TAXATION

Dastageersab A Mulla
B.Com, LL.B
R. L. Law College, Belgaum
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INDEX
Sl No Contents Page No.
INCOME TAX ACT, 1961
1 History 1
2 Feature of income tax 1
3 Important terms 4
4 Residential Status 4
5 Scope of income tax 6
6 Direct & Indirect Taxation 7
7 Heads of income 8
1) Income from salary 8
2) Income from house property 12
3) Income from business or profession 13
4) Income form capital gain 15
5) Income from Other Sources 17
8 Tax returns 18
9 Exemption 19
10 Taxes 23
11 Fees 23
12 Exemption 23
13 Deduction 23
14 Income Tax Authorities 24
15 Procedure for recovery tax 25
16 Income tax tribunal 28
WEALTH TAX ACT, 1957
1 Who is liable for payment of wealth tax 32
2 Who is not liable for payment of wealth tax 32
3 Assets in wealth tax 33
4 Deemed Assets 35
5 Exempted Assets 36
CENTRAL EXCISE ACT, 1944
1 Objectives of Central Excise 38
2 Nature of Excise Duty 38
3 Basic Conditions for Excise Liability 38
4 Definitions 39
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Goods
Manufacture
Excisable Goods
5 Types of Excise Duty 40
6 Determination of Tariff Headings 41
7 Valuation of Goods 41
8 Transaction Value as Assessable Value 42
9 Valuation Rules 43
10 Administrative Structure of Excise Department 44
11 Summary of Procedures 45
12 Distinction between Cenvat on Inputs and Capital Goods 46
13 Penalty 47
Civil Liability
Criminal Liability
General Penalty
14 Confiscation 47
15 Seizure 48
16 Excise Duty (CENVAT) 48
17 Powers And Duties Of Officers And Landholders 49
18 Customs and Central Excise Settlement Commission 51
19 Jurisdiction and powers of Settlement Commission 52
CUSTOMS ACT, 1962
1 Features of Customs Duty 53
2 Important Definitions 53
Goods 53
Dutiable Goods 54
Imported Goods 54
Export Goods 54
Indian Customs Waters 54
Territorial Waters 54
Exclusive Economic Zones 55
3 Types of Custom Duties 55
4 Imports Procedure 58
5 Export Procedure 58
6 Courier , Post & Baggage
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1) Import & Export through Courier 59
2) Import & Export By Post 60
3) Baggage Rules 60
7 Exemptions allowed for import through Baggage 61
8 Exemption & Remission Of Duty
9 Exemption 63
10 Remission 63
11 Warehousing 63
12 Export Oriented Undertakings (E.O.U.) 64
13 Special Economic Zones (S.E.Z.) 64
14 Duty Drawback 65
15 Deemed Exports 66
16 Officers Of Customs 67
17 Clearance Of Imported Goods And Export Goods
18 Clearance Of Imported Goods 68
19 Clearance Of Export Goods 69
20 Goods In Transit 70
CENTRAL SALES TAX, 1956
1 History 71
2 Introduction 71
3 Inter-State Sale 71
4 Formulation of principles for determining when a sale or purchase of goods 72
takes place in the course of import or export
5 Salient features of High Sea Sale 74
6 Registration of dealers 74
VALUE ADDED TAX
1 Introduction 76
2 What Is Vat? 76
3 Features Of Vat 76
4 General Requirements For VAT System 77
SERVICE TAX
Salient features 78
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INCOME TAX ACT 1961

History
Income tax was introduced in 1860, abolished in 1873 and reintroduced in 1886. Income tax
levels in India were very high during 1950-1980, in 1970-71 there were 11 tax slabs with
highest tax rate being 93.5% including surcharges. In 1973-74 highest rate was 97.75%. But to
reduce tax evasion tax rates were reduced later on, by 1992-93 maximum tax rates were
reduced to 40%.

“No tax shall be levied or collected without the authority of law”

Condition: there are four conditions in article 265:

 There must be a law
 Such law must authorize the tax
 The tax must be levied and collected according to law and
 A tax law should not violate the fundamental rights to equality guaranteed by article 14

Feature of income tax

 Meaning of income: The word “income “is of the widest amplitude and it must be given
its nature and grammatical meaning. The definition given in section 2(24) is inclusive
of all the heads of income narrated in the income tax act 1961. the purpose of the
definition is not to limit the meaning of income.

 Source of income: There are several ways and sources of income to the individual
persons, body of association, firms, trusts, and companies. For the purpose of
convenience of accounting, the framers of the income tax act provided five heads. They
are-
1. Income from salary
2. Income from house property
3. Profit and gain of business or professional
4. Income from capital gain
5. Income from other sources

 Real: income should be real. No tax can be imposed on notional income except where
the act specifically provides. Example: an accretion to capital asset is not charged to
tax, until it is sold and realized under the head “ capital gain”
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 Taxable income: According to the definition in sec 2(24) total income in sec 2(45) all
the income are chargeable to tax. However there are certain income not chargeable to
tax. Example : agriculture income, foreign income to a resident and non-resident ect

 Charged in the heads of the receiver: the income tax is payable by receiver of the
income, not by the payer. Example: the employer pays salary and other benefits to his
employees. Each of the employees is liable to pay tax on his income for that particular
year depending upon the rates of income tax fixed by the finance act of that particular
year. The employer is not liable to pay the income tax of his employees.

 Tax deducted at source (TDS): Sometimes the payer is liable to deduct the income tax
at source itself in advance. Example: the government department shall deduct the
income tax from the bill of the contractors. The employer shall deduct the income tax
from the salaries of his employees at the time of the payments to them.

 Stage of taxability : The nature of income should be deduct at its initial stage, i.e when
the transaction takes place, and the decision of chargeability shall takes place at later
stage. Thus the decision of chargeability at any later stage is not relevant for its
taxability. Through out the year financial transaction took place. Assessment shall be
made after the complete of the assessment year

 Advance tax: sec (207-219) To avoid late payments, late assessments, the new systems
of “advance tax and “TDS “are introduced in the income tax act. These systems prevent
the avoidance and evasion of the income tax and increase the Government revenue.

 Previous year: Under the income tax systems, the term “ previous year” “assessment
year “ are important for changing the income tax. For new entrants, they may give
certain confusion also. The income should have been accrued, arisen or received during
the relevant previous year in which it is intended to tax, unless the provision of the
income tax act and rule provide differently.

 Illegal income: Whether the income is legal or illegal, the person is liable to pay income
tax. Example: the money circulation and other prize distribution system is banned by
“ the prize chits and money circulation schemes ( Banning ) act, 1978” if any person
conducts such money circulation and earns income, he is liable to pay income tax under
the income tax 1961. However such person is liable to be punished under the act of by
the police department. Therefore, the income accrued by illegal means or legal means,
is liable to tax under the act of 1961

 Income from outside: It is to be noted that no one can earn income from himself.
Income must come from outside. There are five important heads of income source. A
firm pays salaries to its employees. That firm accrues income by way of sale of goods
or service to its customers. Accounting is different for the employees and firm. The
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firm is the outside source of the income of the employees. The customers are the
outside source of the income of the firm. A- private limited company may have
dividends received by B and C from A the profit accrued by A are two different sources
of income. Under the companies act a private limited company or public limited
company is a separate parson and have its own existence under the law.

 Permanent or temporary: The income may be temporary or permanent. A Government

or private employee gets salaries through out his service until his retirement,
resignation or death. It is long standing income. Income may also be accrued casually.
Example : lotteries, race gift schemes and giving cars as bumber prize. The person ,
who gets, a car under such lucky scheme, is liable to pay income tax, even though prior
to and after winning the car, his economic condition may be poor and not come under
the purview of the income tax.

 Gift made out of leave and affection: A father may gift a house or car to his daughter
out of love and affection. Such gifts are the income in\ the hands of the daughter.
However such gifts, pin money received by a house-wife, pocket money receive by a
son, etc are not income.

 Money and kind: Income may be accrued by way of cash or kind. A maruti car won by
a subscriber of a newspaper or a customer of a mal is an income in the hands of such
winner.

 Rates of taxes: There are seven categories of person/assesses. There are heads of
sources of income. There are different rates of taxes on those different categories of
person and under these heads of income. The rates of income also may charge from
year to year by the finance act, which is introduced at the end of the February every
year in the parliament.

 Lump sum receipt: The term “lump sum” mean, ‘an aggregate amount received I bulk
quantity at one time’. For the purpose of imposing the income tax the problem does not
arise whether the income is received in installments or in lump sum. Whether the
income is received I installments or in lump sum is taxable.

 Loss: The term ‘loss’ denotes that the assessee has no sufficient profit and income and
is not liable t pay income tax. While computing the accounts of a firm or an individual
businessman, the balance sheet reflects “profit and gains”. If the assessee is profit, he is
liable to tax. If the assessee is in loss, he is not liable to tax.

 Authorities: Section 116-138 explains about the constitution of the various authorities
under the income tax act. To collect income tax properly and to prevent avoidance and
evasion of the taxes, this act has provided various authorities and entrusted various
duties and powers to them
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 Penalties: chapter XXI, section 270 – 275 lay down the provision of penalties.

 Offence and prosecution : chapter XXII, section 275a-280

 Appeal and grievances: chapter XX, 246-269 provisions provides the relief to the
aggrieved assessee. An appeal is a corrective device. It requires in cases, chances or
errors are more. It is less relevant in cases where the chances of error are remote. In the
right of appeal has been accepted as an integral part to fair procedure, nature justice and
normative universality.

 PAN (permanent account number): (sec 139-A) means a number which the assessing
officer may allot to any parson for the purpose of identification and includes a
permanent account number allotted.

Important terms
 Assessee
Means a person by whom any tax or any other sum of money is payable under this Act, and
includes –Person in respect of whom any proceedings under this Act has been taken for
assessment of his income.
Deemed assessee under provisions of this Act Any person deemed to be an assessee in
default under any provisions of this Act

 Assessment year: Means the period of twelve months commencing on the 1st day of April
i.e from 1st april of one year to 31st march of the next year. Example: 1st april, 2013 to
march 31st 2014 will become the assessment year 2013-14

 Previous year : For pervious year ending on 31-3-2014, the assessment year is 2014-15
i.e from 1-4-2014 to 31-3-2015

Residential Status - Section 6

Residential status of an assessee is important in determining the scope of income on which
income tax has to be paid in India.

The different types of Residential Status are:-

Resident (R)
An individual or HUF assessee who is resident in India may be further
classified into
resident and ordinarily resident (ROR) and
resident but not ordinarily resident (NOR).
Non Resident (NR)
To be determined in each previous year (1 April to 31 March next)
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Gross Total Income Assessment Year (A.Y. 2014-15),Previous Year, Deductions,
Total Income

Section 6 resident:

 Individual
An individual is said to be resident in India in any previous year, if he satisfies any of the 2
basic conditions –

a. Physical presence in India for 182 days or more in a previous year

OR
a. Physical presence in India for 60* days or more in the previous year and 365
days or more during the 4 years preceding the previous year

Exception:
1. Citizen leaves for employment or as member of crew of an Indian ship – instead of 60
days, it is 182 days

2. Citizen or Person of Indian Origin already abroad comes on a visit - instead of 60

days, it is 182 days

Resident Individual - Resident but Not Ordinarily

Satisfies any one Basic condition and two Additional conditions –
a. Such person has been a non resident in India in at least 9 out of 10 previous years
preceding the relevant previous year; or
b. The person has been in India for a period of 729 days or less during 7 years
preceding the relevant previous year

Summery for individual

Assessee Basic Condition Additional Condition

Resident and Ordinarily
Resident
Not Ordinarily Resident
Non-Resident
He must satisfy at least one of
the basic conditions.
Must satisfy at least one of the
basic conditions.
Should not satisfy any of the
basic conditions.
Must NOT satisfy both the
additional conditions
Must satisfy either of the
additional conditions
Not applicable
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 Hindu Undivided Family

 Resident unless Control and Management of affairs wholly outside India
 R-NOR if Manager (Karta) is a non resident in India in 9 out of 10 preceding
previous years or is in India for 729 days or less in 7 preceding previous years

 Company
 Resident in India
If an Indian Company – Section 2(26)
If Control and Management of its affairs is situated wholly in India

 Firm, Association of Persons and Any other person

Resident unless control and management of its affairs is situated wholly outside
India

Scope of income tax

The scope of Total Income depends on the Residential Status of the tax payer. The incidence
of tax under different circumstances is given in the following table

ROR RNOR NR

Income received in India Yes Yes Yes

Income deemed to be received in India Yes Yes Yes
Income accruing or arising in India Yes Yes Yes
Income deemed to accrue or arise in India Yes Yes Yes

Income received/ accrued outside India from a Yes Yes No

business in India
Income received/ accrued outside India from a Yes No No
business controlled outside India
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Direct & Indirect Taxation
Basis of Classification:

The basis of classifying taxes into direct tax and indirect tax is “Whether the burden of
the tax is shiftable to others or not.” If it is not shiftable, i.e., when liability to pay and burden
falls on the same person, it is a direct tax. If burden of a tax is shiftable, it is an indirect tax.

Differences between Direct and Indirect

The basis of classifying taxes into direct and indirect taxes is “who ultimately bears the burden
of a tax.”

(a) Direct Tax: When (i) liability to pay a tax and (ii) the burden of that tax falls on the same
person, the tax is called a direct tax.

A direct tax is the tax whose burden is borne by the person on whom it is imposed, i.e.,
its burden cannot be shifted to others. For example, (i) Income tax is a direct tax because the
person whose income is taxed is liable to pay the tax directly to the government and bear the
burden of the tax himself. Other examples of direct tax are (ii) corporate tax—It is levied on
profit of corporations and companies, (iii) Wealth tax—It is imposed on property of
individuals depending upon the value of property. (iv) Gift tax—It is paid to the government
by the recipient of gift depending on value of gift, (v) Estate duty—It is charged from
successor of inherited property.

Similarly (vi) Expenditure tax and (vii) Fringe benefit tax (imposed by state govt.) are
other examples of direct taxes. It is difficult to avoid direct taxes as they are levied directly on
income and property of persons who pay directly to the government.

Merits of Direct Taxes:

 Direct taxes help in reducing disparities in income and wealth of people,

 They are economical because cost of collection for government is relatively low,
 Social and economic Justice is achieved to some extent because direct taxes are based
on ability to pay.

Direct taxes are generally considered progressive taxes because they are based on the ability to
pay. A progressive tax is one the rate of which increases with rise in income and decreases
with fall in income.

(b) Indirect Tax:

When (i) liability to pay a tax is on one person and (ii) the burden of that tax falls on some
other person, the tax is called an indirect tax.
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Thus, it is a tax whose burden can be shifted to others. For example,

 Sales tax: It is an indirect tax because liability to pay tax is that of shopkeeper who in
turn realises the tax amount from the customer by including it in the price of the
commodity. Other examples of indirect tax are
 Excise duty:It is paid by the producer (manufacturer) of goods, who recovers it from
wholesalers and retailers,
 Custom duty: It is charged from importer of goods from a foreign country which is
recovered from retailers and customers,
 Entertainment tax: It is charged from cinema owners, who recover it from cinema
viewers,
 Service tax: It is imposed on selling services (like serving meals in hotels) to
customers. Similarly,
 Octroi (chungi) and
 ‘Value added tax’: ‘Value added tax’ is other examples of indirect taxes. In short, all
taxes levied on goods and services in different forms (like on production, sale,
transport, etc.) are called indirect tax.

Merits of indirect taxes:

 Indirect taxes are convenient to realise because they are Included in the price of the
commodity.
 They have wider coverage since every member (consumer) of society is taxed
through price of the commodity.
 Consumption of harmful commodities like wine, cigarettes, etc. is curtailed, thus
serving social purpose.

Heads of Income (Sec 14)

Five main Heads of Income:
1) Salaries
2) (“Interest on securities” omitted by the Finance Act, 1988, w.e.f. 1-4-1989.)
3) Income from House Property
4) Profits and Gains of Business or Profession
5) Capital Gains
6) Income from Other Sources

1) Income from Salary (Sec 15 to 17)

Income is taxable under head “Salaries”, only if there exists Employer - Employee
Relationship between the payer and the payee. Income can be charged under this head only if
there is an employer employee relationship between the payer and payee
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Salary includes:

 basic salary or wages,

 any annuity or pension,
 gratuity,
 advance of salary,
 leave encashment,
 commission,
 perquisites in lieu of or in addition to salary and retirement benefits.

Note: Basic salary along with commissions and bonuses is fully taxable

The aggregate of the above incomes, after exemptions available, is known as Gross Salary and
this is charged under the head income from salary.

Allowances: An allowance is a fixed monetary amount paid by the employer to the employee
for expenses related to office work. Allowances are generally included in the salary and taxed
unless there are exemptions available.

 The following allowances are fully taxable :

dearness allowance, city compensatory allowance, overtime allowance, servant allowance

and lunch allowance.

 Specific exemptions are available for some allowances as shown below.

 Conveyance Allowance: Upto Rs 800/- a month is exempt from tax.
 House Rent Allowance (HRA) : Hop over the House Rent Allowance article to
check on calculation and exemptions available.
 Leave Travel Allowance (LTA) : LTA accounts for expenses for travel when
you and your family go on leave. While this is paid to you, it is tax free twice in
a block of 4 years.
 Medical Allowance : Medical expenses to the extent of Rs 15,000/- per annum is
tax free. The bills can be incurred by you or your family.

Perquisites : Perquisites (or personal advantage) are benefits in addition to normal salary to
which an employee has a right by way of his employment.

Examples of these are rent free accommodation or car loan. There are some perquisites that
are taxable in the hands of all categories of employees, some which are taxable when the
employee belongs to a specific group and some that are tax free.

Your employer will give you Form 16 which will contain all the earnings, deductions and
exemptions available
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Deductions From Salary Sec 16

Entertainment Allowance: The first deduction which you claim from salary is Entertainment
Allowance. Entertainment allowance received is first included in the employee’s income and
then a deduction is allowed in case of government employees, for a sum equal to 1/5th of
salary (excluding all allowances, benefits and other perquisites) or Rs. 5,000, whichever is
less.

