A(1) or section 139A(1A) or section 139A(2) or

section 139A(3) for allotment of a permanent account number shall be made in
Form No. 49A or 49AA, as the case may be.

Provided that an applicant may apply for allotment of permanent account

number through a common application form notified by the Central Government
in the Official Gazette, and the Principal Director General of Income-tax (Systems)
or Director General of Income-tax (Systems) shall specify the classes of persons,
forms and formats along with procedure for safe and secure transmission of such
forms and formats in relation to furnishing of permanent account number.

2. To whom the application is to be made [Rule 114(2)]:

An application referred to in rule 114(1) shall be made,—

i. in case where the function of allotment of permanent account number

under section 139A has been assigned by the Chief Commissioner or
Commissioner to any particular Assessing Officer, to that Assessing Officer;
ii. in any other case, to the Assessing Officer having jurisdiction to assess the
applicant.

5. Time Limit for Submitting Application for allotment of PAN [Rule 114(3)]
5 ROLL NO : L13/LLB/183031

Situation Time limit for a making application

1. If his total income or the total income of on or before 31st May of the assessment
any other person in respect of which he is year in which such income is assessable
assessable under this Act during any
previous year exceeded the maximum
atnount which is not chargeable to income-
tax.
2. If he is carrying on any business or on or before the end of that financial year
profession whose total sales, turnover or
gross receipts are or is likely to exceed
5,00,000 in any financial year.
3. If he is required to furnish a return of on or before the end of the relevant
income under section 139(4A). i.e. return of financial year
trust and charitable institutions,
4. In the case of a person who is entitled to on or before the end of such financial year
receive any sum or income or amount, on
which tax is deductible under Chapter XVIIB
(relating to TDS) in any financial year.
5. If he is a person who is not required to application can be made at any time
apply for PAN under any of the above
clauses
6 ROLL NO : L13/LLB/183031

6. PAN to be quoted in certain cases [Section 139A(5)]

On allotment of permanent account number, every person shall:

a. quote such number in all his returns to, or correspondence with, any income-tax
authority;
b. quote such number in all challans for the payment of any sum due under this Act;
c. quote such number in all documents pertaining to such transactions as may be
prescribed by the Board in the interests of the revenue, and entered into by him.

Every person shall intimate the Assessing Officer any change in his address or in
the name and nature of his business on the basis of which the permanent
account number was allotted to him. [Section 139A(5)(d)]

7. Aadhaar Number to be intimated [Rule 114(5)] by every person who has been
alloted PAN :

Every person who has been allotted permanent account number as on the 1st day of
July, 2017 and who in accordance with the provisions of subsection (2) of section 139AA
is required to intimate his Aadhaar number, shall intimate his Aadhaar number to the
Principal Director General of Income-tax (Systems) or Director-General of Income-tax
(Systems) or the person authorised by the said authorities.

PDGIT or DGIT (Systems) to specify the formats and standards alongwith

procedure, for the verification of documents [Rule 114(6)]:
The Principal Director General of Income-tax (Systems) or Director-General of Income-
tax (Systems) shall specify the formats and standards alongwith procedure, for the
verification of documents filed with the application under sub-rule (4) or intimation of
Aadhaar number in sub-rule (5), for ensuring secure capture and transmission of data in
such format and standards and shall also be responsible for evolving and implementing
appropriate security, archival and retrieval policies in relation to furnishing of the
application forms for allotment of permanent account number and intimation of
Aadhaar number.

Q.4) Define the term agricultural income. Give an example of

agricultural and non-agricultural income.
Ans.4)
7 ROLL NO : L13/LLB/183031

Introduction :-
Section 10(1) exempts agricultural income from tax and also provides for it
exclusion income putting the total income of the assessee. The reason of exemption
of agricultural income the Central taxation is that the Constitution gives exclusive
power to make laws with reason taxes on agricultural income to the State
Legislatures. From the assessment year1974 agricultural income is, however,,
taken into account to determine tax on non agricultural in certain cases.. This
Chapter explains the meaning of "agricultural income and mode of aggregation of
agricultural income with non-agricultural income to determine tax incidence latter..

