9th SEMESTER

LAW OF TAXATION CLASS NOTES

Course Description
● Unit 1: Historical account of taxation and constitutional footing
● Unit 2: Fundamental notions of Income Tax Act 1961, cannons by Adam Smith
and its underlying concepts
● Unit 3: deals with the tax treatment under the heads of salary (Sec.15 to 17)
and house property (Sec.22 to 27)
● Unit 4: Aspects of trax treatment under the head profits and gains under
business or profession and capital gains
● Unit 5: dwells into the computation of income from other sources (dividends,
lottery, gifts etc), provisions of set off and carry forward, deduction as well
(sec.80), rebates and reliefs
● Unit 6: aims to understand the determination of tax liability as an important
component of tax regime
● Unit 7: the essential aspects of interpretation of taxing statutes in changing
times are dealt (self study as we’ve done in 8th sem)
● Unit 8: GST
 UNIT - 1
Taxation
Characteristics of taxation
Objectives of taxation
Canon of taxation
Classification of taxation
Merits and demerits of direct and indirect taxation
Constitutional Provisions relating to taxes

WHAT IS TAX:
● A forced payment made to a governmental unit that is unrelated to the value of
goods or services provided by the government.
● Once tax paid, cant ask the govt for returning the same amount.
● Amounts collected from tax is used of ‘public service’
● No direct relation between goods and services provided
● Mandatory liability that is to be paid
● Tax (as an investment) is used for the development of the nation
● irrespective of corresponding return as goods or/and services
● Taxation:
○ The most important source of revenue of the government
○ Compulsory charge or payment imposed by the government on individuals
or corporations
○ The persons who are taxed have to pay the tax irrespective of any
corresponding return from the goods and services by the govt.
● Prof Seligman: A tax is a compulsory contribution from the person to the
government to defray the expenses in the common interest of all without the
reference to special benefits conferred.
● Characteristics:
○ Enforced Contribution
■ Mandatorily imposed by govt for any goods or services availed.
■ For the growth and development of the nation.
■ In return: govt provides some facilities for public welfare.
○ Social benefit
■ Levied for common good of society and for public purpose.
■ No special treatment to a specific group.
○ Personal obligation
■ Of a person -- (legal person)
■ Legal obligation as it's enforced

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 ○ Tax as revenue to the State
○ Legal collection
○ Regular and periodical patent
○ No quid pro quo
■ Nothing can be expected to be returned personally
○ Paid in cash
■ Paid in money and not in kind.
● Collected by: Union Govt, State Govt and Urban-Rural local body.
● Direct tax: Income tax (personal income tax, corporate income tax, capital gain
tax), Property Tax levied by State, Transfer tax
● Indirect tax: GST, Customs, Excise, Property Tax.
● Why is tax collected under law? → to generate revenue for the Government.
● Commissioner HR and CE vs Lakshmendra 1954
○ Tax is compulsory exaction of money by a public authority for public
services enforced by law and is not a payment for services rendered
● Art.366(28) does not define tax but states that Taxation includes the imposition
of any tax or impost, whether general or local or special and ‘tax’ shall be
construed accordingly.
● Art.265 of the constitution of India prohibits levy or collection of tax except by
authority of law. Not only levy but also the collection of tax must be sanctioned by
law. → Chhotabhai Jethabhai Patel and Co. V. Union of India AIR
1952 Nagp 139.
● Commissioner of Wealth Tax Gujarat III Ahmedabad v. Ellis Bridge
Gymkhana → A charging section should be construed strictly.
● Taxes cannot be imposed in vacuum. There should be some machinery for
ascertaining the rate of taxation, and the persons or the class of persons liable to
pay the same. → St of Mysore v. D Cawasji and Co., 1970 3 SCC 710.

OBJECTIVES OF TAXATION:
● Raise Revenue
○ Biggest source of government revenue
● Regulation of Consumption and Production
○ Eg: High taxes on alcohol
● Encouraging Domestic Industries
○ Benefits given to domestic industries
○ Various tax beneficial schemes for start-ups and cottage industries.
● Stimulating Investment
● Better distribution of wealth
○ Eg: tax based on income
● Foster Economic Growth

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 ● Development of backward regions
● Promote social goals

CANONS OF TAXATION:
● A good tax system should adhere to certain principles which become its
characteristics.
● A good tax system is therefore based on some principles.
● Adam Smith formulated four important principles of taxation.
● Few more economists have suggested various other cannons (Eg: CF Bastable).
● These principles which a good tax system should follow are called canons of
taxation.
● Principles for ensuring a good tax system which has to be taken into
consideration by the government while making tax policies.
● These principles discuss as to how welfare of people should be kept in mind and
what facilities are to be provided, how taxes should be used for economic growth.