Professional Tax: Tax on employment by whatever name called, levied by a State under
Article 80C 276 of the Constitution shall be allowed as a deduction. [Sec. 16(iii)]

Deductions Permissible under Chapter VI-A: Certain deductions are available from the
gross taxable income, under sections 80C to 80U. Important deductions are:

 Section 80C: Deduction under this section is available only to an individual or an

HUF.Section 80C of the Income Tax Act allows certain investments and expenditure to
be deducted from total income up to the maximum of Rs 150,000 from the Financial
Year 2014-15.[
 [Sec. 80CCC]: Contribution to LIC Pension Plan (Jeevan Suraksha) or Pension Fund
of other insurance companies.
 [Sec. 80CCD]: Contribution to notified Pension Scheme by employees of Central
Government or any other employer or by any other individual.
 80CCG]: Investment in listed equity shares under Rajiv Gandhi Equity savings
Scheme.
 [Sec. 80D]: Payment of Medical Insurance Premia (Mediclaim) or contribution to
Central Government Health Scheme. Deductible upto a maximum of Rs. 15,000 (Rs.
20,000 in case the person insured is a senior citizen). Besides, an additional deduction
upto Rs. 15,000 (Rs. 20,000 in case the person insured is a senior citizen) [The age limit
for a senior citizen from A.Y.2013-14 is 60 years or more] shall be allowable in respect
of medical insurance premium for parent(s).
 [Sec. 80DD]: Expenditure on medical Treatment etc. and deposit for maintenance of
handicapped dependents. A deduction is allowed to compensate for any expenditure
incurred by an assesses, during a year, for the medical treatment (including nursing),
training and rehabilitation of one or more handicapped relatives wholly dependent on
him, and for amount deposited in an approved scheme of LIC or UTI, for the benefit of
a handicapped dependent. A fixed deduction of Rs. 50,000 is allowable, in aggregate
for any or both the purpose specified above, irrespective of the actual amount of
expenditure incurred.
 [Sec. 80DDB]: Expenditure or Medical Treatment of assess/dependant relative
Deduction for the amount of expenditure incurred or Rs. 40,000, whichever is less, is
allowable for any year during which expenditure is actually incurred for the medical
treatment of specified diseases or ailments for the assesses himself or a dependent
relative. If the patient is a senior citizen the deduction allowable shall be the
expenditure incurred or Rs. 60,000 whichever is less. Besides, any amount received
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under a medical insurance policy shall be reduced from the amount of deduction
allowable.
 [Sec. 80E]: Interest on Loan taken for Higher Education. Any amount paid by way
of interest on a loan taken from any financial institution or any approved charitable
institution for the purpose of pursing his higher education, is deduction without any
limit.
 [Sec. 80EE]: Interest on Loan taken for first residential house. Deduction is
allowable for interest on housing loan from a bank/housing finance company, for
allowable is Rs. 1, 00,000, subject to specified conditions. The deduction is allowable
for A.Y. 2014-15 and A.Y. 2015-16 only.]
 [Sec. 80G]: Donation for Charitable Purposes There are a number of donations in
respect of which deduction is permissible under Sec. 80G. Deduction @ 50% is
available for donation to Jawaharlal Nehru Memorial Fund, Prime Minister Drought
Relief Fund, [National Children’s Fund] Indira Gandhi Memorial Trust or Rajiv Gandhi
Foundation etc. 100% deduction is allowed for donations to National Defense Fund,
Prime Minister’s National Relief Fund, [National Children’s Fund,]National
Foundation for Communal Harmony, Chief Minister’s/Lt. Governor’s Relief Fund etc.
Deduction is granted subject to the prescribed maximum ceiling and on furnishing of
appropriate certificate from the done organization. Donation of a sum exceeding Rs.
10,000 shall be eligible for deduction, only if it paid by a mode other than cash.
 [Sec. 80GG]: Expenditure on Rent. Rent paid by an assesses not owning a house and
not in receipt of house rent allowance u/s 10(13A) for residential accommodation
whether furnished or unfurnished, is deductible subject to the prescribed ceilings
 [Sec. 80GGA]: Donations to specified institutions/associations for Research or for
Rural Development Donation of a sum exceeding Rs. 10,000 shall be eligible for
deduction, only if it paid by a mode other than cash.
 [Sec. 80U]: Physical Disability Rs. 50,000 for disability and Rs. 1, 00,000 for severe
disability

Computation of Income from salary

Income from salary xxxx

Income by way of allowance xxx

Taxable value of perquisite xxx

Gross salary xxxx

Less: Deduction under section 16 xxx

Entertainment allowance xxx

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Professional tax xxx
Less : deduction under sec 80C to 80U xxx

Taxable income under the head salaries XXXX

2) Income from House Property (Sec 23 -27)

Income under this head is taxable if the assessee is the owner of a property consisting of
building or land appurtenant thereto and is not used by him for his business or professional
purpose. An individual or an Hindu Undivided Family (HUF) is eligible to claim any one
property as Self-occupied if it is used for own or family's residential purpose.

Chargeability (Section 22):

The annual value of a property, consisting of any buildings or lands appurtenant

thereto, of which the assessee is the owner, is chargeable to tax under the head ‘Income from
house property’ after claiming deductions under Section 24 provided such portion of the
property is not used by the assessee for the purpose of business or profession the income from
which is chargeable to Income tax.

Essential Conditions for charging income under this head

i) The property must consist of buildings and lands.
ii) The assessee must be the owner
iii) The property must not be used for the purpose of business or profession.

For the purpose of point (ii) ownership includes free hold, leased and deemed ownership.

What is Deemed ownership?

Section 27 considers the following people as deemed owners though not the legal
owners.

 Transferor is considered a deemed owner incase of transfer to a spouse or child without

adequate consideration.
 The holder of an impartible estate is considered an owner of all properties.
 Person having right in a property for a period not less than 12 years.

Property Incomes Exempt From Tax

Some incomes from house property are exempt from tax. They are neither taxable nor
included in the total income of the
Assessee for the tax purposes. These are:
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1. Income from a farm house.
2. Annual value of one palace in the occupation of anex-ruler.
3. Property income of a local authority.
4. Property income of an approved scientific research association.
5. Property income of an educational institution and hospital.
6. Property income of a registered trade union.
7. Income from property held for charitable purposes.
8. Property income of a political party.
9. Income from property used for own business or profession.
10. Annual value of one self occupied property.

Computation of Income from House Property

1) Gross Annual Value (Expected rent /

Actual rent received or receivable Xxxx
whichever is higher)

(In case of vacancy least of the above three)

2) Less: Taxes actually paid by owner to Xxx
municipal authorities
Net Annual Value Xxxxx
3) Less: Deductions u/s 24
a) Statutory deduction @ 30% of NAV xxx
b) Interest on borrowed capital xxx
(Rs.1,50,000 is the max permissible for self
occupied and there is no cap on let out)
Total Xxxxx
( Income chargeable under the head
“Income from House Property” )

Deductions u/s 24:

a) Statutory deduction: An amount of 30% of NAV is straight away allowed as deduction.
b) Interest on borrowed capital is allowed to the extent of:
 Rs.1,50,000 incase of self occupied property acquired or constructed with in 3 years
and has started before 1-4-1999.
 Rs.30,000 in any other case.
 Incase of let out property there is no maximum amount fixed under this block.

3) Income from business or profession (Sec 28 – 45)

What is business: In brief, Business includes any trade, commerce and manufacturing of
goods with a purpose of making profit within the permissible laws of country.
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What is a Profession: It includes services provided by the professionally qualified or
technically qualified person according to their qualification.

Income from Business/Profession: means any income which is shown in profit and loss
account after considering all allowed expenditures.

Income chargeable under business/profession

The following are few examples of incomes which are chargeable under this head:-

1. Normal Profit from general activities as per profit and loss account of business entity.
2. Profit from speculation business should be kept separate from business income and
shown separately.
3. Any profit other than regular activities of a business should be shown as casual income
and will be shown under “income from other sources” head.
4. Profit earned on sale of REP License/Exim scrip, cash assistance against export or duty
drawback of custom or excise.
5. The value of any benefits whether convertible into money or no from
business/profession activities.
6. Any interest, salary, commission etc. received by the partner of a firm will be treated
as business/professional income in hand of partner. However, the share of profit from
partnership firm is exempt in hand of partner.
7. Amount recovered on account of bad debts which were already adjusted in profit in
earlier years etc.

Expenses deductible from income from business/profession

All the expenses relating to business and profession are allowed against income. Following are
few examples of expenditures which are allowed against income:-

 Rent rates and insurance of building.

 Payment for know-how, patents, copy rights, trade mark, licenses.
 Depreciation on fixed assets.
 Payment for professional services.
 Expenditures on scientific research for business purposes.
 Preliminary Expenses in case of Limited companies.
 Salary, bonus, commission to employees.
 Salary, interest and remuneration to working partners subject to certain conditions.
 Communication expenses.
 Traveling and conveyance expenses.
 Membership fees etc.
 Advertisement expenses in respect of promotion of business products.
 Discount allowed to customers.
 15
 Interest on loans (Whether Private of Institutional).
 Bank Charges/Bank Commission expenses.
 Entertainment/Business Promotion expenses
 Staff Welfare expenses.
 Festival Expenses.
 Printing and stationery expenses
 Postage expenses.
 All other expenses relating to business/profession

Note: The above expenditures are allowed on the basis of actual payment as well as on accrual
basis at the date of finalization accounts.

Expenses which are deductible on actual payment only

Following expenses will be allowed if these expenses have been paid before or on due date or
before filing of income tax return:-

1. Any tax, duty, cess or fees by whatever name called

2. Contribution to provident fund, ESI premium, gratuity fund or other funds for welfare
of employees.
3. Bonus or commission or leave encashment payable to employees.
4. Interest on loan from public financial institutions, state financial corporation or from scheduled
bank.

4) Income from Capital Gain (46- 55a)

Under the Income Tax Act, any profits or gains arising from the transfer of a capital
asset effected in the previous year, shall be chargeable to income tax under the head 'capital
gains' and shall deemed to be the income of the previous year in which the transfer took place
unless such capital gain is exempted under the prescribed exemptions.

'Capital gains' means any profit or gains arising from transfer of a capital asset. If any
Capital Asset is sold or transferred, the profits arising out of such sale are taxable as capital
gains in the year in which the transfer takes place. Capital gains is the difference between the
price at which the capital asset was acquired and the price at which the same asset was sold. In
technical terms, capital gain is the difference between the cost of acquisition and the fair
market value on the date of sale or transfer of asset.

Basis of Charge:-
a) There must be a capital asset
b) Capital asset must have been transferred
c) There must be profit or loss on such transfer
 16
d) Such capital gain should not be exempt u/s 54, 54B, 54D,54EC,54F,54G, 54GA

Meaning of Capital Asset: - Capital asset means property of any kind, whether or not
connected with business or profession of assessee but does not include:-
a) Any stock-in- trade
b) Personal effects meaning
Movable property
Held for use by assessee or member of family dependent upon him
The following assets can never be personal effects:-
 Jewellery
 Archeological collections
 Drawings
 Paintings
 Sculptures
 Any other work of art
 Does not include house property as it is immovable property

c) Rural agricultural land

 Within municipal limits and population less than 10000

 If outside municipal limits at least 8km. away from municipal limits

d) 7% gold bonds and 6.5% bonds of CG

e) Bearer bonds, issued by CG
f) Gold deposit bonds under Gold deposit scheme, 1999

Capital asset is of two types:

(a) Short term capital asset

This is an asset that is held for not more than 36 months immediately preceding the date of its
transfer. However, if the following assets are held for 12 months, they will qualify as well :

1. Equity or preference shares held in a company

2. Any other security listed on a recognized stock exchange of India
3. Units of Unit Trust of India
4. Units of specific Mutual Funds
5. Zero coupon bonds
 17
(b) Long term capital asset:

This is an asset that is held for more than 36 months or 12 months as the case may be.

Transfer is defined as the sale of the asset, giving up of rights on the asset, forceful takeover
by law or maturity of the asset to name a few. Many transactions are not considered as
transfer, for example, transfer of a capital asset under a will.

Capital Gains

Any profits or gains arising from the transfer of a capital asset effected in the previous year
shall be chargeable to income-tax under the head ‘Capital Gains’.

Since capital assets are of two types, there will be two types of capital gains :

 Short term capital gains (STCG) – capital gains arising on transfer of short term asset.
 Long term capital gains (LTCG) – capital gains arising on transfer of long term asset.

Examples of assets are apartments, land, shares, mutual funds, gold among many others.

You can infer from the information above, that stock and units of equity diversified mutual
funds qualify for LTCG if held for more than a year.

Similarly, if real estate is held for 3 years, it qualifies for LTCG. If sold before 3 years,
it qualifies for STCG.

In order to tax capital gains, the following conditions must have been met:

 The assessee must have owned a capital asset.

 The assessee must have transfered the capital asset in the previous year. So it is not
necessary that the property should have been a capital asset on the date of acquisition
(date when asset was acquired by the investor) of the asset by the assessee.
 There must have been profit or gains as a result of such transfer.

5) Income from Other Sources (56-59)

It is residuary head of Income which must satisfy the following conditions:-

1. There must be an income;

2. This income is NOT exempt under the IT Act 1961; and
3. This income is not chargeable to tax under the other heads of income viz. "Salary",
"House property", "Business or Profession" and "Capital Gains".
 18
Example of Income from Other Sources

Some examples of certain incomes normally taxed under this head are given below:-

 Interest on bank deposits, loans or company deposits,

 Dividend;
 Family pension (received by legal heirs of an employee),
 Income from sub-letting of house property by a tenant,
 Agricultural income from agricultural land situated outside India,
 Interest received from IT Dept. on delayed refunds,
 Remuneration received by Members of Parliament,
 Casual receipts and receipts of non-recurring nature,
 Insurance commission,
 Examiner-ship fees received by a teacher (not from employer),
 Income from royalty,
 Director's commission for standing as guarantor to bankers,
 Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games,
 Interest on securities,
 Income from letting out of machinery, plant or furniture, etc.
 Any sum exceeding Rs. 50,000/- received without consideration shall be treated as
income provided that the sum of money is not received from any relative or on the
occasion of marriage of the individual or under a will or inheritance etc

Tax Returns
1. The tax form or forms used to file income taxes with the Internal Revenue Service (IRS).
Tax returns often are set up in a worksheet format, where the income figures used to calculate
the tax liability are written into the documents themselves. Tax returns must be filed every
year for an individual or business that received income during the year, whether through
regular income (wages), interest, dividends, capital gains, or other profits.

2. A return of excess taxes paid during a given tax year; this is more accurately known as a
"tax refund".

Investopedia Explains 'Tax Return'

Individuals use Form 1040, corporations use Form 1120 and partnerships use Form 1065.
Investment income is recorded on Form 1099. Most large corporations and sole proprietors file
tax returns quarterly, rather than just once per year. This keeps the tax balance running as close
to $0 as possible and avoids oversized tax bills at the end of the year.
 19
There are five categories of Income Tax returns.

1. Normal return u/s 139(1)

2. Belated return
3. Revised return
4. Defective return
5. Returns in response to notices.

 Normal return: Returns filed within the return filing due date, that is 31 July (for non
audit assessees) or 30 September (for assessee or their firms liable for audit) of concerned
assessment year.

 Belated return: In case of failure to file the return on or before the due date, belated
return can be filed before the expiry of one year from the end of the relevant assessment
year.

 Revised return: In case of any omission or any wrong statement mentioned in the
normal return can be revised at any time before the expiry of one year from the end of the
relevant assessment year.

 Defective return: Assessing Officer considers that the return is defective, he may
intimate the defect. One has to rectify the defect within a period of fifteen days from the
date of such intimation. If the assessee wants more time, he can file an application to the
A O and a further 15 days can be granted at the instance of the A O.

 Returns in response To notices: Assessing officer in the process of making assessment,

may serve a notice under various sections like 142(1), 148(1), 153A(a) or 153C. Returns
are required to be furnished within the date specified on the respective notices. may be in
case of the same

Exemption

General
Section Nature of Income Exemption limit, if any
10(1) Agricultural income
10(2) Share from income of HUF
10(2A) Share of profit from firm
10(3) Casual and non-recurring receipts Winnings from races
Rs.2500/- other receipts
Rs.5000/-
10(10D) Receipts from life Insurance Policy
10(16) Scholarships to meet cost of education
 20
10(17) Allowances of MP and MLA. For MLA not exceeding
Rs. 600/- per month
10(17A) Awards and rewards
(i) from awards by Central/State Government
(ii) from approved awards by others
(iii) Approved rewards from Central & State
Governments
10(26) Income of Members of scheduled tribes residing Only on income arising in
in certain areas in North Eastern States or in the those areas or interest on
Ladakh region. securities or dividends
10(26A) Income of resident of Ladakh On income arising in
Ladakh or outside India
10(30) (i) Subsidy from Tea Board under approved
scheme of replantation
10(31) (ii) Subsidy from concerned Board under
approved Scheme of replantation
10(32) Minor's income clubbed with individual Upto Rs. 1,500/-
10(33) Dividend from Indian Companies, Income from
units of Unit Trust of India and Mutual Funds,
and income from Venture Capital
Company/fund.
10(A) Profit of newly established undertaking in free
trade zones electronic hardware technology park
on software technology park for 10 years (net
beyond 10 year from 2000-01)
10(B) Profit of 100% export oriented undertakings
manufacturing articles or things or computer
software for 10 years (not beyond 10 years from
2000-01)

10(C) Profit of newly established undertaking in I.I.D.C

or I.G.C. in North-Eastern Region for 10 years

Income from Salary

Section Nature of Income Exemption limit, if any
10(5) Leave Travel assistance/ concession Not to exceed the amount
payable by Central
Government to its
employees
10(5B) Remuneration of technicians having specialised Exemption in respect of
 21
knowledge and experience in specified fields (not income in the from of tax
resident in any of the four preceding financial paid by employer for a
years) whose services commence after 31.3.93 and period upto 48 months
tax on whose remuneration is paid by the employer
10(7) Allowances and perquisites by the government to
citizens of India for services abroad
10(8) Remuneration from foreign governments for duties
in India under Cooperative technical assistance
programmes. Exemption is provided also in respect
of any other income arising outside India provided
tax on such income is payable to that Government.
10(10) Death-cum-retirement Gratuity-
(i) from Government
(ii) Under payment of Gratuity Act 1972 Amount as per Sub-
sections (2), (3) and (4) of
the Act.
(iii) Any other Upto one-half months
salary for each year of
completed service.
10(10A) Commutation of Pension-
(i) from government, statutory Corporation etc.
(ii) from other employers Where gratuity is payable
- value of 1/3 pension.?
Where gratuity is not
payable - value of 1/2
pension
(iii) from fund set up by LIC u/s 10(23AAB)
10(10AA) Encashment of unutilised earned leave
(i) from Central or State government
(ii) from other employers Upto an amount equal to
10 months salary or Rs.
1,35,360/- which ever is
less
10(10B) Retrenchment compensation Amount u/s. 25F(b) of
Industrial Dispute Act
1947 or the amount
notified by the
government, whichever is
less.
10(10C) Amount received on voluntary retirement or Amount as per the
termination of service or voluntary separation Scheme subject to
 22
under the schemes prepared as per Rule 2BA from maximum of Rs. 5 lakh
public sector companies, statutory authorities, local
authorities, Indian Institute of Technology,
specified institutes of management or under any
scheme of a company or Co-operative Society
10(11) Payment under Provident Fund Act 1925 or other
notified funds of Central Government
10(12) Payment under recognised provident funds To the extent provided in
rule 8 of Part A of Fourth
Schedule
10(13) Payment from approved Superannuation Fund
10(13A) House rent allowance least of-
(i) actual allowance
(ii) actual rent in excess of
10% of salary
(iii) 50% of salary in
Mumbai, Chennai, Delhi
and Calcutta and 40% in
other places
10(14) Prescribed [See Rule 2BB (1)] special allowances To the extent such
or benefits specifically granted to meet expenses expenses are actually
wholly necessarily and exclusively incurred in the incurred.
performance of duties
10(18) Pension including family pension of recipients of
notified gallantry awards

Exemptions to Non-citizens only

Section Nature of Income Exemption limit, if any

10(6)(i)(a) and (i) passage money from employer for the employee
(b) and his family for home leave outside India
(ii) Passage money for the employee and his family
to 'Home country' after retirement/termination of
service in India.
10(6)(ii) Remuneration of members of diplomatic missions
in India and their staff, provided the members of
staff are not engaged in any business or profession
or another employment in India.
10(6)(vi) Remuneration of employee of foreign enterprise for
services rendered during his stay in India in
 23
specified circumstances provided the stay does not
exceed 90 days in that previous year.
10(6)(xi) Remuneration of foreign Government employee on
training in certain establishments in India.