What is agricultural income:-

Section 10(1) exempts agricultural income from income-tax. By virtue of section 2
expression “agricultural income" means:
1. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes (sec. 2(1A)
2. Any income derived from such land by agricultural operations including
processing of agricultural produce, raised or received as rent-in-kind so as to
render it fit for the make sale of such produce [sec. 2(1A)(b)
3. Income attributable to a farm house subject to certain conditions (sec. 2(1A)(C)
With effect from the assessment year 2009-10, any income derived from saplings
or see grown in a nursery shall be deemed to be agricultural income.
Rent or revenue derived from land (Sec. 2(1A)(a)] - According to section
2(1A)(a)following three conditions are satisfied, income derived from land can be
termed as agricultural income":
a. rent or revenue should be derived from land (may be in cash or kind);
b. the land is one which is situated in India (if the land is situated in a foreign
country condition is not satisfied); and
c. the land is used for agricultural purposes.
8 ROLL NO : L13/LLB/183031

LAND USED FOR AGRICULTURAL PURPOSES - The primary condition to

claim exemption "agricultural income” is that the land in question should be used
for agricultural purpose. Whether exemption is sought under sub-clause (a) or (b)
or (c) of section 2(1A).
The terms "agriculture" and "agricultural purposes" have not been defined in the
Act. Therefore, to depend upon ordinary meaning and decided cases.
In CIT v. Raja Benoy Kumar Sahas Roy (19571 32 ITR 466 (SC), Bhagwati, J.
Led down by following principles to serve as a guide in the determination of the
scope of the term "agriculture" and "agricultural purposes":
The basic operations :-
Prior to germination, some basic operations are essential, to constitute agriculture.
The basic operations would involve expenditure of human Skill and labour upon
the land itself and not merely on the growth from the land. Some illustrative
instances of basic operation are tilling of land, sowing of the seeds, planting, and
similar kind of operation on the land.
Subsequent operations:-
Besides the basic operations, there are certain subsequent operations which are
performed after the produce sprouts from the land.
Illustrative instance of subsequent operations are weeding, digging the soil around
the growth, removal of undesirable undergrowth and all operations which foster
the growth and preserve the same, not only from insect and pests but also from
degradation from outside, tending, pruning, cutting! Harvesting and rendering the
produce fit for the market. Mere performance of these subsequent operations on the
products of the land (where such products have not been raised on the performance
of the basic operations described above) would not be enough to characterise them
as agricultural operations, Where, however, the subsequent operations are
performed in conjugation with and in continuation of the basic operations, the
9 ROLL NO : L13/LLB/183031

subsequent operation would also constitute part of the integrated activity of

agriculture.
Agriculture not merely includes food and grains - Agriculture does not merely
imply raising food and grains for the consumption of men and animals; it also
includes all products from performance of basic as well as subsequent operations
on land. These products, for stance may be grain or vegetable or fruits including
plantation and groves or grass or pasture or consumption of beasts or articles of
luxury such as betel, coffee, tea, spices, tobacco, etc., commercial crops like
cotton, flax, jute, hemp, indigo, etc. All these are products raised from the land and
the term "agriculture” cannot be confined merely to the production of food and
rains products for human beings but must be understood as comprising all the
products of the land which have some utility either for consumption or for trade
and commercial asset would also include forest products such as timber, sal and
piyasal trees, casuarina plantation, ndu leaves, horra nuts, etc.
Some connection with land not sufficient - The mere fact that an activity has some
connection with or is in some way dependent on land is not sufficient to bring it
within the scope the term “agriculture". For instance, breeding and rearing of
livestock, dairy farming, cheese and butter-making and poultry farming would not
by themselves be agricultural purposes.
Income from nursery operations - There was a judicial controversy whether (or
not) income from nursery operations would qualify as agricultural income within
the definition given under section 2(1A). With a view to giving finality to the
issue, section 2(1A) has been amended with effect from the assessment year 2009-
10 so as to provide that any income derived from .....or seedlings grown in a
nursery shall be deemed to be agricultural income. Accordingly irrespective of
whether the basic operations have been carried out on land, such income be treated
as agricultural income, thus qualifying for exemption under section 10(1).
10 ROLL NO : L13/LLB/183031

2.Income derived from agricultural land by agricultural operations (Sec.