Canon of Equality:
● Based on ability to pay tax based on individual capacity (higher income pays
higher tax and poorer persons pays lesser taxes).
● Persons should be taxed accordingly to their ability to pay taxes. Thats why its
called the principle of ‘ability’.
● Equality does not mean the equal amount of tax, but equality in the tax burden.
● Canon of equality -- a progressive tax system as per modern economists. As per
Adam Smith it was proportional.
● Aka cannon of ability
● Tax is proportional to income
● Equity in collection of tax
● Theory: utility of money diminishes with the increase of income
● Horizontal equity -- persons in similar circumstances should face similar tax
burden.
● Vertical equity -- persons with higher income should pay not only more tax but
also a higher percentage of their income as tax
○ Surcharge -- Tax on tax
■ So for example if there is a 30% tax on Rs.100, the tax is Rs 30 and
there would be a surcharge of 10% on the 30 Rs tax, making the
total tax Rs.33 on Rs.100.
○ Surcharge reason: while tax is being collected, the person would have the
capacity to pay more.
● Tax Slabs

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○ Old Tax Slabs
Under 60 Yrs

Upto Rs. 2.5L Nil

Rs 2.5L - 5L 5%

Rs. 5L to 10L 20%

>Rs.10L 30%

60 to 79 Yrs

Upto 3L Nil

Rs. 3L to 5L 5%

Rs. 5L to 10L 20%

> Rs. 10L 30%

Above 80 Yrs

Upto Rs. 5L Nil

Rs. 5L to 10L 20%

> Rs. 10L 30%

○ New Tax Rates
Old Rate Ann. Income (rs.) New rate %

Nil < 2.5L nil

5% 2.5L - 5L 5

20% 5L - 7.5L 10

7.5L - 10L 15

30% 10L - 12.5L 20

12.5L - 15L 25

> 15L 30
○

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Canon of Certainty
● The tax which each individual is required ro pay should be certain and not
arbitrary.
● The time of payment, the manner of payment and the amount to be paid should
be clear to every tax payer.
● The application of this principle is beneficial to both, the government as well as
the tax payer.
● Eg: TDS (paid by salaried persons for the benefit of the govt)
● tax is paid - government gets revenue - used for welfare schemes.
● Sec.211 → Installments of advance tax.
○ Company Assessee:
■ 15% → 15th June
■ 45% amount already paid → 15th September
■ 75% amount already paid → 15th December
■ Whole amount → 15th March
○ Non Company Assessee:
■ 30% → 15th September
■ 60% amount already paid → 15th December
■ Whole amount → 15th March

Canon of Convenience
● Section 190 - TDS, 206C is TCS
● The mode and timings of tax payment should be convenient to the taxpayer.
● The taxes should be imposed in such a manner and at the time which is most
convenient for the tax payer (TDS, TCS, advance Tax payments are based on this
canon).
● This principle is also known as ‘the pay as you earn method’.

Canon of Economy:
● Every Tax has a cost of collection
● The cost of tax collection should be minimum
● Collection should be minimum if revenue is minimum

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 CANNONS OF MODERN ECONOMISTS

● Canon of Elasticity
○ Where the govt can be flexible -- frequent alterations in the levy of the tax
based on the situation.
○ Taxation should be elastic in nature in the sense that more revenus is
automatically fetched when income of the people rises. This means that
taxation must have been built-in flexibility.
○ Eg: emergency(during the pandemic), certain relaxations have been
given by the govt with respect to returns
● Canon of Productivity
○ Sufficient revenue should be generated
○ Tax must yield sufficient revenue and not adversely affect the production
in the economy.
○ collection , calculation, payment should be easy
○ Few tax which brings large revenue is better than many taxes which yield
small revenue
○ Eg: TDS is convenient, even GST (paid by the consumer)
○ Fairly productive tax >>>>>> productive than other large no of taxes,
such as GST which has replaced a lot
○ A Tax must yield sufficient revenue and not adversely affect production in
the economy.
○ Few Taxes which bring large revenue is better than many taxes which yield
small revenue.
● Canon of Simplicity
○ Simple and comprehend-able
○ Tax rates and tax systems ought to be simple and comprehensible and not
to be complex and beyond the understanding of the layman
● Canon of Diversity
○ There should be a multiple tax system of diverse nature rather than having
a single tax system. It does not mean there should be too many taxes but
there shall be fairly good number of taxes producing the required amount
of revenue.
○ Number of taxes from which govt can collect
○ Should be clear and fairly good
● Canon of expediency
○ A Tax should be determined on the ground of its economic, social and
political expediency, e.g a tax on agricultural income lacks social, political
or administrative expediency in India and that is why agriculture is
exempt from tax.