Taxes: A tax represents money that a government charges an individual or business when they
perform a particular action or complete a specific transaction. This tax is often assessed as a
percentage of an amount of money involved in the transaction. For example, a tax is applied
on the income that a person makes during a year. In addition, a tax is often placed on the sale
of goods.

Fees: A fee is related to a tax, in that it is also a charge paid to the government by individuals
or by a business. However, a fee is specifically applied for the use of a service. The fee rate is
directly tied to the cost of maintaining the service. Money from the fee is generally not applied
to uses other than to providing the service for which the fee is applied. For example, a
government may charge a fee to visit a park.

Exemption: The word “exempt” means “free from an obligation from doing something”. In
the case of income tax, “exemption” gives you the freedom to not pay the tax. So, when a
particular income is not taxable at all, it’s an exemption. Of course, certain income can be
exempted from tax provided certain conditions are met.
For instance, leave travel allowance amount is exempted from tax, provided certain
conditions are met. Likewise house rent allowance is an exemption you get under Section
10(13a) of the Indian Income Tax Act. Also, capital gains from transfer of agriculture land,
invested in another agriculture land. Another example of exemption is when long-term capital
gain arising from transfer of eligible equity share of company.

Deduction: The word “deduct” means “to subtract or take away for the total”. Likewise, the
word “deduction” as far as income tax goes, means the amount is taken away (reduced) from
the total taxable income. Usually when the government wants to encourage savings, they offer
deductions for investing in certain instruments and hence lower your taxable income by that
extent.
For example, if your gross income is Rs 5 lakh and you invest Rs 1 lakh in an
instrument that offers deduction, your total taxable income (income on which tax is due)
reduces to Rs 4 lakh. So if your tax liability is, say, 10 percent of your taxable income, after
accounting for deduction, you will pay Rs 10,000 less in income-tax. Examples of financial
instruments which offer various deduction benefits are as follows.
Investment in an equity linked savings scheme is also available for deduction up to Rs 1
lakh this year under Section 80 C. Health insurance premiums paid for self, spouse or children,
also get a tax deduction benefit under Section 80 D. Also, under Section 80 E you get a
deduction on repayment of education loan (only interest) taken for higher studies for self,
 24
spouse or children when taken from authorised lenders. Keep in mind that this deduction is
allowed for eight assessment years or until the entire interest is paid, whichever is earlier.

Income Tax Authorities and their Powers sec 116

The Government of India has constituted a number of authorities to execute the Income Tax
Act and to control the Income Tax Department efficiently.

The Central Board of Direct Taxes is the supreme body in the direct tax set-up. It has to
perform several statutory functions under the various acts and it is responsible for the
formulation and implementation of different policies relating to direct taxes administration.
The Board consists of a Chairman and six members.

Appointment of Income Tax Authorities in India

The Central Government can appoint those persons which it thinks are fit to become Income
Tax Authorities.
 The Central Government can authorize the Board or a Director-General,
 a Chief Commissioner or a Commissioner or
 a Director to appoint income tax authorities below the ranks of
 an Deputy Commissioner or
 Assistant Commissioner,
According to the rules and regulations of the Central Government controlling the conditions of
such posts.

Powers of Income Tax Authorities

1) Power relating to Discovery, Production of evidence, etc: The Assessing Officer, The
Joint Commissioner, the Chief Commissioner or the Commissioner has the powers as are
provided in a court under the code of Civil Procedure, 1908, when trying to suit for the
following matters

(a) discovery and inspection;

(b) to enforce any person for attendance, and examining him on oath
(c) issuing commissions; and
(d) compelling the production of books of account and other document.

2) Power of Search and Seizure: Today it is not hidden from income tax authorities that
people evade tax and keep unaccounted assets. When the prosecution fails to prevent tax
evasion, the department has the to take actions like search and seizure.

3) Requisition of Books of account, etc: Where the Director or the Director-General or

 25
Commissioner or the Chief Commissioner in consequence of information in his possession,
has reason to believe that (a), (b), or (c) as mentioned under section 132(1) and the book of
accounts or other documents or the assets have been taken under custody by any authority or
officer under any other law, then the Chief Commissioner or the Director General or Director
or Commissioner can authorize any Joint Director, Deputy Director, Joint Commissioner,
Assistant Commissioner, Assistant Director, or Income tax Officer to require the authority to
provide sue books of account, assets or any documents to the requisitioning officer, when such
officer is of the opinion that it is no longer necessary to retain the same in his custody.

4) Power to Call for Information: The Commissioner The Assessing Officer or the Joint
Commissioner may for the purpose of this Act:
(a) can call any firm to provide him with a return of the addresses and names of partners of the
firm and their shares;
(b) can ask any Hindu Undivided Family to provide him with return of the addresses and
names of members of the family and the manager;
(c) can ask any person who is a trustee, guardian or an agent to deliver him with return of the
names of persons for or of whom he is an agent, trustee or guardian and their addresses;
(d) can ask any person, dealer, agent or broker concerned in the management of stock or any
commodity exchange to provide a statement of the addresses and names of all the persons to
whom the Exchange or he has paid any sum related with the transfer of assets or the exchange
has received any such sum with the particulars of all such payments and receipts;

5) Power of Survey: The term 'survey' is not defined by the Income Tax Act. According to the
meaning of dictionary 'survey' means casting of eyes or mind over something, inspection of
something, etc. An Income Tax authority can have a survey for the purpose of this Act.

The objectives of conducting Income Tax surveys are:

• To discover new assessees;
• To collect useful information for the purpose of assessment;
• To verify that the assessee who claims not to maintain any books of accounts is in-fact
maintaining the books;
• To check whether the books are maintained, reflect the correct state of affairs.

6) Collection of Information: For the purpose of collection of information which may be

useful for any purpose, the Income tax authority can enter any building or place within the
limits of the area assigned to such authority, or any place or building occupied by any
person in respect of whom he exercises jurisdiction.

Procedure for recovery tax (222 – 276)

Issue of notice. [When a certificate has been drawn up by the Tax Recovery Officer] for the
recovery of arrears under this Schedule, the Tax Recovery Officer shall cause to be served
upon the defaulter a notice requiring the defaulter to pay the amount specified in the certificate
 26
within fifteen days from the date of service of the notice and intimating that in default steps
would be taken to realise the amount under this Schedule.

When certificate may be executed.

No step in execution of a certificate shall be taken until the period of fifteen days has elapsed
since the date of the service of the notice required by the preceding rule :

Provided that, if the Tax Recovery Officer is satisfied that the defaulter is likely to conceal,
remove or dispose of the whole or any part of such of his movable property as would be liable
to attachment in execution of a decree of a civil court and that the realisation of the amount of
the certificate would in consequence be delayed or obstructed, he may at any time direct, for
reasons to be recorded in writing, an attachment of the whole or any part of such property:

Provided further that if the defaulter whose property has been so attached furnishes security
to the satisfaction of the Tax Recovery Officer, such attachment shall be cancelled from the
date on which such security is accepted by the Tax Recovery Officer.

Mode of recovery.

If the amount mentioned in the notice is not paid within the time specified therein or
within such further time as the Tax Recovery Officer may grant in his discretion, the Tax
Recovery Officer shall proceed to realise the amount by one or more of the following modes
:—

(a) by attachment and sale of the defaulter’s movable property

(b) by attachment and sale of the defaulter’s immovable property;

(c) by arrest of the defaulter and his detention in prison;

(d) by appointing a receiver for the management of the defaulter’s movable and immovable
properties.

Interest, costs and charges recoverable.

There shall be recoverable, in the proceedings in execution of every certificate,—

(a) such interest upon the amount of tax or penalty or other sum to which the certificate relates
as is payable in accordance with sub-section (2) of section 220, and

(b) all charges incurred in respect of—

(i) the service of notice upon the defaulter to pay the arrears, and of warrants and other
processes, and
 27
(ii) all other proceedings taken for realising the arrears.

Property exempt from attachment.

(1) All such property as is by the Code of Civil Procedure, 1908 (5 of 1908), exempted from
attachment and sale in execution of a decree of a civil court shall be exempt from attachment
and sale under this Schedule.

(2) The Tax Recovery Officer’s decision as to what property is so entitled to exemption shall
be conclusive.

Investigation by Tax Recovery Officer.

(1) Where any claim is preferred to, or any objection is made to the attachment or sale of, any
property in execution of a certificate, on the ground that such property is not liable to such
attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or
objection :

Provided that no such investigation shall be made where the Tax Recovery Officer considers
that the claim or objection was designedly or unnecessarily delayed.

(2) Where the property to which the claim or objection applies has been advertised for sale, the
Tax Recovery Officer ordering the sale may postpone it pending the investigation of the claim
or objection, upon such terms as to security or otherwise as the Tax Recovery Officer shall
deem fit.

(3) The claimant or objector must adduce evidence to show that—

(a) (in the case of immovable property) at the date of the service of the notice issued
under this Schedule to pay the arrears, or

(b) (in the case of movable property) at the date of the attachment, he had some interest
in, or was possessed of, the property in question.

(4) Where, upon the said investigation, the Tax Recovery Officer is satisfied that, for the
reason stated in the claim or objection, such property was not, at the said date, in the
possession of the defaulter or of some person in trust for him or in the occupancy of a tenant or
other person paying rent to him, or that, being in the possession of the defaulter at the said
date, it was so in his possession, not on his own account or as his own property, but on account
of or in trust for some other person, or partly on his own account and partly on account of
some other person, the Tax Recovery Officer shall make an order releasing the property,
wholly or to such extent as he thinks fit, from attachment or sale.
 28
(5) Where the Tax Recovery Officer is satisfied that the property was, at the said date, in the
possession of the defaulter as his own property and not on account of any other person, or was
in the possession of some other person in trust for him, or in the occupancy of a tenant or other
person paying rent to him, the Tax Recovery Officer shall disallow the claim.

(6) Where a claim or an objection is preferred, the party against whom an order is made may
institute a suit in a civil court to establish the right which he claims to the property in dispute;
but, subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be
conclusive.

Income tax tribunal

Introduction
The Appellate Tribunal is the next Appellate Forum available under the Income tax Act, 1961,
after the Commissioner of Income Tax (Appeals) decides the appeal filed by the assessee. The
Appellate Tribunal provides an opportunity to both the assessee and the assessing authority to
come in appeal against the orders passed by the first appellate authority.

Constitution of Appellate Tribunal

The Income Tax Appellate Tribunal is constituted by the Central Government under section
252(1) of the Act.
The sub-section (1) to section 252 further vests the Central Government with the power to
appoint Members of the Appellate Tribunal as Judicial Members and Accountant Members.
As per sub-section (2) to section 252 the Members of the Appellate Tribunal can be
selected from the profession as well as from the Department. A person with 10 years
experience as advocate or a judicial officer within the territory of India or a member of the
Indian Legal Service and has held a post in Grade II of that service or any equivalent or higher
post for at least three years is eligible to be appointed as a judicial member. Similarly, an
accountant member shall be a person who has for at least ten years been in the practice of
accountancy as a Chartered Accountant under the Chartered Accountants Act, 1949 or as a
registered accountant under any law formerly in force or partly as a registered accountant and
partly as a chartered accountant, or who has been a member of the Indian Income Tax Service,
Group A and has held the post of Additional Commissioner of Income Tax or any equivalent
or higher post for at least three years.
Sub-section (3) to section 252 authorises the Central Government to appoint either the
Senior Vice President or one of the vice-Presidents as the President of the Appellate Tribunal.
The provisions of sub-section (4) and (4A) of section 252 deal with the appointment of
Senior Vice President and Vice-Presidents.
Sub-section (5) of the section 252 authorizes the President to delegate the powers of the
President to the Senior Vice President or a Vice President.
 29
Sitting bench and territorial jurisdiction:
Rule 3 of the Income-tax Appellate Tribunal Rules provides that a bench shall hold its
sitting at its headquarters or at such other place or places as may be authorised by the
president. The standing order under Income Tax (Appellate Tribunals) Rules, 1963 dated 16-9-
1997 provides that for the place of sitting of the benches and their territorial jurisdiction. The
notification mentions that the ordinary jurisdiction of the Bench will be determined not by the
place of business or residence of the assessee but by the location of the office of the Assessing
Officer.

The President is vested with the powers to constitute the Benches under the provisions of sub-
section (1) of section 255. The Benches constituted from among the Members by the President
shall exercise the powers vested with the Appellate Tribunal.

Benches:

 Division Bench
As per the provisions of sub-section (2) to section 255 a Bench of the Appellate Tribunal
shall consist of two Members, one shall be a Judicial Member and another shall be
accountant member. A division Bench consists of more than one Member. Sub-section (3)
provides exemption to usual practice of a Bench consisting of two Members by laying
down the pecuniary jurisdiction. Here, it may be relevant to refer to the provision provided
under section 24 of the Wealth Tax Act, 1957, which deals with the provisions pertaining
to the Appellate Tribunal. Sub-section (11) to section 24 of the Wealth Tax Act provides
that the provisions of sub-sections (1), (4) and (5) to section 255 of the Act shall apply to
the Appellate Tribunal in the discharge of its functions. Thus, the provisions of sub-section
(2) of section 255 of the Act, which lays down the condition that the Bench should consist
of one Judicial Member and one Accountant Member is not applicable to the bench
constituted under the Wealth Tax Act, 1957. Therefore, the Wealth Tax Bench of the
Appellate Tribunal may consist of two judicial Members or two accountant Members. As
per the provisions of sub-section (3) to section 255 an appeal, irrespective of the quantum
of disputed issue, has to be heard by a division Bench where the assessed income as
determined by the Assessing Officer is more than Rs. 5 lakhs. The maximum penalty
leviable u/s. 271B is Rs. 1 lakh. An appeal against the levy of the penalty u/s. 271B can be
heard by a division Bench only if the assessed income is more than Rs. 5 lakhs. In a case
where the assessed loss is more than Rs. 5 lakhs, the pecuniary jurisdiction requires that
any appeal pertaining to that assessment year shall have to be heard by the Division Bench
only. The Apex Court, though in a different context, has held that the word income
includes positive as well as negative profits in the case of CIT vs. Golta 156 ITR 323 (SC).
The ratio of this decision is applied for allocating an appeal to a division Bench.
 Single Member Court (SMC)
Sub-section 3 to section 255 provides that where the assessed income is less than Rs. 5
lakhs the appeal can be heard and disposed of by the president or any other Member of the
Appellate Tribunal, authorised by the Central Government, sitting singly. Here it is
important to note that only the Members who have been authorised by the Central
 30
Government can constitute Single Member Court (SMC). The provisions of sub-section 3
to section 255 lays down the pecuniary jurisdiction on the basis of assessed income and not
on the basis of the quantum of the issue or issues raised before the Appellate Tribunal.
Therefore, in a case where the disallowance of Rs. 10 lakhs results into an income of Rs.
2,00,000/- only, the Appeal can be heard by a Single Member Court.
 Third Member Bench
As mentioned earlier usually a bench of the Appellate Tribunal shall consist of one judicial
member and one accountant member. If the members of a Bench differ in opinion on any
point, then as per the provisions of sub-section (4) to section 255, the case shall be referred
by the president of the Appellate Tribunal for hearing on such point or points by one or
more of the other members of the Appellate Tribunal. The point or points referred to the
Third Member shall be decided according to the opinion of the majority of the members of
the Appellate Tribunal who have heard the case, including those who first heard it (JCIT
vs. Jindal Tractbel Power Co. Ltd. (1999) 240 ITR 189 (Kar).
 Special Bench
Section 255(3) also provides for Constitution of Special Bench consisting of three or more
members. The President, for disposal of particular case or cases, may constitute such
Special Bench. At least one of the members of such Special Bench must necessarily be a
judicial member and one accountant member.

Duties of Tribunal
 Primary duties
Opportunity of being heard:
One of the primary duties of the Appellate Tribunal is to settle the lis between the
assessee and the Department in terms of the provisions of section 254 (1). The Appellate
Tribunal is duty bound to dispose of the appeals filed before it after affording an
opportunity of being heard to both the parties. This is a vital requirement of the sub-
section (1) to section 254. This duty assumes further importance due to the fact that the
order passed under sub-section (1) shall be final subject to the orders of the High Court in
a reference u/s. 256 or appeal u/s. 260A.
 Speaking order should be passed
The Appellate Tribunal being the final authority as far as facts are concerned, it is
necessary and it is the requisite of the law that in disposing the appeal it clearly sets out
the facts.

Powers of the Appellate Tribunal

As discussed earlier, there are many features which make the Appellate Tribunal a unique
judicial forum. The Appellate Tribunal is vested with all the powers the income tax
authorities referred to in section 131 by virtue of section 255 (6).