2(1A)(b)] –
Under section 2 (1A) (b) gives the following three instances of agricultural
income:
Any income derived by agriculture from land situated in India and used for
agricultural purpose;
Any income derived by a cultivator or receiver of rent –in-kind of any process
ordinarily employed to render the produce raised or receiver by him to make it fit
to be taken to market ;or
Any income derived by a cultivator or receiver of rent-in-kind of any process
ordinarily employed to render the produce raised or received by him to make it fit
to be taken to market; or
Any income derived by such land by the sale by a cultivator or receiver or rent- in -
kind of the produce raised or received by him in respect of which no process has
been performed than a process of the nature described in (b).
The aforesaid incomes are agricultural income, if such income are derived from
land. Which is situated in India and is used for agricultural purposes?
Any surplus arising on sale or transfer of agricultural land (in urban area) is not
treated as rent or revenue derived from land.
INCOME DERIVED FROM MARKETING PROCESS - Sometimes it
becomes difficult to find ready market of the crop as harvested. In order to make
the produce a commodity which is saleable, it becomes necessary to perform some
kind of process on the produce. The income, arising by way of enhancement of
value of such produce, by performing such process to make the raw produce fit for
market, is also agricultural income. However, the following condition must be
satisfied:
a. the process must be one which is ordinarily employed by a cultivator or receiver
of rent-in-kind; and
11 ROLL NO : L13/LLB/183031

b. the process must be applied to render the produce fit to be taken to market. For
instance, tobacco leaves are ordinarily dried to make them suitable for sale.
Therefore, the income from the ordinary process employed to dry the tobacco
leaves to make them fit to be taken to market, is agricultural income. The ordinary
process employed to render the produce fit to be taken to market includes
thrashing, winnowing, cleaning, drying, crushing, boiling and decanting, etc.,
though the nature of process depends upon quality of the produce and varies from
time to time and place to place.
Moreover, if marketing process is performed on a produce which can be sold in its
raw form (without requiring any process to make it fit for marketing), income
derived there from is partly agricultural and partly non-agricultural. For instance, if
sugarcane is generally sold in a given area without being subjected to any process,
the process of converting sugarcane into gur would not be agricultural process and
income attributable to the process of converting sugarcane into gur would not be
agricultural income-Brihan Maharashtra Sugar Syndicate Ltd. v. CIT [1946] 14
ITR 611 (Bom.).
Section 2(1A)(b) does not contemplate sale of commodity different from what is
cultivated and processed and where the assessee was growing mulberry leaves,
feeding them to silkworms and obtaining silk cocoons, income from sale of silk
cocoons would not be agricultural income-K. Lakshmanan Co. v. CIT [1999] 239
ITR 597 (SC).
Income from farm building (Sec. 2(1A)(c)}-Bona fide annual value of house
property is taxable under section 22.)However, income from a house property
which satisfies the following cumulative conditions would be treated as
agricultural income and, consequently, it would be exempt from tax by virtue of
section 10(1):
a. the building should be occupied by the cultivator (as a landlord or as a tenant) or
receiver of rent-in-kind (as a landlord);
12 ROLL NO : L13/LLB/183031

b. it should be on or in the immediate vicinity of land, situated in India and used

for agricultural purposes;
c. the cultivator or receiver of rent-in-kind should by reason of his connection with
the agricultural land requires the building as a dwelling house or as a store house or
other out building; and
d. the land is assessed to land revenue or local rate or, alternatively, the land
(though not assessed to land revenue or local rate), is situated outside "urban
areas", i.e., any area which is comprised within the jurisdiction of any
municipality/cantonment board having a population of not less than 10,000 persons
or within notified distance (up to a maximum of 8 kilometres) from the limits of
any such municipality or cantonment board.
It all the aforesaid conditions are satisfied, income from a farm building is
exempted from tax under section 2(1A)(C).
What are instance of income held to be agricultural/non agricultural income
In the following cases income is held as agricultural income.
1. If denuded parts of the forest are replanted and subsequent operations in forestry
are carried out the income arising from the sale of replanted trees.
2.Profit on sale of standing crop or or the produce after harvest by cultivating
owner or tenant of land.
3.Rent for agricultural land received from sub tenants by mortgagee-in-possession.
4.compantation received from an insurance company for damage caused by hail
storm to the green leaf forming part of assessee's tea garden (moreover, no part of
such compensation consists of manufacturing income, as such compensation
cannot be apportioned under rule between manufacturing income and agricultural
income).
5. Income from growing flowers and creepers.
6. Salary received by a partner for rendering services to a firm which is engaged in
agricultural operations is agricultural income as payment of salary is only a mode
13 ROLL NO : L13/LLB/183031