 Power to call for documents

Under section 255(6), read with section 131, the Tribunal has the power to call for
documents relevant for deciding the appeal.
 31
 Power to remand
There are no provisions u/s. 254 which are coterminous with the provisions of sub-
section (4) to section 250 which gives the first appellate authority the power to direct
the Assessing Officer to make further inquiry and report the result of it.
 Power to award cost
With effect from 1-6-1999, sub-section 2B is inserted to section 254, which gives the
discretion to the Tribunal to award costs in suitable cases if the facts so warrant
 Power for rectification of mistake apparent on record
The Tribunal’s power to rectify its orders is derived from the provisions contained in
section 254(2) of the Act. The said section provides that the Tribunal shall rectify any
mistake apparent from the record by amending any order made by it under sub-section
(1) within four years from the date of the order if the mistake is brought to its notice by
the assessee or the Assessing Officer.
 Ex parte order
Rules 24 and 25 of Appellate Tribunal Rules, 1963, deals with procedure for hearing ex
parte by the Tribunal. Proviso to rule 24 provides that when an appeal has been
disposed of ex parte and the appellant applies afterwards and satisfies the Tribunal that
there was sufficient cause for his non-appearance when the appeal was called out for
hearing, the Tribunal shall make an order setting aside the ex parte order and restoring
the appeal.
 No power of review
The Appellate Tribunal does not have any power to review its own order. The statute
only permits rectification of mistake apparent on record.
 32

WEALTH TAX ACT, 1957

The Wealth Tax Act, 1957 governs the taxation process associated with the Net Wealth
that an Individual, a Hindu Undivided Family (HUF), or a Company possesses on the
Valuation Date.

The Reserve Bank of India is exempted from paying Wealth Tax though the entity
fulfils the requirement of being a corporation in India. It is an Act that provides for the levy of
Wealth Tax on liable Assessees and came into force on April 1, 1957. This Act requires liable
Assessees to file their Wealth Tax Return in Form BA, duly signed by the Assessee. The due-
date for filing return of Wealth Tax shall be same date as that applicable to an assessee under
the Income Tax Act.

Who is liable for payment of wealth tax

Residential status is key to deciding wealth tax liability. The thumb rule is that resident
Indians are subject to wealth tax on their global assets, while non-resident Indians and
foreigners are liable to pay tax only on their assets located in India. NRIs come under the
ambit of wealth tax on assets held here. But if a non-resident returns to India to reside here, the
assets brought in by him or her are not liable to wealth tax. Assets acquired by an NRI from
the money brought in within one year of his or her return are also exempt. This exemption
holds good for a period of seven years after the return to India, says Section 5(1)(v) of the
Wealth Tax Act.
Assesses section 3.
1.Individual. It includes trustees of a private trusts, legal heir.
2.HUF
3.Company.
However partnership firms and association of persons are not liable to wealth tax but
partners of a firm or members of an association of persons are liable for their share in the
property of the firm or association as the
case may be.1% of the amount by which net wealth exceeds 30 lakh.

Who is not liable for payment of wealth tax

Section 45:
1.Section 25 companies. (Non- Profit companies)
2.Any co-operative society
3.Any social club
4.Any political party as defined u/s 13A of the Income Tax Act
5.A mutual fund specified u/s 10(23D) of the Income Tax.

Computation of net wealth section 2(m): Section 2(ea) + Section 4 - section 5 - debts
owed by him on the valuation date which have been incurred in relation to the taxable assets.
 33
Assets in wealth tax
1. Building Section 2(e)(I).
(a) Any building or land appurtenant thereto whether used for commercial or residential
purpose is treated as an asset.
(b)Any farm house situated within 25 km from the local limits of municipality or cantonment
board is treated as an asset. (It means farm house situated beyond 25 km from the local limits
of municipality or cantonment board is not treated as asset)

Exception: However following buildings are not treated as an asset

(i)A residential house allotted by a Company (not individual or HUF) to a full time employee
whose Gross Annual Salary (GAS) is less than ₹ 10 lakh (GAS= all cash salary excluding
perquisites)
a.X Ltd. allots a residential house to a full time employee whose GAS is less than 10,00,000.
b.Mr. X allots a residential house to a full time employee whose GAS is less than 10,00,000.
c.X Ltd. allots a residential house to a part time employee whose GAS is less than 10,00,000.
d.X Ltd. allots a residential house to a full time employee whose GAS is 10,00,000.
Ans : Not an asset; It is an asset; It is an asset; It is an asset.
(ii)A residential property which is let out for a minimum period of 300 days in the PY not
treated as an asset.
However commercial house if let out or lying vacant treated as an asset.
(iii)Where the building is used for commercial/residential purpose forming part of stock in
trade is not treated as an asset.
(iv)When the building is occupied by the assessee for the purpose of any business or
profession carried on by him. (e.g. Factory, Godown or Office Building)
Note: As per the Memorandum explaining the Finance Bill, 1996, the objective of including a
house for commercial purpose in the definition of asset is to cover those houses which are let
out. The letting out is not considered “as occupied for carrying on the business”. Therefore
house meant for commercial purposes is an asset if it is let out or is lying vacant.
(v)When the building is the property in the nature of a commercial establishment or complex.
(E.g. LIC building; Videocon Tower)

RABINDRANATH DHAL: In this case ;./the High Court held that if a building owned by a
person is made available to the partnership firm in which such person is a partner and the
partnership firm uses the building for the purposes of its business or profession, then it can be
said that the building is being used by the partner for the purposes of his business or profession
and consequently such building is not an asset. Under the general law partnership firm is not a
legal entity and the partners collectively constitute a partnership firm. The said building shall
not be included in wealth of the partner since it is not an asset.

2. Motor Cars Section 2(ea)(ii).

It includes all motor vehicles except heavy vehicles. Heavy vehicles, Bus, trucks are not
treated as motor cars, and therefore they are not treated as an asset.
 34
Exception: Not treated as an asset in following cases
a.Motor cars used by the assessee in the business of running them on hire; or
b.Motor cars held as stock-in-trade.

3. Jewellery etc.section 2(ea)(iii).

Jewellery, bullion, utensils, or any other article made wholly or partly of gold, silver,
plantinum or any other precious metal or any alloy containing one or more of such precious
metals.

Exception: Not treated as an asset in following cases

a.If the above said asset forming part of stock in trade.
b.Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
Note: “Jewellery” includes:
(i)ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any precious or
semi-precious stones, and whether or not worked or sewn into any wearing apparel.
(ii)precious or semi-precious stones, whether or not set in any furniture, utensils, or other
article or worked or sewn into any wearing apparel

4. Yachts, Boats And Aircrafts Section 2(ea)(iv).

Ship is neither a boat nor a yacht and therefore not treated in the net wealth of the assessee.
Exception: Not treated as an asset in following cases
a.If the above said assets forms part of stock-in-trade.
b.If the above said assets are used by the assessee for commercial purpose.

5. Urban land section 2(ea)(v).

Meaning of urban land
(A)Any area within the jurisdiction of Municipality / Cantonment board; or
(B) In any area within the distance, measured aerially (shortest aerial distance)

URBAN Population (as per latest Distance (Straight distance as

AREA census ) crows flies)
1 more than 10,000 and upto 1,00,000 2km from the local limits of
2 more than 1,00,000 and upto 10,00,000 6km any municipality or
3 exceeds 10,00,000 8km cantonment board.
 35
Exception: Not treated as an asset in following cases
a. a.Land on which construction of building is not permissible under any law.
b. When the land is occupied by any building which has been constructed with the
approval of appropriate authority.
c. Any unused land held by the assessee for industrial purpose for a period of 2 years from
the date of its acquisition. (It means that any unused industrial land held for more than
2 years shall be treated as an asset)
d. Any land held by the assessee as stock in trade for a period of 10 years from the date of
its acquisition by him. (It means that any land held for more than 10 years as a stock
in trade shall be treated as an asset)

6. Cash in hand section 2(ea)(vi).

A. Cash in hand held by Individual or HUF in excess of 50,000.
B .In case of a company, if during search and seizure any unaccounted cash is found, then the
amount of unaccounted cash not recorded in books of account as on the valuation date and
which is not adjusted by the Department against any tax liability upto the valuation date shall
be treated as an asset in the hands of the Company.
Note: However cash at bank and cheques are not treated as an asset.

Deemed Assets
 Asset transferred to spouse section 4(1)(a)(i).
 Asset transferred for the benefit of spouse Section 4(1)(a)(iii)
 Asset transferred to son’s wife section 4(1)(a)(v)
 Asset transferred for the benefit of son’s wife Section 4(1)(a)(vi)
 Asset held by a minor child section 4(1)(a)(ii)
 Self-acquired property converted into joint family property section 4(1A).
 Revocable transfer section 4(1)(a)(iv).
Any transfer which is not irrevocable is revocable transfer. Value of property shall
be included in the net wealth of the transferor.
 Asset transferred irrevocably section 4(5).
 Importable estate section 4(6).
The holder of an impartible estate shall be deemed to be the individual owner of all
the properties comprised in the estate.
 Member of a cooperative society section 4(7).
 Possession of property in part performance of contract section 4(8)(a).
 Leased assets section 4(8)(b).
 36
Exempted Assets
Section 5 Wealth Tax is not applicable to

 Trusts
 Artificial Judicial Persons
 Partnership firms
 Association of persons (AOPs)
 A company registered under Section 25 of the Company Act, 1956
 Co-operative Societies
 Social clubs
 Political parties
 Mutual funds specified under Section 10 Clause (23D) of the Income Tax Ac

1)Trust Property section 5(i). Any property held by the assessee under a trust or other legal
obligations for any public purpose of a charitable or religious nature in India is exempt.
Exemption is not available in respect of the business assets of the trust.

However in following cases business assets shall be exempt from tax.

a. Where the business is incidental to the attainment of the objectives of the trust and separate
books of accounts are maintained by such trust in respect of such business.
b.Business carried on by an institution, fund or trust referred to in section 10(23B) or section
10(23C) of the Income Tax Act.
Section 10(23B): Trusts existing solely for the development of khadi or village industries.
Section 10(23C): Universities, Educational institutions and hospitals.

2) HUF property section 5(ii).

Interest of the assessee in the coparcenary property of any HUF of which he is member is
exempt

3) One building of the ruler section 5(iii).

Any one building in the occupation of the ruler is exempt provided it is declared by the Central
Govt. as his official residence immediately before the commencement of the Constitution
(26th amendment). Exemption is available for such building which is occupied by the
assessee.

4) Heirloom jewelry section 5(iv).

a.Jewellery is not the personal property of the ruler; and
b.Jewellery has been recognised by the Central Govt. as his heirloom.
c.That the jewellery shall be permanently kept in India and shall not be removed outside India
except for a purpose and period approved by the Board.
d.Reasonable steps shall be taken for keeping the jewellery substantially in its original shape.
e.Reasonable facilities shall be allowed to any officer of Govt., or authorised by the Board, to
examine the jewellery as and when necessary
 37

5) Assets held by indian repatriates section 5(v).

Assets brought to India on permanent return if following conditions are satisfied:
a.The assessee is a person of Indian origin or citizen of India.
b.He was ordinarily residing in a foreign country.
c.on leaving such country, he has returned to India with the intention of permanently residing
therein.
then following assets shall be exempt for a period of 7 successive assessment year
commencing with the assessment year next following the date on which such person returned
to India.
What is exempt
a.Money and the value of assets brought by him into India; and
b.Value of assets acquired by him out of such money provided the assets are acquired within 1
year immediately preceding the date of his return and at any time thereafter.
• Explanation 2 Section 5(v). Any asset acquired out of money deposited in Non-resident
(External) Account shall also be exempt from wealth tax.

6) House or plot of land section 5(vi).

a.One house or part of a house belonging to individual / HUF (irrespective of its use); or
b.A plot of land belonging to an individual / HUF comprising of an area of 500 sq. mtrs or
less.
[Gaj Singh v.s Settlement Commissioner] For an ex-ruler, section 5(iii)/(vi) do not operate
simultaneously, i.e. where an ex-ruler has claimed exemption for one house u/s 5(iii) he is not
entitled to claim exemption for another house u/s 5(vi).
 38
CENTRAL EXCISE ACT, 1944

Introduction:
Central Excise is a levy (tax), levied on a commodity (manufactured within the country) by the
Union Government by an Act of Parliament (usually in the Finance Bill, in the presentation of
the Budget in the Parliament, generally on the last working day of February every year) by
notifying under a Tariff. It is an indirect tax paid by the manufacturer, who passes its incidence
to the customers.
“Excise Duty” is levied the moment the process of manufacture is complete.

Objectives of Central Excise Act, 1944

1. To collect excise duty on manufactured goods more conveniently
2. To reduce collection costs
3. To control wasteful expenditures
4. To avoid tax evasion by appropriate control measures
5. To promote industrial growth in backward areas
6. To support local industries
7. To collect high revenues

Nature of Excise Duty

 Govt. has constitutional powers to levy Excise Duty
 Power to impose excise on alcoholic liquors, opium, and narcotics is granted to State Govt.
 Power to impose excise on other items is granted to Central Govt.

Basic Conditions for Excise Liability

 Following four conditions must be satisfied to levy Excise Duty on any article:
- Duty is on goods (movable and marketable)
- Goods must be excisable (included in CETA, 1985)
- Goods must be manufactured or produced
- Manufacture or production must be in India

 Levy means imposition and assessment but does not include collection of tax. Thus, duty is
levied as soon as taxable event occurs, but collection can take place anytime - before, at the
time or even after the taxable event.
 Taxable event is manufacture or production in India.
 Duty is payable by the manufacturer or producer of excisable goods. In case where goods
are allowed to be stored in a warehouse without the payment of duty, the duty liability is of the
person who stores the goods.
 Rate of duty is as applicable on date of removal i.e. clearance from factory
 39
 Goods have to be classified and valued in the state in which the goods are removed from the
factory. Any further processing done afterwards is not relevant.
 Duty liability arises even when goods are not sold or free replacements are given during
warranty period.
 Duty is payable even when not collected from consumers.
 Duty is payable even if duty was paid on raw materials.
 Duty can be levied on Govt. undertakings.
 Duty is considered as a manufacturing expense and is included as an element of cost for
inventory valuation, like other manufacturing expenses.

Definitions
Goods
The word “goods” has not been defined under the Central Excise Act. Article 366(12) of the
Constitution defined “goods” as “goods include all materials, commodities, and articles.” This
definition is quite wide for the purpose of Central Excise Act.
As per judicial interpretation, for purpose of levy of Excise duty, an article must satisfy two
requirements to be “goods” i.e.
 Goods must be movable - immovable property or property attached to earth is not “goods”
and hence duty cannot be levied on it.
 Goods must be marketable - item must be such that it is capable of being bought or sold
and must be known in the market. This is the test of “Marketability”

Manufacture

The word “manufacture” is not defined completely in the Act. Definition in section 2(f) is
inclusive. “Manufacture” includes any process -
 incidental or ancillary to the completion of manufactured product, or
 which is specified in relation to any goods in the Section or Chapter notes of the First
Schedule of CETA, 1985 as amounting to manufacture, or
 which, in relation to goods specified in third schedule to the CEA, involves packing or
repacking of such goods in a unit container or labeling or re-labeling of containers or
declaration or alteration of retail sale price or any other treatment to render the product
marketable to consumer

Thus, manufacture means

 Manufacture specified in various Court decisions i.e. new and identifiable product having a
distinctive name, character or use must emerge, or
 Deemed Manufacture

E.g. Manufacture of table from wood, conversion of pulp into base paper, conversion of
sugarcane to sugar, etc.

The word “Manufacturer” shall be understood accordingly and shall include not only a person
 40
who employs hired labor in the production or manufacture of excisable goods, but also any
person who engages in their production or manufacture on his own account.

Excisable Goods
Section 2(d) of Central Excise Act defined Excisable Goods as “Goods specified in the
Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes
salt.” Thus, unless the item is specified in the CETA as subject to duty, no duty is levied.

Types of Excise Duty

 Basic Excise Duty (BED): This is the duty charged under section 3 of the Central
Excises and Salt Act, 1944 on all excisable goods other than salt which are produced or
manufactured in India. Basic Excise Duty [also known as Central Value Added Tax
(CENVAT)] is levied at the rates specified in Central Excise Tariff Act.
 Special Excise Duty (SED): As per the Section 37 of the Finance Act, 1978 Special
excise Duty was attracted on all excisable goods on which there is a levy of Basic
excise Duty under the Central Excises and Salt Act,1944. Special Excise Duty is levied
at the rates specified in the Second Schedule to Central Excise Tariff Act, 1985.
 Education Cess on Excise Duty: Section 93 of Finance (No. 2) Act, 2004 states that
education Cess is 'duty of excise', to be calculated on aggregate of all duties of excise
including special excise duty or any other duty of excise, but excluding education Cess
on excisable goods.
 Excise duty in case of clearances by EOU: The EOU units are expected to export all
their production. However, if they clear their final product in DTA (domestic tariff
area), the rate of excise duty will be equal to customs duty on like article if imported in
India.
 National Calamity contingent Duty (NCCD): A 'National Calamity Contingent Duty'
(NCCD) has been imposed vide section 136 of Finance Act, 2001 [clause 129 of
Finance Bill, 2001, w.e.f. 1.3.2001]. This duty is imposed on pan masala, chewing
tobacco and cigarettes.
 Duties under other Acts: Some duties and Cess are levied on manufactured products
under other Acts. The administrative machinery of central excise is used to collect those
taxes. Provisions of Central Excise Act and Rules have been made applicable for levy
and collection of these duties / Cess.
 Additional Duty on Goods of Special Importance (AED [GSI]): Some goods of
special importance are levied Additional Excise under Additional Duties of Excise
(Goods of Special Importance) Act, 1957. The 'Additional Duty' is in addition to excise
duty. This scheme was introduced based on the suggestion made by the manufacturers
to Government, that multiple level taxes and duties should be avoided. Levy and
collection of all taxes at one stage by single authority will be convenient for payment
and administration. Hence, by agreement between Central and State Governments, it
was decided to make a beginning in 1957, by selecting some items where additional
duty will be collected instead of sales tax and such additional duty will be distributed
among various States. Revenue from this duty is distributed among State Governments
 41
on the basis of percentages given in the second schedule to the Act. Some items
covered are textile articles like cotton fabrics, silk and wool fabrics, man-made fibers,
terry fabrics, metallised yarn, embroidery; sugar, branded tobacco, pan masala
containing tobacco and cigarettes.
 Duty on Medical and Toilet Preparations: Excise duty is imposed on medical
preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.
 Additional Duty on Mineral Products: Additional duty on mineral products (like
motor spirit, kerosene, diesel and furnace oil) is payable under Mineral Products
(Additional Duties of Excise and Customs) Act, 1958.
 Additional Customs Duty commonly known as countervailing Duty (CVD):
Countervailing duty (CVD) is imposed on the Imports.
 Special Additional Duty of Customs (Special CVD): Special CVD is being imposed
on items bound under the Information Technology Agreement (except information
technology software), and also on specified inputs/raw materials for manufacture of
electronics/IT goods.

Determination of Tariff Headings

Central Excise Tariff has four columns -
 Heading number
 Sub-heading number
 Description of goods
 Rate of Duty

Valuation of Goods

Excise duty is payable on one of the following basis -

 Specific duty, based on some measure like weight, volume, length, etc.
 Duty as a % of Tariff Value fixed u/s 3(2)
 Duty based on Maximum Retail Price printed on carton after allowing deductions
 Compounded Levy Scheme
 Duty as a % on Assessable Value fixed u/s 4 (ad valorem duty)

Specific Duty

It is a duty payable on the basis of certain unit like weight, length, volume, thickness, etc.
Calculation of duty payable is comparatively easy. In view of simplicity, many goods were
covered under “specific duty”.
However, the disadvantage is that even if selling price of the product increases, the revenue
earned by Govt. does not increase correspondingly. Hence, most goods are covered under “Ad
valorem” duty.
Presently, specific rates have been announced for -
 Cigarettes (length basis)
 42
 Matches (per 100 boxes / packs)
 Sugar (per quintal basis)
 Marble slabs and tiles (square meter basis)
 Color TV when MRP is not marked on package or when MRP is not the sole consideration
(based on screen size in cm)
 Cement clinkers (per ton basis)
 Molasses resulting from extraction of sugar (per ton basis)

Tariff Value

In some cases, tariff value is fixed by the Govt. from time to time. This is a “Notional Value”
for purpose of calculating the duty payable. The tariff value may be fixed on the basis of
wholesale price or average price of various manufacturers as the Govt. may consider
appropriate. Provision of fixing tariff value is used very rarely as frequent changes become
necessary when prices rise.

Presently, tariff values are fixed for -

 Pan masala packed in retail packs of less than 10 gm per pack
 Tariff value of readymade garments falling under heading 6101.11 or 6201.00 has been
prescribed as 60% of the retail sale price of such goods as specified on the package.

Transaction Value as Assessable Value

Following are the main requirements for transaction value -
 Price actually paid or payable.
 Price is for the goods.
 Price includes any amount that the buyer is liable to pay to, or on behalf of the assessee.
Thus, payment made by buyer to another person, on behalf of assessee, will be includible.
 The payment should be “by reason of, or in connection with the sale.” These terms have
always been construed strictly in judicial interpretation.
 The amount may be payable at the time of sale or at any other time. Such time may be before
or after sale.
 Any amount charged for, or to make provision for, advertising or publicity, marketing and
selling organization expenses, storage, outward handling, servicing, warranty, commission or
any other matter is includible. However, these expenses are includible only when the aforesaid
conditions are satisfied i.e. (a) the amount should be paid or payable to assessee or on behalf
of assessee and (b) payment should be by reason of sale on in connection with sale.
Amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on
such goods is to be excluded while calculating “transaction value”. The amount may be
payable any time in the future.
 43
Inclusions in Transaction Value

 Packing charges
 Design and Engineering charges
 Consultancy charges relating to manufacturing
 Compulsory after Sales Service / service in warranty period
 Pre-delivery inspection charges for vehicles
 Loading and handling charges within the factory
 Royalty charged in franchise agreement

Exclusions from Transaction Value

 Trade Discounts
 Outward handling, freight and transit insurance charges
 Notional Interest on security deposit / advances
 Installation and Erection expenses
 Interest on Receivables
 Bank charges for collection of sale proceeds

Valuation Rules
If “assessable value” cannot be determined u/s 4(1) (a), it shall be determined in such manner
as may be prescribed by rules discussed below -

Value nearest to time of removal if goods are not sold - If goods are not sold at the time of
removal, then value will be based on value of such goods sold by assessee at any other time
nearest to the time of removal, subject to reasonable adjustments. Thus, this rule is applicable
in case of removal of free samples or supply under warranty claims.

Goods sold at different place - sometimes, goods may be sold at place other than the place of
removal e.g. in case of FOR delivery contract. In such cases, actual cost of transportation from
place of removal up to place of delivery of the excisable goods will be allowable as deduction.
Cost of transportation can be either on actual basis or on equalized basis.

Valuation when price is not the sole consideration - If price is not the sole consideration for
sale, the “Assessable Value” will be the price charged by assessee, plus money value of
additional consideration received.
The buyer may supply any of the following directly or indirectly, free or at reduced cost.
 Materials, components, parts and similar items
 Tools, dyes, moulds, drawings, blue prints, technical maps, charts and similar items used
 Material consumer, including packaging materials
 Engineering, development, art work, design work and plans and sketches undertaken
elsewhere than in the factory of production and necessary for the production of the goods.
In such cases, value of such additional consideration will be added to the price charged by
assessee to arrive at the “transaction value.”
 44
Sale at depot / consignment agent - when goods are sold through depot, there is no sale at the
time of removal from factory. In such cases, price prevailing at depot (but at the time of
removal of factory) shall be the basis of Assessable Value. The value should be “normal
transaction value” of such goods sold from the depot at the time of removal or at the nearest
time of removal from factory.

Valuation in case of Captive Consumption - Captive consumption means goods are not sold
but consumed within the same factory or another factory of same manufacturer (i.e. inter-unit
transfers). In case of captive consumption, valuation shall be done on the basis of cost of
production plus 10% -

 Direct material cost + Direct labor cost + Direct expenses = Prime Cost
 Prime Cost + Production Overheads + Administration Overheads + R&D Cost
(Apportioned) = Cost of Production
 Cost of Production + Selling Cost + Distribution Cost = Cost of Sales
 Cost of Sales + Profit = Selling Price

Administrative Structure of Excise Department

Ministry of Finance (Government of India)

Central Board of Excise and Customs (CBE&C - Board)

Chief Commissioner of Central Excise

Commissioner of Central Excise (for each Commissionerate of Central Excise)

Additional Commissioner of Central Excise

Joint Commissioner of Central Excise

Deputy / Assistant Commissioner of Central Excise (for each division)

Superintendent (for each range)
(He is the lowest rank of Gazetted Officer)

Inspector (Non-Gazetted officer)

Board - CBE&C: It has its headquarters in New Delhi. This Board consisting of six / seven
members, headed by Chairman, has powers to administer the Excise Act. Chairman of the
Board is empowered to distribute work among him and other members and specify cases
which will be considered jointly by the Board.
 45

Chief Commissioner of Central Excise: India is divided into 34 zones. Each “zone” is under
the supervision of Chief Commissioner of Central Excise who has administrative powers to
control the Commissioners and Commissioner (Appeals) within his zone. In the interiors i.e.
non-coastal areas, the Chief Commissioner of Central Excise looks after customs work also.

Commissioner of Central Excise: Each “zone” covers various Commissionerates and

Commissioner of Central Excise is the administrative-in-charge of the “Commissionerate”.
Presently, there are 92 Commissioners and 71 Commissioner (Appeals). Commissioner has
unlimited powers of adjudication.

Additional Commissioner of Central Excise: There may be one or more Additional

Commissioner in a Commissionerate. Restrictions on powers of Additional Commissioner
have been placed through administrative instructions. Additional Commissioner thus has
restricted powers of adjudication.

Joint Commissioner of Central Excise: this post was created in May 1999, subsequent to
implementation of report of fifth pay commission. (This post is equivalent to earlier Deputy
Commissioner).

Deputy / Assistant Commissioner of Central Excise: Each Commissionerate of Central Excise

is divided into divisions and each division is under the administrative control of Deputy /
Assistant Commissioner of Central Excise. Assistant Commissioner (Senior Scale) is
designated as Deputy Commissioner. However, both have same powers.

Superintendent and Inspector: The division under each Deputy / Assistant Commissioner of
Central Excise is further divided into various ranges and each range is under control of
Superintendent of Central Excise, who is of the rank of a Gazetted Officer. Inspectors work
under Superintendent and have some powers. Inspector is not a Gazetted Officer.

Summary of Procedures:
Every person who produces or manufactures excisable goods is required to get registered
unless exempted. If there is any change in information supplied in form A-1, the same should
be supplied in form A-1.

 Manufacturer is required to maintain Daily Stock Account (DSA) of goods

manufactured, cleared and in stock.
 Goods must be cleared under Invoice of assessee, duly authenticated by the owner or
his authorized agent. In case of cigarettes, invoice should be countersigned by Excise
officer.
 Duty is payable on a monthly basis through TR-6 challan / Cenvat credit by 5th of
following month except in March. SSI units have to pay duty on monthly basis by 15 th
of following month.
 Cenvat records and return by 10th of following month.
 46
 Monthly return in form ER-1 should be filed by 10th of following month. SSI units have
to file quarterly return in form ER-3. EOU / STP units to file monthly return in form
ER-2.
 Assessees paying duty of Rs. 1 Cr or more per annum through PLA are required to
submit Annual Financial Information Statement for each financial year by 30th
November of succeeding year in prescribed form FR-4.
 Every assessee is required to submit information relating to Principal Inputs every year
before 30th April in form ER-5 to Superintendent of Central Excise. Any alteration in
principal inputs is also required to be submitted to Superintendent of Central Excise
in form ER-5 within 15 days. Only assessees manufacturing goods under
specified tariff headings are required to submit the return. Even in case of
assessees manufacturing those products, only assessees paying duty of Rs. 1 Cr
or more through PLA are required to submit the return.

 Every assessee who is required to submit ER-5 is also required to submit monthly
return of receipt and consumption of each Principal Input in form ER-6 to
Superintendent of Central Excise by 10th of following month.
 Every assessee is required to submit a list in duplicate of records maintained in respect
of transactions of receipt, purchase, sale or delivery of goods including inputs and
capital goods.
 Inform change in boundary of premises, address, name of authorized person, change in
name of partners, directors of Managing Director in form A-1.

These are core procedures which each assessee has to follow. There are other procedures
which are not routine -
 Export without payment of duty or under claim of rebate
 Receipt of goods for repairs / reconditioning
 Receipt of goods at confessional rate of duty for manufacture of excisable goods
 Payment of duty under Compounded Levy Scheme
 Provisional Assessment
 Warehousing of goods
 Appeals and settlement

Distinction between Cenvat on Inputs and Capital Goods

All inputs (except HSD, LDO and
petrol) are eligible
Inputs are required to be used “in or in
relation to manufacture”
Only capital goods are eligible
Capital goods should be “used in
factory”. Purpose for which it is used is
irrelevant

Credit is available as soon as input is
received in factory
There is no such provision in respect in
Cenvat on inputs
Cenvat credit on inputs can be
refunded if final product is exported
and assessee does not claim duty
drawback
If assessee opts out of Cenvat, he has
to pay / reverse credit of duty availed
on inputs lying in stock on the day he
opts out of Cenvat
Inputs can be sent directly to place of
job worker from supplier-manufacturer
47
Up to 50% credit is available in current
year and balance in subsequent
financial year/s
Assessee cannot claim depreciation on
excise duty portion of value of capital
goods
Cenvat on capital goods cannot be
refunded if final product is exported,
but credit can be used for clearance of
other final products
This provision does not apply to
Cenvat on capital goods
Capital goods have to be brought in
factory and then sent to job worker

Penalty
There are 3 types of penalties in Central Excise:
 Civil Liability
 Criminal Liability
 General Penalty

Civil Liability - it will arise when the provisions of the act are violated. In this case, the
penalty involves confiscation of goods and monetary penalty. It is imposed by Excise
Authority as per the provisions of the Central Excise Rules.

Criminal Liability - it involves imposition of fine and imprisonment. It is granted by

Criminal Court or prosecution as per the provisions of the Act.

General Penalty - if goods are removed in contravention of Act, rules or notification or goods
are not accounted for or goods are manufactured, produced or stored without applying for
registration or excise rules and notifications have been contravened with an intention to evade
the duty, general penalty is applicable.
It includes confiscation of goods and penalty up to duty payable or Rs. 10,000 whichever is
higher.

Confiscation
Confiscation means the gods become property of Govt. and Govt. can deal with it as it wants.
Following can be confiscated -
 48
 Contravening goods
 Conveyance for transport of goods / smuggled goods
 Packages in which contravening excisable goods are packed
 Goods used for concealing contravening excisable goods
 Contravening goods with form changed - even if mixed without other goods and cannot be
separated
 Sale proceeds from sale of contravening excisable goods
 No confiscation of container obtained on hire

Seizure
Seizure means goods are taken into the custody by the department. The property of goods
remains with the owner.
If goods are liable for confiscation, the same can be seized by Excise officers
If seized goods are to be confiscated, SCN must be given within 6 months of seizure of goods.
Panchnama must be made for seizure of goods and seized goods must either be kept in police
station or in the custody of the Excise Department.

Excise Duty (CENVAT)

CENVAT as popularly known as Central Excise Duty is a duty on the

manufacture/production of goods in India. The regulatory body is the Central Board of Excise
and Customs (CBEC) , an agency of the Department of Revenue, Ministry of Finance of India.
The law governing central excise is primarily defined by the following legislations:

The Central Excise Act, 1944 – This Act governs the levy of excise duty. The legislation
provides for the parameters for levy of duty like when it is to be charged, how the goods are to
be valued for the purpose of duty, how the duty would be regulated and administered such as
provisions for discharge of excise liability, filing returns, powers of excise officers in this
regard and also includes the powers of investigation, appellate remedies, advance rulings and
other matters related to excise duties

The Central Excise Tariff Act, 1985 (CETA) – This Act supplements the Central Excise
Act by classifying products and prescribing the rate of excise duty applicable to the various
classification of manufactured products. CETA classifies goods under 91 chapters and a
specific code is assigned to each item. There are over 1,000 tariff headings and 2,000 sub-
headings. It is based on the Harmonised System of Nomenclature (HSN).

Taxable Event which creates Liability for Excise Duty

The taxable event for levy of excise duty is the act of manufacture or production of goods in
India. There are four basic conditions for levy of excise duty:
1. The duty is on “goods”, i.e. products that are movable and marketable;
 49
2. The goods in question must be excisable , i.e., must be mentioned in Excise Tariff Act;
3. The goods must be “manufactured or produced”;
4. Such manufacture or production must be in India .
For administrative convenience excise duty on goods is collected at the time of their removal
from the factory.

Duty Structure
Broadly, the following types of duties are levied by the Central Government on goods
manufactured in India:
1. Basic Excise Duty
2. Education Cess and Secondary and Higher Education Cess on Excise Duty
3. National Calamity Contingent Duty
4. Duties Under Other Acts
5. Specifiedduty
6. Duty based on the production capacity

Exemptions
As under the customs regime, excise law also provides for exemptions both general, as well as
some specific exemptions which apply to only specified classes of goods or manufacturers.
Some broad categories of general exemptions include:

Exemption for the small scale sector – a threshold exemption from excise duty is given to units
with a turnover of less than 1.5 crore rupees (INR 15 million).
Exemption to intermediate products used for captive consumption -intermediate products
manufactured within the factory are exempt from excise duty, subject to the conditions defined
under the respective notifications.

Job work - exemption is given to a job worker who manufactures excisable goods from inputs
supplied by a principal who undertakes to discharge the excise duty liability on the final
product, subject to the stipulated conditions.

Location based exemption – exemption from excise duty is granted to units operating in
specified backward regions of India, for example, many excise exemptions have been granted
to the manufacturing units set up in the North Eastern States of India.

Powers and Duties of Officers and Landholders

Central Excise Officer may exercise the powers and discharge the duties conferred or
imposed under this Act on any other Central Excise Officer who is subordinate to him.
Notwithstanding anything (2) contained in sub-section (1), the [Commissioner of Central
Excise (Appeals)] shall not exercise the powers and discharge the duties conferred or imposed
on a Central Excise Officer other than those specified in section 14 or Chapter VIA.]
 50
 Power to arrest. Section 13. —
Any Central Excise Officer not below the rank of Inspector of Central�(1) Excise may,
with prior approval of the Commissioner of Central Excise, arrest any person whom he has
reason to believe to be liable to punishment under this Act or the rules made there under.

 Power to summon persons to give evidence and produce documents in inquiries

Sect 14
Any Central Excise Officer duly empowered by the Central Government in this behalf,
shall have power to summon any person whose attendance he considers necessary either to
give evidence or to produce a document or any other thing in any inquiry which such
officer is making for any of the purposes of this Act. A summons to produce documents or
other things may be for the production of certain specified documents or things or for the
production of all documents or things of a certain description in the possession or under the
control of the person summoned.

All persons so summoned shall (2) be bound to attend, either in person or by an

authorized agent, as such officer may direct; and all persons so summoned shall be bound
to state the truth upon any subject respecting which they are examined or make statements
and to produce such documents and other things as may be required :

Provided that the exemptions under Sections 132 and 133 of the Code of Civil Procedure,
1908(5 of 1908) shall be applicable to requisitions for attendance under this section.
Every such inquiry as aforesaid (3) shall be deemed to be a “judicial proceeding” within
the Meaning of Section 193 and Section 228 of the Indian Penal Code, 1860 (45 of 1860).
 Special audit in certain cases Section [14A If at any stage of enquiry,(1) investigation
or any other proceedings before him, any Central Excise Officer not below the rank of
an [Assistant Commissioner of Central Excise, or Deputy Commissioner of Central
Excise] having regard to the nature and complexity of the case and the interest of
revenue, is of the opinion that the value has not been correctly declared or determined
by a manufacturer or any person, he may, with the previous approval of the Chief
Commissioner of Central Excise, direct such manufacturer or such person to get the
accounts of his factory, office, depots, distributors or any other place, as may be
specified by the said Central Excise Officer, audited by a cost accountant, nominated by
the Chief Commissioner of Central Excise in this behalf.
 Special audit in cases where credit of duty availed or utilised is not within the
normal limits, etc. Section 14AA.

Powers Landholder
 Searches and arrests how to be made. Section 18. — All searches made under this Act or
any rules made there under and all arrests made under this Act shall be carried out in
accordance with the provisions of the Code of Criminal Procedure, 1898 (5 of 1898), relating
respectively to searches and arrests made under that Code.