of adjustment of the firm's income [it may be noted that share of profit from such
firm is not taken as “agricultural income" as such share is exempt under section
10(2A)].
7. Interest on capital received by a partner from the firm engaged in agricultural
operations.
8. If nursery is maintained by carrying out basic operations and subsequent
operations are carried out in pots in continuation of basic operations, then income
from such nursery would be agricultural income.
Instances of non-agricultural income:
1. Annual annuity received by a person in consideration of transfer of agricultural
land even it is charged on land, as source of annuity is covenant and not land.
2. Interest on arrears of rent in respect of agricultural land as it is neither rent nor
revenue received from land.
3. Interest accrued on promissory notes obtained by a zamindar from defaulting
tenants.
4. Income from sale of forest trees, fruits and flowers growing on land naturally,
spontaneously without the intervention of human agency.
5. Income from sale of wild grass and reeds of spontaneous growth.
6. Income of salt produced by flooding the land with sea water as it is not derived
from land for agricultural income.
7. Profit accruing from the purchase of a standing crop and resale of it after
harvest by a merchant having no interest in land except a mere licence to enter
upon the land and gather upon the produce, as land is not the direct, immediate
or effective source of income,
8. Remuneration received by managing agent at a fixed percentage of net profit
from a Company having agricultural income.
9. Interest received by a money-lender in the form of agricultural produce.
 14 ROLL NO : L13/LLB/183031

10. Income of sale of agricultural produce received by way of price for water
supplied to land.

11. Commission earned by the landlord for selling agricultural produce of his tenant.
12. Income derived from land let out for storing crops.
13. Income from fisheries.
14. Maintenance allowance charged on agricultural land,
15. If the assessee takes loans on hypothecation of agricultural produce cultivated by
him in advances the same to its sister concerns, interest earned thereupon (is not
agricultural income).
16. Royalty income of mines.
17. Income from butter and cheese making.
18. Income from poultry farming.
19. Income from sale of trees of forest which are of spontaneous growth and in
relation which forestry operations alone is performed.
20. Where the assessee-company is growing various kinds of hybrid/germ plasm
seed are conducting agrigenetic agricultural research costing crores of rupees,
income earned on of such seeds cannot be treated as 'agricultural income'.
21. Receipts from TV serial shooting in farm house.
What is the tax treatment of income which is partially agricultural and partner
from business [Rules 7, 7A, 7B and 8]
For disintegrating a composite business income which is partly agricultural and man
non-agricultural, the following rules are applicable
Income Non- Agriculture Income
agricultural Income Tax Rule
Agriculture
Income
 15 ROLL NO : L13/LLB/183031

Growing and manufacturing tea in India 40% 60% Rule-1

Sale of centrifuged latex or cenex or latex 35% 65% Rule-3

based crepes (such as pale latex crepe) or
brown crepes (such as estate brown crepe,
remilled crepe, smoked blanket crepe or
flat bark crepe) or technically specified
block rubbers manufactured or processed
from field latex or coagulum obtained from
rubber plants grown by the seller in India
Sale of coffee grown and cured by seller 25% 75% Rule-7B
Sale of coffee grown, cured, roasted and 40% 60% Rule -7B
grounded by seller in India with or without
mixing chicory or other flavouring
ingredients

Any other case (Rule 7] - For disintegrating a composite business income which
is partly agricultural and partly non-agricultural, the market value of any
agricultural produce raise by the assessee or received by him as rent-in-kind and
utilised as raw material in his business is deducted. No further deduction is
permissible in respect of any expenditure incurred by the assessee as a cultivator or
receiver of rent-in-kind.
16 ROLL NO : L13/LLB/183031

Q.10) Write short notes on the following topics:

Ans.10.a)
Assessment year :
As per [SEC.2(9)] of the Income Tax Act, 1961 -
Assessment year means the period starting from April 1 and
ending on March 31 of the next year. Thus, the assessment
year 20221-22 commences April 1, 2021 and ends on March
31, 2022.
Income of previous of an assessee is taxed during the next
following assessment year at the rates prescribed by the
relevant Finance Act.

Meaning of Previous Year: Section 2(34) & Section 3 Income Tax

As per S.2(34) of Income Tax Act, 1961, unless the context otherwise
requires, the term ‘previous year’ means the previous year as defined in
section 3. In view of above, we need to visit Section 3 of Income Tax Act,
1961, which defines the term previous year as under:

“For the purposes of this Act, “previous year” means the financial year
immediately preceding the assessment year:

Provided that, in the case of a business or profession newly set up, or a

source of income newly coming into existence, in the said financial year,
the previous year shall be the period beginning with the date of setting up
of the business or profession or, as the case may be, the date on which the
source of income newly comes into existence and ending with the said
financial year.”