 Disposal of persons� arrested. Section 19 — Every person arrested under this Act shall be
forwarded without delay to the nearest Central Excise Officer empowered to send persons so
 51
arrested to a Magistrate, or, if there is no such Central Excise Officer within a reasonable
distance, to the officer-in-charge of the nearest police station.

 Procedure to be followed by officer-in-charge of police station.— Section 20 The officer

in- charge of a police station to whom any person is forwarded under section 19 shall either
admit him to bail to appear before the Magistrate having jurisdiction, or in default of bail
forward him in custody to such Magistrate.

 Inquiry how to be made by Central Excise Officers against arrested persons forwarded
to them under section 19. — Section 21.

 Vexatious search, seizure, etc., by Central Excise Officer. Section 22.

Any Central Excise or other officer exercising powers under this Act or under the rules
made There under who —
 without reasonable ground of(a) suspicion searches or causes to be searched any
house, boat or place;
 Veraciously and unnecessarily (b) detains, searches or arrests any person;
 Veraciously and unnecessarily seizes(c) the movable property of any person, on
pretence of seizing or searching for any article liable to confiscation under this Act;
 commits, as such officer, any other (d) act to the injury of any person, without
having reason to believe that such act is required for the execution of his duty;
 shall, for every such offence, be punishable with fine which may extend to two
thousand rupees.
Any person willfully and maliciously giving false information and so causing an arrest or a
search to be made under this Act shall be punishable with fine which may extend to two
thousand rupees or with imprisonment for a term which may extend to two years or with both.

Customs and Central Excise Settlement Commission. — Section 32

The Central Government shall, by notification in the Official Gazette, constitute a
Commission to be called the Customs and Central Excise Settlement Commission for the
settlement of cases under this Chapter and Chapter XIVA of the Customs Act, 1962 (52 of
1962).
The Settlement(2) Commission shall consist of a Chairman and as many Vice-
Chairmen and other Members as the Central Government thinks fit and shall function within
the Department of the Central Government dealing with Customs and Central Excise matters.
The Chairman,(3) Vice-Chairman and other Members of the Settlement Commission
shall be appointed by the Central Government from amongst persons of integrity and
outstanding ability, having special knowledge of, and experience in, administration of customs
and central excise laws :
Provided that, where a member of the Board is appointed as the Chairman, Vice-Chairman or
as a Member of the Settlement Commission, he shall cease to be a member of the said Board.
 52

Jurisdiction and powers of Settlement Commission Section 32A.

(1) Subject to the other provisions of this Chapter, the jurisdiction, powers and
authority of the Settlement Commission may be exercised by Benches thereof.
Subject to the other (2) provisions of this section, a Bench shall be presided over by the
Chairman or a Vice-Chairman and shall consist of two other Members.
The Bench for which (3) the Chairman is the presiding officer shall be the principal
Bench and other Benches shall be known as additional Benches.
Notwithstanding�(4) anything contained in sub-section (1) and sub-section (2), the
Chairman may authorise the Vice-Chairman or other Member appointed to one Bench to
discharge also the functions of the Vice-Chairman or, as the case may be, other Member of
another Bench.
The principal Bench�(5) shall sit at Delhi and the Central Government shall, by
notification in theOfficial Gazette, establish additional Benches at such places as it considers
necessary.
Notwithstanding (6) anything contained in the foregoing provisions of this section, and
subject to any rules that may be made in this behalf, when one of the persons constituting a
Bench (whether such person be the presiding officer or other Member of the Bench) is unable
to discharge his functions owing to absence, illness or any other cause or in the event of the
occurrence of any vacancy either in the office of the presiding officer or in the office of one or
the other Members of the Bench, the remaining Members may function as the Bench and if the
presiding officer of the Bench is not one of the remaining Members, the senior among the
remaining Members shall act as the presiding officer of the Bench :
Provided that if at any stage of the hearing of any such case or matter, it appears to the
presiding officer that the case or matter is of such a nature that it ought to be heard of by a
Bench consisting of three Members, the case or matter may be referred by the presiding officer
of such Bench to the Chairman for transfer to such Bench as the Chairman may deem fit.
[Provided further that at any stage of the hearing of any such case or matter, referred to
in the first proviso, the Chairman may, if he thinks that the case or matter is of such a nature
that it ought to be heard by a Bench consisting of three Members, constitute such Bench and if
Vice- Chairman is not one of the Members, the senior among the Members shall act as the
presiding officer of such Bench.]
Notwithstanding (7) anything contained in the foregoing provisions of this section, the
Chairman may, for the disposal of any particular case, constitute a special Bench consisting of
more than three Members.
Subject to the other (8) provisions of this Chapter, the special Bench shall sit at a place
to be fixed by the Chairman.
 53

CUSTOMS ACT, 1962

Features of Customs Duty:

a) Customs Duty levied as per rates specified in Custom Tarrif CTA 1975
b) Export – Taking goods to a place outside India
c) Import – Bringing goods from place outside India
d) Out of India means beyond 12 Nm
e) Indian customs waters – 12 Nm to 24 Nm.
f) Customs duty is on goods
g) Goods include
- Vessels, Aircrafts & Vehicles
- Stores
- Baggage
- Currency
- Negotiable Instruments
- Any other movable property
h) Customs Duty is for Import & Exports
i) Dutiable goods are those which are chargeable to duty & on which duty has not been paid
j) Imported goods
- Brought in India
- From place outside India
- Not cleared for home consumption
k) Export goods
- Taken out of India
- To place outside India
l) Customs is payable on Re-import, free replacements and free supplies.

Important Definitions

A) Goods
 Customs duty is on ‘goods’ as per section 12 of Customs Act.
 The duty is payable on goods belonging to Government as well as goods not belonging to
Government
 ‘Goods’ included
(a) Vessels, Aircrafts and Vehicles
(b) Stores
(c) Baggage
(d) Currency and negotiable instruments and
(e) Any other kind of movable property.
 54

B) Dutiable Goods

 ‘Dutiable goods’ as any goods which are chargeable to duty and on which duty has not been
paid.
 Thus, goods continue to be ‘dutiable’ till they are not cleared from the port. However once
goods are assessed even at ‘Nil’ rate of duty, they no more remain ‘dutiable goods’
 Export goods as well as imported goods can be ‘dutiable goods’ if imported goods or export
goods are not chargeable to duty, they will not be ‘dutiable goods’

C) Imported Goods
 Any goods brought in India from a place outside India, but does not include goods which
have been cleared for home consumption.
 Thus, once goods are cleared by customs authorities from customs area, they are no longer
‘imported goods’

D) Export Goods
 ‘Export Goods’ means any goods which are to be taken out of India to a place outside India.
 Goods brought near customs area for export purpose will be ‘Export Goods’

E) Indian Customs Waters

‘Indian Customs Waters’ means the waters extending into the sea up to the limit of
contiguous zone of India.
Contiguous zone of India comes immediately after territorial waters. The outer limit of
contiguous zone is 24 nautical miles from the nearest point of basic line . Thus, area beyond
12 nautical miles and upto 24 nautical miles is ‘contiguous zone of India’. The Central
Government has powers to take measures in this area for security of India and immigration,
sanitation, customs and other fiscal matters.
Thus, ‘Indian Customs Waters’ extend up to 12 nautical miles beyond territorial waters.
Significance of definition of ‘Indian Custom Waters’ is as follows –
 Customs officers has powers to arrest a person in India or within Indian customs waters
(section 104)
 Customs officer has powers to stop and search any vessel in India or within the Indian
Customs waters, (section 106). If such vessel does not stop, it can be fired upon .If a vessel
does not stop, it can be confiscated (section 115 (1) (c) )
 A vessel which is within Indian customs waters or which has been in Indian Customers
Waters can be confiscated which is constructed or fitted in any manner for purpose of
concealing goods. (section115(1) (a) )
Thus powers of customs officers extend up to 12 nautical miles beyond territorial waters.

F) Territorial Waters
Territorial water extend up to 12 nautical miles from the base line on the coast of India and
include any bay, gulf, harbour, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853
 55
Kms) Sovereignty of India extends to the territorial waters and to the seabed and subsoil
underlying and the air space over the waters.

G) Exclusive Economic Zones

‘Exclusive Economic Zone’ extends to 200 nautical miles from the base-line. In this zone, the
coastal state has exclusive right to exploit if for economic purposes like constructing artificial
is lands (for oil exploration, power generation etc.) Fishing, mineral resources and scientific
research . However, other countries have right of navigation and over – flight rights. Other
countries can lay submarine cables and pipelines with consent of Indian Government. Such
consent may be declined for protecting interest of India.

Types of Custom Duties.

i) Basic Customs Duty
Basic customs duty is levied under section 12 of customs Act. Normally, it is levied as a
percentage of value of goods imported. The rates vary for different items, but general rate on
non-agricultural goods at present is 10% [ w .e. f. 1-3-2007]

ii) Additional Customs Duty U/S 3(1) (CVD)

Additional customs duty’ is often called ‘Countervailing Duty’ (CVD).
This duty is equal to excise duty levied on a like product manufactured or produced in India. If
like article is not produced or manufactured in India, the excise duty that would be livable on
that article had it been produced in Indian is the base. If the product is livable with different
rates, then highest rate among those rates is to be considered. The duty is livable on value of
goods plus customs duty payable.

iii) Education Cess On Customs Duty

An education cess of customs has been imposed on imported goods w.e.f. 9-7-2004. The cess
is 2% of the aggregate duty of customs. However, education cess will not be payable on
Special CVD (SAD). Safeguard duty under countervailing duty, anti dumping duty, SAH
education cess, Education cess itself on imported goods.

iv) Secondary & Higher Education Cess.[S.A.H.]

In addition to existing education cess, an education cess of 1% of the total duties of customs
has been imposed on imported goods.
SAH education cess will not be payable on
(a) Special CVD or SAD
(b) Safeguard duty
(c) Countervailing duty
(d) Anti dumping duty
(e) Education cess
 56
(f) SAH education cess itself

v) Additional duty under section 3(3)

In addition to CVD further additional duty can be levied by Central Government to counter
balance excise duty livable on raw materials, components etc. similar to those used in
production of such article.
This levy has use when goods manufactured indigenously is exempt from excise duty.
In such case, the indigenous manufacture will be loser to the extent of duty paid on inputs.
This duty paid on his inputs is lost as final product is exempt from duty . This becomes
additional cost to indigenous manufacturer. On the other hand, the imported goods do not have
to pay CVD as the product is exempt from duty. The foreign supplier has not paid any excise
duty on his inputs. He gets cost advantage to that extent. Section 3(3) is intended to offset such
cost advantage to foreign supplier.

vi) Additional Duty Under Section 3(5) (Special CVD – SAD)

This duty is in addition to any other duty imposed under Customs Act or any other law
The Additional Duty U/S 3(5) can be imposed by issuing a notification. Such tax cannot
exceed 4% of value of that article.
Purpose of the additional duty is to counter balance sales tax, VAT, local tax or other
charges leviable on articles on its sale, purchase or transaction in India. The obvious intention
is to provide level field to manufacturers in India who are manufacturing similar goods.
Hence, it is termed as ‘special “CVD” or ‘SAD’(Special Additional Duty)
Value of article for purpose of levy of this additional duty is
(i) Assessable Value determined
(ii) + (ii) Basic customs duty payable. CVD payable u/s 3(1) + (iii) Additional duty payable
u/s 3(3)

However, ‘value’ will not include following :

(a) Additional Duty payable u/s 3(5)
(b) Safe guard duty payable u/s 8(B) and 8 (C)
(c) Countervailing duty payable u/s 9
(d) Anti dumping duty u/s 9(A)
SAD has been imposed on all imported goods w.e.f. 1-3-2006 @ 4%,

vii) Protective Duties

Tariff Commission has been established under Tariff Commission Act, 1951. If the Tariff
Commission recommends and Central Government is satisfied that immediate action is
necessary to protect interest of Indian Industry. Protective customs duty at the rate
recommended may be imposed under section 6 of Customs Tariff Act.
 57
viii) Countervailing Duty on Subsidized Goods
If a country or territory pays any subsidy (directly or indirectly) to its exporters for exporting
goods to India, Central Government can impose Countervailing duty up to the amount of such
subsidv.

ix) Anti Dumping Duty on Dumped Articles

Often, large manufacture from abroad may export goods at very low prices compared to prices
in his domestic market. Such dumping may be with intention to cripple domestic industry or to
dispose of their excess stock. This is called ‘dumping’ and is an unfair trade practice. In order
to avoid such dumping and to protect domestic industry, Central Government can impose,
under section 9A of Customs Tariff Act, anti-dumping duty, if the goods are being sold at less
than its normal value. Levy of such anti-dumping duty is permissible as per WTO agreement.
Anti dumping action can be taken only when there is an Indian Industry producing ‘Like
Articles’

x) Safeguard Duty
Central Government is empowered to impose ‘safeguard duty’ on specified imported goods if
Central Government is satisfied that the goods are being imported in large quantities and under
such condition that they are causing or threatening to cause serious injury to domestic
industry. Such duty is permissible under WTO agreement. The only condition under WTO is
that it should not discriminate between imports from different countries having Most Favored
Nation (MFN) status.

xi) NCCD of Customs Duty

A ‘National Calamity Contingent Duty’ (NCCD) of customs has been imposed vide section
134 of Finance Act, 2003, On pan masala, chewing tobacco and cigarettes. Further, NCCD of
customs of 1% has been imposed on PFY, motor cars, multi utility vehicles and two wheelers.
NCCD of Rs 50 per ton is imposes on domestic crude oil. For purpose of calculation of
NCCD, value will be same as calculated for purpose of CVD u/s 3(2) of Customs Tariff Act.

xii) Export Duty

Since Government activity encourages export, there is export duty on very few products.
Articles on which export duty is leviable are given in second schedule to customs Tariff. At
present, 25% export duty is imposed on luggage leather, 15% Export Duty is levied only on
hides, skins and leather, and duty of 10% is levied on snake skins and lamb skins.

xiii) Cess on Imports

Cess is levied on indigenous manufactured goods like sugar, Tea, Jute, Beedis, automobiles,
Tobacco, Coffee, Rubber , Paper and paper board, iron ore, limestone and dolomite,
manganese ore, chrome ore and coking and non-coking coal. This is recoverable as excise
duty. If these are imported, corresponding cess will be payable
 58

Imports Procedure
1) To be followed by person –in charge of conveyance
- Arrive at customs port / air port only
- Submit import manifest to customs authorities within 12 hours of arrival
- Furnish list of stores on ship to be landed
- Keep excess stock under customs seal
- Start unloading only after customs authorities grant “Entry Inwards”

2) To be followed by Importer
- Submit following documents

 Bill of entry
 Invoice
 Packing list
 GATT declaration form
 Importer’s / Cha’s Declaration
 Import license
 Certificate of country of origin
 L/C & bank draft
 Insurance documents
 Technology literature
 Test report
 DEPB (Original)
 Split up of value of spares, components & machinery

- Documents submitted by importer are checked & assessed by customs officials & then goods
are cleared
- Date of presenting B.E. is relevant & rate of duty as applicable on this date is considered for
calculating duty
- Heavy demurrage is payable of goods are not cleared from port within 3 days.

Export Procedure
1) To be followed by person - in charge of conveyance
- Vessel is granted ‘Entry Outward’
Loading can start only after this permission
- Shipping bill duly passed by customs
Officer is handed over to him
- Export Manifest / Export report in the prescribed form should be submitted before departure.
- Report should be declared as true by him.
 59

2) To be followed by Exporter
- Obtain business identification no. (bin) From director general of foreign trade (DGFT)
- Open current A/C with designated bank for crediting duty drawback claims.
- If export is under DEPB, advance license etc. same should be registered at custom station.
- Submit shipping bill / Airway bill /Bill of export
- Assess goods for duty even if no duty payable
- Make appropriate declarations in prescribed Forms for :
(a) Drawback claim (b) DEEC Scheme (c) Adv. License
(d) DEPB Scheme (e) ARE –1 Declaration
- Complete excise formalities for export
- Follow prescribed procedures & submit necessary papers for claiming duty drawback
- Prepare & submit prescribed forms by RBI to enable RBI to ensure that export proceeds are
received in India through proper banking channel only
- Prepare / Submit following documents
(a) Commercial invoice (b) Packing list
(c) Certificate of Origin (d) Pre-shipment Insp. Report
(e) Insurance Policy (f) L / C
(g) Declaration of value (h) Excise are – 1 form
(i) GR / SDF form for RBI (J) Letter showing Bin No.

Courier, Post & Baggage

1) Import & Export through Courier

A) Import
i) Permitted by air from specified air ports & land custom Station. by land
ii) Maxm. Wt. allowed is 70 Kg. / Package
iii) Goods covered by any other Acts are not permitted
iv) Animals & its parts, Plants, Perishables, Stones, Gold, Silver, Chemicals, Publications
containing incorrect Indian boundaries are not allowed
v) Life savings drugs are allowed
vi) Courier must be Registered with commissioner of customs
vii) Free gifts & samples up to Rs. 10,000 per consignment allowed
viii) Gem / Jeweler up to Rs. 25 lakhs per consignment allowed.
ix) Courier bags are kept separately & dealt with as per directions of commissioner of customs
x) He has to submit specified declaration & ‘Courier Bill of Entry’ in prescribed form
 60
xi) Goods must be cleared by courier within 30 days of import otherwise they are disposed of
by customs authorities.

B) Export
i) Permitted from specified air ports & land customs station
ii) Courier must file a statement before departure of any flight in prescribed form along with
“Courier Shipping Bill”
iii) Free gifts Rs. 25,000 & samples Rs. 50,000 can be exported
iv) Export by EOU / SEZ / EHTP / STP units through authorized courier is permitted
v) Export of Gem / Jwellery Rs. 25 lakhs per consignment is allowed
vi) Goods must be exported within 7 days from customs area otherwise they are disposed of by
customs authorities.

2) Import & Export by Post

A) Import
i) Post parcels are allowed to pass from port / Air Port to foreign parcel Deptt. Without
payment of custom duty.
ii) Post master hands over to principal appraiser customs
a) Memo of parcels from each country of origin
b) Parcel bill or sender’s declaration
c) Customs declaration & dispatch notes
d) Any other information required
iii) Post bags opened under supervision & control of principal appraiser customs
iv) Packets containing dutiable goods are presented to customs appraiser
v) Parcels opened by him are distinctly sealed & after assessment handed over to post master
vi) Post master hands over the parcels to the addressee on receipt of custom duty from him
vii) Gifts up to Rs. 10,000 can be imported without payment of custom duty
viii) Post parcels with customs duty less than Rs. 100 are exempted from custom duty.