Therefore, basically the Previous Year indicates the year/ period prior to
another. Under Income Tax, the returns are filed by assessee after end of
the year/ period during which earnings are made and that period is called
previous year/ financial year. However, when such earnings are subjected
to assessment/ review by ITO in the subsequent period/ year, the same is
called assessment period/ year.
17 ROLL NO : L13/LLB/183031

For example, previous year corresponding to assessment year 2021-22

means the preceding financial year, i.e. 2020-21 (01/04/2020 to
31/03/2021), however the previous year may begin from a later date in the
case of new business/ source of income (i.e. from 01/04/2020 or any date
thereafter upto 31/03/2021). For example, in the case of a new business
set-up on 01/10/2020, the previous year will be the period from 01/10/2020
to 31/03/2021, which in fact is just a part of the financial year 2020-21.

c) Concept of Previous Year & Financial Year vis-a-vis Assessment Year

Understanding concept of previous year is very simple, it’s basically a

period of upto 12 months just preceding the assessment year. Since
financial year is always a period of 12 months and income/ source of
income may be of smaller span/ tenure than of 12 months, so the concept/
term of previous year is used under Income Tax to cover income or source
of income coming into existence after the commencement of financial year
and to cover income or source of income coming to an end before
completion of the financial year. Either way any income or source of
income is not required to be spread to the whole of financial year, it may be
part of the same and the same may be called a previous year.

Accordingly Previous Year in the case of a continuing business shall be the

Financial Year immediately preceding the relevant Assessment Year,
whereas Previous Year in the cases of newly set up business or for new
source of income shall be the period commencing from the date of set up of
new business or from the date of coming into existence of any source of
income, to the forthcoming 31st March of that Financial Year immediately
preceding the relevant Assessment Year.

It may not be out of place to mention that now even under Companies Act
2013 all the companies are required to have a uniform financial year. In
other words, normally a period of upto 12 months ending on 31 March
every year, however in the case of first accounting period, the same may
be of less than 12 months and may extend upto 18 months with prior
approval of the ROC.

However, there are few exceptions to the rule that income of previous year
is chargeable to tax in the immediately following assessment year. In such
cases income of the previous year is subject to charge of tax in the same
previous year, wherein previous year and assessment year are considered
as the same in the case of certain assessees to avoid situations of income
escaping assessment:
18 ROLL NO : L13/LLB/183031

a) Income from Shipping business in India in the case of non-

residents [Section 172];

b) Assessment of persons leaving India permanently or for longer

duration [Section 174];

c) Assessment of association of persons (AOP) or body of individuals (BOI)

or artificial juridical person (AJP), which are formed for a particular short
period of time/ event/ purpose, i.e. which are dissolved within the same
previous year [Section 174A];

d) Assessment of persons suspected to transfer their property to avoid tax

liability [Section 175]; and

e) Assessment of income from a business which has been discontinued

during the previous year [Section 176].

10.C) Person :

Who are included in ‘Person’ [SEC.2(31)], Income Tax Act, 1961

The term ‘person’ includes:
a) An individual;
b) A Hindu undivided family;
c) A company;
d) A firm;
e) An association of persons or a body of individuals, whether
incorporated or not;
f) A local authority; and
g) Every artificial juridical person not falling within any of
preceding categories.

These are seven categories of persons chargeable to tax

under the Act. The aforesaid definition is inclusive and not
19 ROLL NO : L13/LLB/183031

exhaustive. Therefore any person, not falling in the above –

mentioned seven categories, may still fall in the four corners
of the term ‘person’ and accordingly may be liable to tax
under section 4.
Example of Person
1. Delhi University is an artificial juridical person.
2. DCM Ltd. Is a company.
3. Delhi Municipal Corporation is a local authority.
4. Taxmann Publications (P.) Ltd is a company.
5. Laxmi Commercial Bank Ltd. Is a company.
6. ABC Group Housing Co-Operative Society is an
Association of persons.
7. XY & Co, firm of X &Y is a firm.
8. A joint family of X, Mrs. X and her sons A & B may be a
Hindu Undivided Family.
9. X & Y who are legal heirs of Z (Z died in 1996 and X & Y
carry on his business without entering into partnership is
an association of persons.

Q. 1a) State whether the following statements are true or

false.

i) University of Calcutta is natural person. – False , as the

same is an artificial juridical person.
ii) Casual income is exempted from taxation. – False
iii) Educational Scholarship is exempted from tax. – True
iv) Income tax is indirect tax. – False
v) GST is direct tax. – False
20 ROLL NO : L13/LLB/183031

vi) The employer-employee relationship is mandatory for an

income adjudged under the head ‘salary’ – True
vii) Income from contract for service included under the head
of salary for taxing purpose. – False
viii) City compensatory allowance is fully taxable. – True
ix) Assessment year means a period of twelve commencing
from 1st February of every year and ending on 28th
February of the next year. – False
x) Best judgment Assessment means assessment made
under section 144 of the Income Tax Act. - True

Q. 1b) Explain how the residential status of an individual is

determined under the Income Tax Act. ?

Ans.1b)

RESIDENTIAL STATUS AND ITS EFFECT ON TAX INCIDENCE

Tax incidence on an assesses depends on his residential status. For instance,

whether an income, accrued to an individual outside India, is taxable in India
depends upon the residential status of the individual in India. Similarly, whether an
income earned by a foreign national in India (or outside India) is taxable in India,
depends on the residential status of the individual, rather than on his citizenship.
Therefore, the determination of the residential status of a person is very significant
in order to find out his tax liability.
What one must know for deciding residential status
21 ROLL NO : L13/LLB/183031

The following norms one has to keep in mind while deciding residential status of
an assesses
Different taxable entities - All taxable entities are divided in the following
categories for the purpose of determining residential status :
a) an individual ;
b) a Hindu undivided family;
c) a firm or an association of persons ;
d) a joint stock company; and
e) every other person.
Different residential status - An assesses is either:(a) resident in India, or (b) non-
resident in India. However, a resident individual or a Hindu undivided family has
to be (a) resident and ordinarily resident, or (b) resident but not ordinarily resident.
Therefore, an individual and a Hindu undivided family can either be:
a. resident and ordinarily resident in India ; or
b. resident but not ordinarily resident in India ; or
c. non-resident in India
All other assesses (viz, a firm, an association of persons, a joint stock company and
every other person) can either be:
a resident in India; or
b. non-resident in India.
Residential status for each previous year- Residential status of an assessee to be
determined in respect of each previous year as it may vary from previous year to
previous year.
Different residential status for different previous years in same assessment
year - If a person is resident 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(s) relevant to the same assessment year in respect of each of his
other sources of income (sec. 6(5)).
22 ROLL NO : L13/LLB/183031

Different residential status for different assessment years - An assessee may

enjoy different residential status for different assessment years. For instance, an
individual who has been regularly assessed as resident and ordinarily resident has
to be treated as non-resident in a particular assessment year if he satisfies none of
the conditions of section 6(1) in that year.
Resident in India and abroad - It is not necessary that a person, who is "resident"
in India, cannot become "resident" in any other country for the same assessment
year. A person may be resident in two (or more) countries at the same time. It is,
therefore, not necessary that a person who is resident in India will be non-resident
in all other countries for the same assessment year.
Omus of proof - Whether an assessee is a resident or a non-resident is a question
of fact and it is the duty of the assessee to place all relevant (facts before the
income tax author.
How to determine residential status of an individual (Sec. 6)
An individual may be (a) resident and ordinarily resident in India. (b) resident but
ordinarily resident in India, or (c) non-resident in India.
Resident and ordinarily resident (Sec. 6(1), 6(6)(a)] - To find out whether an
India is "resident and ordinarily resident" in India, one has to proceed as follows -

BASIC CONDITIONS TO TEST AS TO WHEN AN INDIVIDUAL IS

RESIDENT IN INDIA-
Under section 6(1) an individual is said to be resident in India in any previous
year. if he satisfied one of the following basic conditions -
EXCEPTIONS . The aforesaid rule of residence is subject to the following
exceptions,
exception one. By virtue explanation (a) to section 6(1), the period of 60 days"
referred to in (b) above has been extended as follows –
23 ROLL NO : L13/LLB/183031

Assessment years Who can take the benefit of extended period Extended
period
1990-91 onwards An Indian citizen who leaves India during the 182 days
previous year for the purpose of employment
outside India on an Indian citizen who leaves
India during the previous year as a member of
an Indian slip

Exception two - By virtue of Explanation (b) to section 6(1), the period of "60
days" referred to in (b) above has been extended as follows-
Assessment years Who can take the benefit of extended period Extended
period
1995-96 onwards Indian citizen of a person of Indian origin who 182 days
comes on a visit to India during the previous
year

A person is deemed to be of Indian origin if he, or either of his parents or any of

his grand-parents, was born in undivided India. It may be noted that grandparents
include both maternal and paternal grand-parents.
ADDITIONAL CONDITIONS TO TEST AS TO WHEN A RESIDENT
INDIVIDUAL IS ORDINARILY PESIDENT IN INDIA - Under section 6(6),a
resident individual is treated as "resident and ordinarily resident" in India if he
satisfies the following two additional conditions -

Additional condition (1) He has been resident in India in at least 2 out of 10

previous years immediately proceeding the relevant
24 ROLL NO : L13/LLB/183031

previous year.