B) Export
i) Goods must be covered by a declaration in a prescribed form
ii) Export of Indian / Foreign currency is not allowed unless accompanied by permit issued by
RBI
iii) Goods up to Rs. 25,000 can be exported as a gift
iv) Export of purchases by foreign tourists allowed on submitting proof that payment was
received in foreign exchange.

3) Baggage Rules
A) Baggage includes –
i) Dutiable goods imported by
- Passengers
- Member of a crew
 61
In his baggage
ii) Unaccompanied baggage if dispatched previously or subsequently within prescribed period.
Baggage does not include
- Motor vehicles, alcoholic drinks & goods imported their courier
- Articles imported under imported license for himself or for others

B) Following are general prohibitions

i) Indian / Foreign currency (above RBI limits )
ii) Narcotic drugs
iii) Domestic pets (If not as per health regulations )
iv) Exoctic Birds, wind orchids, wild life
v) Endangered species
vi) Ivory
vii) Reptile skins
viii) Antiques

C) There are 2 Channels

i) Green Channel – Person not having any dutiable goods can pass through this. However if
found carrying dutiable goods. Goods are confiscated & he is prosecuted.
ii) Red channel – Person having dutiable goods pass their this & submit declaration. Baggage
checked by customs officer & appropriate duty is charged at 35% + 2% E.C. & 1% SAH.
Education Cess. There is no SAD & CVD

D) Exemptions allowed for import through Baggage

 Person transferring his residence to India is eligible to bring his personal & household
articles to India without duty
 Bona fide baggage accompanying passenger is exempted from customs duty
This includes personal effects, wearing apparel & toilet requisites
 Laptop computer brought as baggage by person over 18 years of age (other than member of
crew is fully exempt from customs duty
 Gold brought as baggage by a passenger of Indian origin or a person holding Indian passport.
The duty is only Rs. 100 per 10 gms. For import of gold bars bearing manufacturer’s or
refiner’s engraved serial number and weight expressed in metric units and gold coins. In case
of other gold, including tola bars and ornaments (but excluding ornaments studded with stones
or pearls), the duty is Rs. 250 per 10 10 gms. Up to 10 kg. gold can be brought by each eligible
passenger
 Silver brought as baggage by a passenger of Indian origin holding Indian passport up to 100
kg. is chargeable to duty of Rs. 500 per kg. (plus education cess @ 2% and SAH education
cess of 1% of duty), if the person was staying abroad for over six months. Duty has to be paid
only in convertible foreign currency. No CVD is payable. Silver can be brought in any form,
including medallions, coins and jewelry, except foreign currency coins and jewellery studded
with stones or pearls. Out of the period of 6 months. Short visits up to 30 days are permitted, if
the concession was not availed in such short visit.
 62
 Customs duty is not payable if amount of duty is equal to or less than Rs. 100

 A passenger of 10 or more year of age is allowed general free allowance of Rs. 25,000, if the
Indian Resident is returning from country other than Nepal, Bhutan, Myanmar or China . This
allowance is also available to foreign citizens residing in India, after stay of more than three
days. This allowance cannot be pooled with General Free Allowance of other passengers e.g.
husband and wife bringing one item of Rs. 50,000 will not be permitted duty free. This
General Free Allowance is not applicable to un-accompanied baggage.
The limit of Rs. 25,000 is reduced as follows –(a) Rs. 12,000 for passengers after stay
abroad of three days or less(b) If the passenger is up to 10 years of age and is returning from
country other than Nepal, Bhutan, Myanmar or China, the allowance is Rs. 6,000 if a person is
returning after stay of more than 3 days & Rs. 3,000 it has stay was 3 days or less, (c) If the
passenger is returning from Pakistan by land route, as specified in Annexure IV of baggage
Rules, the general free allowances is Rs. 6,000 for passengers above 10 years and Rs. 1,500
for passengers up to 10 years. Of age.
 An Indian Resident or foreigner residing in Indian of Age 10 or more is entitled to lower rate
of General free allowance of Rs. 6,000 if he is returning form Nepal, Bhutan, Myanmar or
China after stay of more than 3 days, by route other than land route. Passenger up to 10 years
returning from these countries after stay of more than 3 days is entitled to General Free
Allowance of Rs. 1,500. There is no duty on personal effects.

 There is no general free allowance if a person is returning from these countries after stay of
three days or less. There is no free allowance if passenger returns by land route from these
countries, even if his stay abroad was more than 3 days. If the passenger is returning from
Pakistan by land route the general free allowance is Rs. 6,000 for passengers above 10 years
and Rs. 1,500 for passengers up to 10 years of age.

 An Indian passenger who was engaged in his profession abroad for over three months is
allowed to import following duty free goods as additional allowance
(a) Used household articles up to Rs. 12,000 ( e.g. linen, utensils, tableware, kitchen
appliances, an iron etc. )
(b) Professional equipment like portable equipments, apparatus and appliances required in
such profession, up to Rs. 20,000. The limit will be increased to Rs. 40,000 if he was abroad
for over 6 months. [The allowance is in addition to General Free Allowance ]
This exemption of professional equipment is only for carpenters, plumbers welders, masons
and the like and not for items of common use like cameras, type writer, cassette – recorder,
computers, word processor etc.
 If the passenger was residing abroad for over one year, jewellery can be imported duty free
up to Rs. 10,000 in case of gentleman passenger and Rs. 20,000 in case of lady passenger.

 Import by foreign experts – Foreign experts assigned to India under various UN schemes etc.
are permitted to bring various articles, including VCR, video camera and Air – conditioners.
These are exempt from customs duty on obtaining certificate of undertaking from the expert.
Duty will be paid by concerned ministry / department.
 63

Exemption & Remission Of Duty

1) Exemption :
Exemption in duty is granted in following ways
a) Government issues notification in the public interest and exemption is granted on items
specified in notification after condition are fulfilled as per notification & W.E.F. date
mentioned thereto
b) Imports for Exports by FTZ, 100% EOU, Advance license, Job Work etc.
c) Specified imports for projects
d) Preferential rates for imports from specified countries
e) Lower rate in case of agreement by Govt. with some country

2) Remission :

a) Remission means waiver of duty

b) In following cases duty is remitted
i) Goods lost, Destroyed or Pilfered after unloading but before clearance for home
consumption
ii) If importer abandon goods because
- Goods are deteriorated
- Duty is very high.

Other Provisions In Customs

1) Warehousing
a) Imported goods can be kept without payment of duty
b) Pay customs duty & take goods out of warehouse
c) Available to – Traders & Direct Importers
d) Opened at warehousing Stn. Approved by customs
e) Public & private warehouses
f) Bond is required from importer for movement of goods from customer’s port to
warehousing Stn.
g) Period of warehousing–1 year & further 6 months by permission of commissioner & with
permission of chief commissioner & unlimited period
h) Capital goods by E.O.U. – 5 Yrs. Warehousing
Other goods by E.O.U. - 3 Yrs. Warehousing
i) Warehouse is under physical control of customs officer & clearance can be only with his
permission
j) If goods are damaged during warehousing no duty is payable
k) Goods can be cleared from warehouse only after paying custom duty
 64
l) Importer must pay rent & other charges if not paid warehouse keeper can sell goods after
giving notice to importer & with permission of customs officer
m) Owner of warehoused goods can relinquish title of goods any time before home clearance.
He has to pay rent & other charges. He does not have to pay duty
n) With permission of customs officer warehoused goods can be dealt in any of the following
wary :
- Mfg. & other operation for export or for home consumption
- Inspect goods
- Separate damaged / deteriorated goods
- Sort goods
- Change containers
- Show goods for sale
- Take sample of goods.

3) Export Oriented Undertakings ( E.O.U. )

 EOU can import inputs and capital goods without payment of customs duty.
 They can procure indigenous inputs and capital goods without payment of excise duty.
 Their final product should be normally exported, but they are allowed to sale part of their
production within India, which is termed as ‘DTA’ sales i.e. sale in Domestic Tariff Area.
 EOU units have to follow provisions of
- Customers Act.
- Excise Act
- Income Tax Act.
- Foreign Exchange Management Act.

4) Special Economic Zones (S.E.Z.)

China has made spectacular economic progress in recent years. Exports from China are
growing at phenomenal speed. It was found that one major reason for growth in exports was
due to ‘Special Economic Zones’ development by China. These are huge areas of thousands of
hectares, where raw materials and capital goods can be imported without any duty and final
product is exported. Excellent infrastructure is provided in these SEZs.
 India has also decided to introduce concept of SEZ in India. SEZ are like a separate island
within country. These are treated as if they are outside India for customs purposes. Goods can
be brought in SEZ without payment of customs duty or excise duty. Supplies to SEZ from
other parts of India are treated as ‘ exports’ and are entitled to all export benefits. On the other
hand, supplies from SEZ unit to any person outside SEZ is treated as ‘import’ by that person
ad normal customs duty is payable.
 SEZ have full freedom of operations within SEZ and all facilities of import and export are
provided within the zone itself.
 An entrepreneur can set up a manufacturing unit is SEZ. Normally, all his production will be
exported. He should have positive NFE (Net Foreign Exchange Earnings].
 65
5) Duty Drawback
 Manufacturers or processors can avail ‘ duty drawback’ Here, the excise duty and customs
duty paid on inputs and service tax paid on input services is given back to the exporter of
finished product by way of ‘ duty drawback’

 Drawback, in relation to any goods manufactured in India and exported, means the rebate of
duty or tax, as the case may be, chargeable on any imported materials or excisable materials
used or taxable services used as input services in manufacture of such goods.

 Incidence of un-rebated service tax and Fringe Benefit Tax (FBT) will be factored in various
duty neutralization and remission schemes. No drawback is available on other taxes like sales
tax and octroi.

 Drawback – When not eligible

(i) If sale proceeds of export goods are not received within time stipulated by RBI [This
provision does not apply to goods supplied from DTA unit to SEZ unit.]
(ii) If no customs / excise duty is paid on the inputs or service tax is not paid on input services
(iii) If imported inputs were obtained under Advance License (DEEC scheme) without
payment of duty
(iv) If importer avails DEPB or DFRC
(v) Goods manufactured under Customs Bond or Excise Bond where inputs were obtained
without payment of duty
(vi) Goods manufactured by EOU or a unit in Special Economic Zone (as they obtain inputs
without payment of duty )
(vii) If Cenvat was claimed on indigenous inputs. [In such case, excise portion of duty
drawback will not be available ]
(viii) In case of negative value addition – i.e. selling price of exported goods is less than value
of imported goods i.e. foreign exchange spent on import of raw material is more than FOB
value of exports.
(ix) Jute batching oil used in manufacture of jute yarn, twist, twine etc.
(x) Packing materials used in manufacture of jute yarn, jute fabrics and jute manufacture.
(xi) Where specific rates are provided, drawback will not be paid if it is less than 1% of FOB.
Value of the product, unless drawback claim per shipment is over Rs. 500
(xii) If wholesale market price of goods in India is less than the amount of drawback due.
(xiii) Exports to Nepal / Bhutan. However, exports to Nepal are eligible if payment is received
under hard currency i.e. dollars, euro, Yen British pounds etc.
(xiv) No drawback of sales tax, Octroi or other taxes – drawback is of customs and Central
Excise duties only.
(xv) Export of alcoholic liquor, cigarettes, cigar and pipe tobacco: as stores, to foreign going
vessel of less than 200 tons.
(xvi) If goods exported by vessel of less than 1,000 tons: unless certificate is submitted that
sale proceeds in foreign currency have been received and goods have landed at destination
within three months.
(xvii) If drawback is less than Rs. 50.
 66

6) Deemed Exports
India gets foreign aid from World Bank, Asia Development bank etc. for various
prestigious projects in India for which global tenders are invited and India gets aid in foreign
currency. Indian manufacturers and suppliers of services from India have to quote in
competition with foreign suppliers. Evaluation of bids is done without considering customs
duty. Since the supply of goods and service are for projects financed with free foreign
exchange, these suppliers are treated as ‘Deemed Exports’. Similarly, supplies to EOU units
and supplies against annual advance authorization are also ‘deemed exports’
These are so called because the goods and services do not leave the country. Suppliers
of goods and services get payment in Indian rupees and not in foreign currency.

Following are treated as Deemed exports

a) Supply of goods against Advance Authorization or Advance Authorization for Annual
Requirement / DFRC / DFIA.
b) Supply of goods to units located in EOU, STP, BTP or EHTP.
c) Scheme or supply of capital goods to holder of authorization under EPCG scheme.
d) Supply of goods to projects or turnkey contracts financed by multilateral or bilateral
agencies against international competitive bidding.
e) Supply of capital goods to fertilizer plants.
f) Supply of goods to any project where import is permitted at zero customs duty and supply is
make against international competitive bidding.
g) Supply of goods to power projects and refineries.
h) Supply of marine freight containers by EOU if the containers are exported within 6 month.
i) Supply to goods funded by UN Agencies and
j) Supply of goods to nuclear projects through competitive bidding (need not be international
competitive bidding )
Benefits of deemed exports are available to manufacturer exporter only for supply of goods
manufactured in India, and not to merchant exporters.

Benefits to Indian Supplier

The supplier are in India and supplier gets payment in Indian rupees. However, the
Indian supplier is entitled to get following benefits.
 Refund of excise duty paid on final product.
 No excise duty is payable while clearing goods from factory against CT – 3 form to
EOU. The Indian manufacturer is not required to reverse Cenvat credit availed on
inputs.
 No Excise Duty is payable if supply is made against International Competitive
Bidding.
 If Cenvat has been availed, only customs duty paid on inputs / components will be
allowed as deemed duty drawback
 67
 In respect of supplies made against advance authorization / DFRC / DFIA against ‘
deemed export’ the supplier is entitled to Advance Authorization / DFRC / DFIA for
intermediate supplies
 The DTA unit can import inputs duty free under this authorization. Advance
Authorization for intermediate supply / deemed export is issued to manufacturer –
exporter for material required for manufacture of goods to be supplied under deemed
export. Materials can be imported for deemed exports under Advance Authorization for
Deemed Exports without payment of customs duty.

Officers of Customs

Classes of officers of customs Sec 3

There shall be the following classes of officers of customs, namely :
(a) Chief Commissioners of Customs;
(b) Commissioners of Customs;
(c) Commissioners of Customs (Appeals);
(cc) Joint Commissioners of Customs;
(d) Deputy Commissioners of Customs;
(e) Assistant Commissioners of Customs or Deputy Commissioner of Customs
(f) such other class of officers of customs as may be appointed for the purposes of this Act.

Appointment of officers of customs Section 4.. — (1) The Board may appoint such persons
as it thinks fit to be officers of customs.
(2) Without prejudice to the provisions of sub-section (1), the Board may authorise a Chief
Commissioner of Customs or a Commissioner of Customs or a Joint or Assistant
Commissioner of Customs or Deputy Commissioner of Customs to appoint officers of
customs below the rank of Assistant Commissioner of Customs.

Powers of officers of customs. Section 5 – (1) Subject to such conditions and limitations as
the Board may impose, an officer of customs may exercise the powers and discharge the duties
conferred or imposed on him under this Act.
(2) An officer of customs may exercise the powers and discharge the duties conferred or
imposed under this Act on any other officer of customs who is subordinate to him.
(3) Notwithstanding anything contained in this section, a Commissioner (Appeals)] shall not
exercise the powers and discharge the duties conferred or imposed on an officer of customs
other than those specified in Chapter XV and section 108.
 68

Clearance of Imported Goods and Export Goods

Chapter not to apply to baggage and postal articles. Section 44. – The provisions of this
Chapter shall not apply to (a) baggage, and (b) goods imported or to be exported by post.

Clearance of Imported Goods

Restrictions on custody and removal of imported goods. Section 45. – (1) Save as
otherwise provided in any law for the time being in force, all imported goods unloaded in a
customs area shall remain in the custody of such person as may be approved by the
Commissioner of Customs until they are cleared for home consumption or are warehoused or
are transshipped in accordance with the provisions of Chapter VIII.
(2) The person having custody of any imported goods in a customs area, whether under the
provisions of sub-section (1)or under any law for the time being in force, –
(a) shall keep a record of such goods and send a copy thereof to the proper officer;
(b) shall not permit such goods to be removed from the customs area or otherwise dealt with,
except under and in accordance with the permission in writing of the proper officer.
(3) Notwithstanding anything contained in any law for the time being in force, if any imported
goods are pilfered after unloading thereof in a customs area while in the custody of a person
referred to in sub-section (1), that person shall be liable to pay duty on such goods at the rate
prevailing on the date of delivery of an import manifest or, as the case may be, an import
report to the proper officer under section 30 for the arrival of the conveyance in which the said
goods were carried.

Entry of goods on importation. Section 46. – The importer of any goods, other than goods
intended for transit or transhipment, shall make entry thereof by presenting electronically to
the proper officer a bill of entry for home consumption or warehousing in the prescribed form :
Provided that the Commissioner of Customs may, in cases where it is not feasible to make
entry by presenting electronically, allow an entry to be presented in any other manner:
Provided further that if the importer makes and subscribes to a declaration before the proper
officer, to the effect that he is unable for want of full information to furnish all the particulars
of the goods required under this sub-section, the proper officer may, pending the production of
such information, permit him, previous to the entry thereof (a) to examine the goods in the
presence of an officer of customs, or (b) to deposit the goods in a public warehouse appointed
under section 57 without warehousing the same.

Clearance of goods for home consumption Section 47.

Where the proper officer is satisfied that any good sentered for home consumption are not
prohibited goods and the importer has paid the import duty, if any, assessed thereon and any
charges payable under this Act in respect of the same, the proper officer may make an order
permitting clearance of the goods for home consumption.
 69
(2) Where the importer fails to pay the import duty under sub-section (1) within five
days excluding holidays from the date on which the bill of entry is returned to him for
payment of duty, he shall pay interest at such rate, not below ten percent and not exceeding
thirty six percent. perannum, as is for the time being fixed by the Central Government, by
notification in the Official Gazette, on such duty till the date of payment of the said duty :
Provided that where the bill of entry is returned for payment of duty before the
commencement of the Customs (Amendment) Act, 1991 and the importer has not paid such
duty before such commencement, the date of return of such bill of entry to him shall be
deemed to be the date of such commencement for the purpose of this section.
Provided further that if the Board is satisfied that it is necessary in the public interest
so to do, it may, by order for reasons to be recorded, waive the whole or part of any interest
payable under this section.