Additional condition (ii) He has been in India for a period of 730 days or more
during 7 years immediately proceeding the relevant
previous year.

In brief it can be said that an individual becomes resident and ordinarily resident in
India if he satisfies at least one of the basic conditions(i.e., (a)or (b) and the two
additional conditions i.e. (i) and (ii].

It will be worthwhile to note the following propositions :

It is not essential that the stay should be at the same place. It is equally not
necessary that the stay should he continuous. Similarly, the place of stay or the
purpose of stay is not material.
Where a person is in India only for a part of a day, the calculation of physical
presence in India in respect of such broken period should be made on an hourly
basis. A total of 24 hours of stay spread over a number of days is to be counted as
being equivalent to the stay of one day. If, however, data is not available to
calculate the period of stay of an individual in India in terms of hours, then the day
on which he enters India as well as the day on which he leaves India shall be taken
into account as stay of the individual in India.
A stay by an individual on a yacht moored in the territorial waters of India would
be treated as presence in India for the purpose of this section.
Resident but not ordinarily resident (Sec. 6(1), (6)(a)] - An individual who
satisfies at least one of the basic conditions but does not satisfy the two additional
conditions is treated as a resident but not ordinarily resident in India. In other
25 ROLL NO : L13/LLB/183031

words, an individual becomes resident but not ordinarily resident in India in any of
the following circumstances:
Case 1 If he satisfies at least one of the basic
Case 2 If he satisfies at least one of the basic conditions

Non-resident - An individual is a non-resident in India if he satisfies none of the

basic conditions are not relevant.
Rule of residence for an individual in brief - The tables given below summarise
the rule of residence for the assessment year 2009-10:
RULE OF RESIDENCE AT A GLANCE
Resident and ordinarily Resident but not Non-resident
resident ordinarily resident
(1) (2) (3)
Must satisfy at least one Must satisfy at least one Must satisfy none of the
of the basic conditions of the basic conditions basic conditions.
and both of the and one or none of the
additional conditions basic conditions

Rule of residence for individual

ii. Presence of at least 730 days in India during 7 years immediately preceding
the relevant previous year (ie., during April 1, 2001 and March 31, 2008).

X left India for the first time on May 20, 2006. During the financial year 2008-09,
he comes to India once on May 27 for a period of 53 days. Determine his
residential status for the assessment year 2009-10.
26 ROLL NO : L13/LLB/183031

SOLUTION : Since X comes to India only for 53 days in the previous year 2008-
09, he does not satisfy any of the basic conditions laid down in section 6(1). He is,
therefore, non-resident in India for the assessment year 2009.10.
X, a German tourist, comes to India for the first time on May 17, 2008. He
leaves India on September 15, 2008. Determine his residential status for the
assessment year 2009-10. Does it make any difference if he comes to India on a
business trip or if he is an Indian citizen?

X comes to India, for the first time, on April 16, 2006. During his stay in India up
to October 5, 2008, he stays at Delhi up to April 10, 2008 and thereafter remains in
Chennai till his departure from India. Determine his residential status for the
assessment year 2009-10.
SOLUTION: During the previous year 2008-09. X was in India for 188 days (i.e.,
April 2008:30 days ; May 2008: 31 days; June 2008: 30 days; July 2008 : 31 days ;
August 2008 : 31 days ; September 2000: 30 days and October 2008: 5 days). He is
in India for more than 182 days during the previous year and, thus, he satisfies
condition. Consequently, he becomes resident in India. A resident individual is
either ordinarily resident or not ordinarily resident. To determine whether is
ordinarily resident or not, one has to test the two additional conditions as laid down
by section 6(0(a) . This condition requires that X should be resident in India in at
least 2 years out of 10 years preceding the relevant previous year. X is resident in
India for the previous years 2006-07 and 2007-08. This condition requires that X
should be in India for at least 730 days during 7 years immediately preceding the
previous year. X is in India from April 16, 2006 to March 31, 2008 i.e., 715 days).
X satisfies one of the basic conditions and only one of the two additional
conditions. X is, therefore, resident but not ordinarily resident in India for the
assessment year 2009-10.
27 ROLL NO : L13/LLB/183031

Note : In order to determine the residential status, it is not necessary that a person
should continuously stay in India at the same place. Therefore, the information that
X is in Delhi up to April 10, 2008 is irrelevant .
X, an Italian citizen, comes to India for the first time (after 20 years) on May
28, 2008 and stays up to December 5, 2008. Determine his residential status for
the assessment year 2009-10

X, a foreign citizen (not being a person of Indian origin), comes to India, for the
first time in the last 30 years on March 20.2008. On September 1, 2008, he leaves
India for Nepal on a business trip. He comes back on February 26, 2009.
Determine the residential status of X for the assessment year 2009-10.
SOLUTION : During the previous year 2008-09, X stays in India for a period of
188 days ie.. from April 1. 2008 to September 1, 2008 and February 26, 2009 to
March 31, 2009). He satisfies basic condition (a) (namely, presence of at least 182
days or more in India during the previous year) but he is unable to satisfy the two
additional conditions laid down by section 6(6) as he comes to India for the first
time in the last 30 years on March 20, 2008.
He is, therefore, resident but not ordinarily resident in India for the assessment
year 2009.10
X, a foreign citizen, comes to India for the first time on June 20, 2008. On
September 6, 2008. he leaves India for Burma on a business trip. He comes
back on January 1, 2009. He maintains a dwelling place in India from the date
of his arrival in India (i.e., June 20, 2008) till January 15, 2009 when he loved
for Kuwait. Determine his residential status for the assessment year 2009-10.
Does it make any difference if X is a person of Indian origin?
28 ROLL NO : L13/LLB/183031

X, a foreign national (not being a person of Indian origin), comes to India for the
first time on April 15. 2004 During the financial years 2004-05, 2005-06, 2006-07,
2007-08 and 2008-09, he is in India for 130 days, 80 days, 13 days, 210 days and
75 days respectively. Determine the residential status of X for the assessment year
2009-10.
Q.3) What do you mean by the term ‘salary’ ? Explain the importance
of employer-employee relationship.
Ans.3)

As per section 17 (1) of the Income Tax Act, 1961, salary is defined to
include the following ..
a) Wages
b) Any annuity or pension
c) Any gratuity
d) Any fees, commission, perquisites or profits in lieu of or in addition
to salary or wages
e) Any advance of salary
f) Any payment received by an employee in respect of any period
leave not availed by him
g) The portion of of annual accretion any previous year to the balance
at the credit of an employee participating in a recognized provident
fund to the extent it is taxable
h) Transferred balance is a recognized provident fund to the extent it
is taxable.
i) The contribution made by Central Govt. or any other employer to
account of an employee under a notified pension scheme referred
to 80 CCD.

Employer-employee relationship under salary :

29 ROLL NO : L13/LLB/183031

Before an income can become chargeable under the head ‘salaries‘, it is

vital that there should exist between the payer and the payee,
the relationship of an employer and an employee. Consider the following
examples:
(a) Sujatha, an actress, is employed in Chopra Films, where she is paid a
monthly remuneration of Rs 2 lakh. She acts in various films produced by
various producers. The remuneration for acting in such films is directly paid
to Chopra Films by the different producers. In this case, Rs 2 lakh will
constitute salary in the hands of Sujatha, since the relationship of employer
and employee exists between Chopra Films and Sujatha.
(b) In the above example, if Sujatha acts in various films and gets fees f
rom different producers, the same income will be chargeable as income
from profession since the relationship of employer and employee does not
exist between Sujatha and the film producers.
(c) Commission received by a Director from a company is salary if the
Director is an employee of the company. If, however, the Director is not an
employee of the company, the said commission cannot be charged as
salary but has to be charged either as income from business or as income
from other sources depending upon the facts.
(d) Salary paid to a partner by a firm is nothing but an appropriation of
profits. Any salary, bonus, commission or remuneration by whatever name
called due to or received by partner of a firm shall not be regarded as
salary. The same is to be charged as income from profits and gains of
business or profession. This is primarily because the relationship between
the firm and its partners is not that of an employer and employee.
e) A Member of Parliament or of State Legislature is not treated as an
employee of the Government. Salary and allowances received by him are,
therefore, not chargeable to tax under the head ‘Salaries’ but are
chargeable to tax under section 56 under the head ‘Income from other
sources’.