Procedure in case of goods not cleared, warehoused, or transhipped within thirty days
after unloading. Section 48.
If any goods brought into India from a place outside India are not cleared for home
consumption or warehoused or transshipped within thirty days from the date of the unloading
thereof at a customs station or within such further time as the proper officer may allow or if
the title to any imported goods is relinquished, such goods may, after notice to the importer
and with the permission of the proper officer be sold by the person having the custody thereof:
Provided that -
(a) animals, perishable goods and hazardous goods, may, with the permission of the proper
officer, be sold at any time;
(b) arms and ammunition may be sold at such time and place and in such manner as the
Central Government may direct.

Storage of imported goods in warehouse pending clearance. Section 49.– Where in the
case of any imported goods, whether dutiable or not, entered for home consumption, the
Assistant Commissioner of Customs or Deputy Commissioner of Customs is satisfied on the
application of the importer that the goods cannot be cleared within a reasonable time, the
goods may, pending clearance, be permitted to be stored in a public warehouse, or in a private
warehouse if facilities for deposit in a public warehouse are not available; but such goods shall
not be deemed to be warehoused goods for the purposes of this Act, and accordingly the
provisions of Chapter IX shall not apply to such goods.

Clearance of export goods

Entry of goods for exportation. Section 50 – (1) The exporter of any goods shall make entry
thereof by presenting electronically to the proper officer in the case of goods to be exported in
a vessel or aircraft, a shipping bill, and in the case of goods to be exported by land, a bill of
export in the prescribed form.
Provided that the Commissioner of Customs may, in cases where it is not feasible to
make entry by presenting electronically, allow an entry to be presented in any other manner.
 70
(2) The exporter of any goods, while presenting a shipping bill or bill of export, shall make
and subscribe to a declaration as to the truth of its contents.

Clearance of goods for exportation Section 51. – Where the proper officer is satisfied that
any goods entered for export are not prohibited goods and the exporter has paid the duty, if
any, assessed thereon and any charges payable under this Act in respect of the same, the
proper officer may make an order permitting clearance and loading of the goods for
exportation.

Goods in Transit
Chapter not to apply to baggage, postal articles and stores. Section 52. – The provisions
of this Chapter shall not apply to (a) baggage, (b) goods imported by post, and (c) stores.

Transit of certain goods without payment of duty. Section 53. - Subject to the provisions
of section 11, any goods imported in a conveyance and mentioned in the import manifest or
the import report, as the case may be, as for transit in the same conveyance to any place
outside India or any customs station may be allowed to be so transited without payment of
duty.

Transhipment of certain goods without payment of duty. Section 54. - (1) Where any
goods imported into a customs station are intended for transhipment, a bill of transhipment
shall be presented to the proper officer in the prescribed form.
Provided that where the goods are being transhipped under an international treaty or
bilateral agreement between the Government of India and Government of a foreign country, a
declaration for transhipment instead of a bill of transhipment shall be presented to the proper
officer in the prescribed form.
(2) Subject to the provisions of section 11, where any goods imported into a customs station
are mentioned in the import manifest or the import report, as the case may be, as for
transhipment to any place outside India, such goods may be allowed to be so transhipped
without payment of duty.
(3) Where any goods imported into a customs station are mentioned in the import manifest or
the import report, as the
 71

CENTRAL SALES TAX, 1956

History:

Britishers enacted the Government of India Act, 1935 to formulate India as a Federal State.

First Sales Tax Act:

The Madras State Government imposed the first sales tax in India in the year 1939 via
the Madras General Sales Tax Act, 1939. The intention of this tax is to fill up the budget
deficit that arose due to prohibition of liquor. The tax was in the rate of 1/2 paise in the rupee.
Soon other states began to levy sales tax and there was no co-ordination between states in the
tax levy.

Considerable developments in the area of taxation occurred after Indian independence.

The Government took the recommendations of the Taxation Enquiry Commission that gave a
broad view on what to be taxed and what shouldn't be taxed.

Introduction :

The original Central Sales Tax Act, 1956 had 18 sections in 5 chapters. The Central Sales Tax
(Registration and Turnover) Rules 1957 explained about the provisions of the implementation
of the act. The Act was amended in 2001. The Value Added Tax system was later
implemented.

The Central Sales Tax Act 1956 extends to whole of India. Therefore interstate
movement of goods from and to any part of India as a result of trade, commerce and other
business activity, export of goods from any part of the India and import of goods in any part of
India would be governed by the Central Sales Tax 1956.

Inter-State Sale
Introduction
As stated in the introduction one of the objectives of CENTRAL SALES TAX ACT is the
following:
(iv) “To formulate principles for determining--
(a) When a sale or purchase takes place in the course of inter-state trade or commerce.
(b) When a sale or purchase takes place outside a State.”

Section 3: This section defines the inter-Sate sale.

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Salient features of inter-State sale:

(i) There should be a completed sale.
(ii) There should be agreement or contract with a stipulation regarding movement of goods
from one State to another State.
(iii) The goods should move due to the stipulation in the agreement or contract.
(iv) Concluded sale should take place in a State which is different from the State from where
the movement started.
(v) The movement might be incidental to the contract of sale.
(vi) Where the property in the goods passes on to the buyer is not important.
(vii) The sale can precede the movement of the goods or movement of the goods can precede
the sale.
(viii) If the movements of the goods commence and terminates in the same State, even though
it passed through other State, it will not be treated as inter-State sale.

CST v.Lakhmi Ladha & Co. 77 STC 366(Bom)

In this case Lakhmi Ladha & Co was manufacturer of Tarpaulins at Bombay. They
entered into contract with Gujrat State Road Transport Corporation for supply of Tarpaulins to
Ahemedabad. The goods were first transferred to Branch at Surat and that branch delivered the
goods to the Transport Corporation. It was held to be inter-State transaction as the goods had
moved from Bombay to Surat under a contract of sale.

Formulation of principles for determining when a sale or purchase of goods

takes place in the course of import or export

Every country requires foreign exchange by way of dollars. For the purpose of the
foreign exchange, every country depends upon the exports of goods to other countries. Every
country tries to reduce the imports to minimize its burden to pay foreign exchange. In India the
subject of import and export goes to the center. The state cannot make any law on import and
export. The parliament can only make the law pertaining to the imports and export.

No tax on export Sale

If a sale is a export sale as explained below, no sales tax is leviable under CST and VAT

Export Sale u/s 5(1)

A sale or purchase of goods is deemed to be in course of export of the goods out of the
territory of India, only if—
(i) Sale/purchaser either occasions such export; or
(ii) is effected by a transfer of documents of title to goods after the goods have crossed the
customs frontiers of India.
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We can note the following points regarding `
‘Export Sale’:
(i) Sale should occasion the export
(ii) Sale to foreign tourist do not constitute `Sale in the course of Export’. Sales by star hotels
of food to foreign airlines on any airports in India does not amount to ‘sales in the course of
export’.
(iii) Goods should be destined to foreign country , though actual reaching of destination not
necessary.

Penultimate sale or sales u/s 5(3)

Penultimate sale means a sale preceding the sale occasioning export is also deemed to
be in the course of export u/s 5(3). The conditions to be fulfilled:
(a) The sale is for purpose of complying with agreement or order in relation to export.
(b) It is made after the agreement or order in relation to export.
(c) Same goods which are sold in penultimate sale should be exported.
(d) The exporter has to submit Form H to the dealer who is supplying the goods by way of
penultimate sale for export

Export sale by transfer of documents

After the goods crossed the customs frontier, the goods can be sold by way of transfer of
documents of title of goods and it will be treated as export sale. However, due to customs
formalities prevailing in India, this sale is not taking place.

Sale during Import-Section 5(2)

No tax on Import
If a purchase is an import as explained below, no sales tax is leviable under CST and VAT.

Import
A sale or purchaser of goods is deemed to be in course of import of the goods into the territory
of India, only if-
(i) The sale or purchase either occasions such import, or
(ii) Is effected by a transfer of documents of title to goods before the goods have crossed the
customs frontiers of India.

Imports by transfer of documents of title to goods or High Sea Sale

Imports by transfer of documents is popularly known as “ High Sea Sales”.

Necessity for High Sea Sale: If A imports the goods from foreign country and sells the goods
locally, he will not pay tax when he imports the goods and he has to pay local sales tax if sells
locally or he has to pay CST if he sells the imported goods in inter-state trade. On the other
hand, if the manufacturer imports on his own and uses it for manufacture , he will not pay any
tax when he imports the goods. However, it is not possible for manufacturers and others who
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requires imported goods to import goods directly due to Many reasons. In these cases in order
to avoid the sales tax, parties resort to ‘High Sea Sale’.

Salient features of High Sea Sale

(i) If imported goods are sold to a buyer in India by transfer of documents of title of goods,
before the goods have crossed the customs frontier of India, it will be treated as Sale or
purchase in the course of import.
(ii) Where transfer of documents of title effects sale, such transfer should take place before the
goods are moved out or customs station.
(iii) If the above mentioned conditions are satisfied in any sale transaction, the there will be no
CST or VAT.

Registration of dealers

Section 2(b) of the central sales taxes act define “Dealer” section 7 of the central sales
tax act, 1956 and rule 3 to 10 of the central sales tax ( Registration and turnover) rules, 1957
explain about the procedure for the registration of a Dealer under the central sales tax Act.
Section 6 and 6a of the Central sales tax act,1956 impose the liability to pay tax upon
the person, who sells goods in the course of inter-state trade or commerce, shall apply for
registration within such time as may be prescribed, to such authority as may be specified by
the central Government, and the application shall contain such particulars as may be
prescribed. Submission of application for registration under section 7 for such person and to
become a dealer is compulsory and necessary. The object and purpose of the registration of a
dealer under C.S.T Act is to regularize the trade, commerce and inter-state sales. An
application for registration under Section 7 shall be made not later than 30 days from the date
on which the dealer become liable to pay tax under the C.S.T Act

Procedure

 Application: An application for registration under section 7 shall be made by a dealer to the
notified authorities in Form-A. The assistant commercial tax officer of a state is also a
notified authority to register a dealer under C.S.T Act. Along with the power to grany
registration under the VAT Act. Form-a shall be dully filled in and signed by the proprietor
or one of the partners in case of a partnership firm, or Karta in case of Hindu undivided
family, or by a Director/Managing agent/Principal officer in case of a private/public
limited company, Form-A shall be duly verified.
Where a dealer has more than one place of business within a state, he shall make
a single application In respect of all such places, name in such application one of such
place as the principal place of business for the purposes of the Rules made under the C.S.T
Act and submit such application to the notified authority specified I respect of the principal
place of the business so named. Any place so named shall not In any case be different from
the place, if any, declared by him to be the principal place of business by whatever name
called, under the general sales law/VAT of the state. An application for registration shall be
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made not later than 30 days from the date on which the dealer becomes liable to pay tax
under the Act.

 Fees: A fee of Rs 25 shall be payable I respect of every application for registration, and
such fee may be paid in the form of court fee stamps affixed to such application.

 Security: the applicant shall have to produce the sufficient security. If necessary, he shall
have to submit addition security, if required. Where the security furnished by a dealer Is in
the form of a surety bond and the surety becomes insolvent or dies, the dealer shall within
30 days of the occurrence of any of the aforesaid events, inform the authority granting the
registration and shall within 90 days of such occurrence furnish a fresh surety bond or
furnish in the prescribed manner other security for the amount of the bond

 Certificate of registration: When the notified authority is satisfied, after making such
enquiry as it thinks necessary, that the particulars contained in the application are correct
and complete, and the fee has been paid, it shall register the dealer and grant him a
certificate of registration inn Form-B and also a copy of such Certificate for every place of
business within the state other than the principal place of business mentioned therein.

 Rejection of application: When the notified authority is not satisfied that the particulars
contained in the application are correct and complete, or where the fee has not been paid,
he shall reject the application for reasons to be recorded in writing. Before the application
is rejected, the applicant shall be given an opportunity of being heard in the matter and, as
the case may be, or correcting and completing the said particular or complying with the
requirements.

 Exhibition: The certificate of registration granted in Form-B shall kept at the principal
place of business mentioned in such certificate and a copy of such certificate granted, shall
be kept at every place of business within the state other than the principal place of
business, mentioned in such certificate.

 Amendment: Certificate of registration may be amended for the appropriate reasons by the
notified authority on an application by the dealer.

 Duplicate certificate: Where the certificate of registration granted to a dealer is lost,

destroyed defaced or mutilated, he may on application made in this behalf to the notified
authority and on payment of Rs 5 obtain a duplicate copy of such certificate. The fee shall
be paid in the form of Court fee stamps.

 Cancellation of certificate of registration: The certificate of registration may be

cancellation due to death, alteration in the firm, etc. which are similar to the cancellation of
certificate of registration under sales tax/VAT Rules. The notified authority shall, before
amending or canceling, as the case may be, the certificate of registration is cancelled; the
dealer shall forthwith surrender to the notified authority the certificate of registration and
the copies thereof, if any granted to him.
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VALUE ADDED TAX

INTRODUCTION

Value Added Tax or VAT is a broad based tax levied at multiple stage with tax on
inputs credited against taxes on output. The origin of VAT can be traced as far back as the
writing of F V on Siemens, who proposed it in 1919 as a substitute for the then newly
established German turnover tax.
Since then numerous economists have recommended it in different contexts. In
addition, various committees have examined the tax in detail. However, for its rejuvenation,
the tax owes much to Maurice Faure and Carl Shoup. The recent evolution of VAT can be
considered as the most important fiscal innovation of the present century.

WHAT IS VAT?

VAT is a tax, which is charged on the ‘increase in value’ of goods and services at each
stage of production and circulation. It is also chargeable on the value of all imported goods. It
is charged by registered VAT businesses/persons/taxpayers. VAT has replaced a number of
other taxes and its introduction has not resulted in either increased prices to final consumers or
reduced profitability of business. VAT is levied on the difference between the sale price of the
goods produced or the services rendered, and the cost thereof that is, the difference between
the output and the input.

FEATURES OF VAT:
1. Tax levied and collected at every point of sale.
2. Tax collected at every point of sale and the tax already paid by the dealer at the time of
purchase of goods will be deducted from the amount of tax paid at the next sale.
3. Dealers reselling tax paid goods will have to collect VAT and file returns and pay VAT at
every stage of sale (value addition)
4. It is transparent and easier.
5. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the
amount of tax payable on sale.
6. The returns and the challans are filed together in a simple format after self-assessment done
by the dealer himself.
7. At the most a few forms are required.
8. Tax on goods and services both.
9. Self-assessments by dealers.
10. Penalties will be stricter.
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General Requirements for VAT System:

1. Compulsory issue of tax invoice and retail invoice: Tax invoice is issued to a
dealer/consumer who has to take input VAT Credit whereas retail invoice is meant for inter
state sales or sale to a consumer who does not require input credit of VAT.

2. Registration: There is a compulsory registration of the dealer if the aggregate turnover

exceeds a certain specified limit.

3. Composition scheme: A small dealer whose turnover does not exceed a specified limit (say
in Delhi Rs. 50 lakhs) can opt for composition scheme where he shall have to pay tax himself
at a small percentage of gross turnover and in this case buyer of goods with not get input VAT
Credit.

4. Tax payer identification Number (TIN): There will be a taxpayer’s identification number
of 11 digit numericals which will be unique to each dealer.
5. Simplified returns of VAT are to filed monthly or quarterly as specified by each state.
6. Self-assessment by dealers.

7. Audit under VAT has been made compulsory by various States.

8. No requirement of any declaration form as bill will be raised for each sale and VAT shall be
levied.

9. Comprehensive coverage as only few commodities have been exempted from VAT.
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SERVICE TAX

It is a tax which is payable on service provided by the service provider. Just like Excise
duty is payable in goods which are manufactured, similarly Service Tax is payable on service
provided. This Tax is payable by the provider of service to the Government of India. However,
the Service provider can collect this Tax from the consumer of service (also referred to as
recipient of service) and deposit the same with the Government.

The current of Service Tax rate is 12%

Salient features
The salient features of levy of service tax are:

1. Scope: It is leviable on taxable services ‘provided’ or ‘to be provided’ by a service

provider. The services ‘to be provided’ in future are taxed only if payment in its respect is
received in advance.

Two separate persons required Payment to employees not covered: For charge of service
tax, it is necessary that the service provider and service recipient should be two separate
persons acting on ‘principal to principal basis’. Services provided by an employee to his
employer are not covered service tax and, therefore, salaries or allowances paid to them cannot
be charged to service tax.

2. Rate: It is leviable @ 12% of the value of taxable services. Education Cess @ 2% and
Secondary and Higher Education Cess @ 1 % are chargeable on the amount of service tax,
thus, making the effective rate of service tax at 12.36% of the value of taxable service.

3. Taxable services: Service tax is leviable only on the taxable services. Taxable services
mean the services taxable under section 65(105) of the Finance Act, 1994.

4. Value: For the levy of the service tax, the value shall be computed in accordance with
section 67 read with Service Tax (Determination of Value) Rules, 2006.

5. Free services not taxable: No service tax is leviable upon the services provided free of
cost.

6. Payment of service tax : The person providing the service (i.e. the service provider) has to
pay service tax in such manner and within such period as is prescribed in the Service Tax
Rules, 1994. The service tax is to be paid only on the receipt of payment towards the value of
taxable services.
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7. Procedures: Provisions have been made for registration, assessment including self
assessment, rectifications, revisions, appeals and penalties on the service provider.

8. CENVAT credit: The credit of service tax and excise duty across goods and services is
allowable in accordance with the CENVAT Credit Rules, 2004.

Accordingly, output service provider (i.e. provider of any taxable service) can avail
credit not only of the service tax paid on any input service consumed for rendering any output
service but also of the excise duty paid on any inputs and capital goods used for rendering
output service. CENVAT credit so availed can be utilized for payment of service tax on
taxable output service.

9. Services provided by an unincorporated association/body to its members also taxable

[Explanation to Sec. 65] : ‘Taxable service’ includes any taxable service provided or
to be provided by any unincorporated association or body of persons to a member thereof,
for cash, deferred payment or any other valuable consideration. Hence, the services (falling
under any category of taxable service) provided or to be provided by any unincorporated
association/body to member thereof shall be liable to service tax. This provision is an
exception to the ‘principle of mutuality’.

10. Performance of statutory activities/duties, not ’service’: An activity performed by a

sovereign /public authority under provisions of law does not constitute provision of taxable
service to a person and, therefore, no service tax is leviable on such entities.

11. Import/Export of services: While import of services is chargeable to tax u/s 66A, the
export of services has been made exempt from tax. Import/export provisions are discussed
separately.