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 ○ Eg: Agriculture income
● Canon of coordination
○ Between all authorities (state and union and local bodies)
○ Good collection is possible if there is good coordination
● Canon of neutrality
○ Should not unduly encourage the tax payer in positive or negative manner
○ Should not be in excess nor too less, there should be a balance
○ Tax system should not have any adverse effect. It should not create any
inflationary or deflationary effect on the economy.

TAX BASE
● Is the total amount of assets or revenue that a government can charge tax on.
● For example: the assessed value is the tax base for property taxes and taxable
income is the tax base for income tax.
● Tax base = Taxable amount
● Direct taxes
● It is the grounds on which tax is to be levied
● In case of a company then there are no income limits here unlike a person, so
that's why they pay 30% of whatever amount they get which is the total taxable
income.
● GST: tax base is the MRP or the turnover of the all the taxpayers --
● Impact of Tax:
○ On the person who pays the tax on the 1st instance
○ GST: seller
● Incidence of Tax:
○ Division of tax || who ultimately pays the tax
○ who ultimately bear the tax like consumer
○ GST: consumer

TYPES OF TAXING SYSTEMS

Proportional tax
● A tax is called proportional when the rate of taxation remains constant as the
income of the taxpayer increases.
● In this system, all incomes are taxed at a single uniform rate, irrespective of
whether tax payer’s income is high or low
● The tax liability increases in absolute terms, but the proportion of income taxed
remains the same.
● Irrespective of income, taxation liability remains the same

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 ● Eg: companies or income tax slabs.

Progressive tax
● When the rate of taxation increases as the tax payer’s income increases.
● Any change in the income leads to a change in tax rate
● There is a positive relationship between income and tax rate
● The tax rate on higher income is higher and lower income is lower
● Income increases then taxable liability increases
● In such a system, the individual income are divided into different slabs and the
rate of income is different for each slab. Along with increase in income, the slabs
as well as the tax rate changes. This type of taxation helps in reducing economic
inequalities

Regressive Taxation
● A regressive tax is one in which the rate of taxation decreases as the tax payer’s
income increases.
● Lower income is taxed at a higher rate, whereas higher income is taxed at a lower
rate.
● It places more burden on people with lower income.
● It is against the object of a welfare state.
● Eg: Sin Tax
● Indirect taxes are regressive in nature, such as GST.
● Denmark, Sweden, Norway
● encourages earnings as well as people would want to avoid paying higher rates

Degressive Taxation
● When the rate of progression in taxation does not increase in the same
proportion as the increase income
● In this case, the rate of tax increases upto a certain limit, after that a uniform rate
is charged
● Thus degressive tax is a combination of progressive and proportional taxation.
This type of taxation is often used in case of income tax.
● IT act is degreesive

PROFESSIONAL TAX
● Tax on profession - doctors lawyers etc
● Levied by state govt

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 ● Max amount rs. 2500 → Art. 276(2)
● Same for all professionals
● Art. 246(3) → Entry 23 and 60 → taxes on profession pad

CLASSIFICATION OF TAXES
● Usually categorised based on the form, nature, aim and method of taxation
● Direct and Indirect taxes
● Hicks classifies direct and indirect taxes on the basis of administrative
arrangements
● In case of direct taxes - there is a direct relationship between the taxpayer and
revenue authorities. A tax collecting agency directly collects the tax from the
taxpayers.
● Whereas in case of indirect taxes - there is no direct relationship between the
taxpayer and the revenue authorities. They are collected through traders and
manufacturers

Direct Taxes:
● Examples: Income Tax, Securities Transaction tax, Dividend Distribution Tax
● Abolished Acts: Wealth Tax, Gift Tax, Banking cash transaction tax, fringe benefit
tax

Advantages and Disadvantages (Merits vs Demerits):

Advantages Disadvantages

● Equitable ● Painful
● Certain ● Tax evasion
● Economical ● Arbitrary in nature
● Elastic ● Inconvenient
● Reduces Inequalities ● Discourages saving and
● Productive investment
● Creates Public Consciousness ● Discourages foreign investment
● Anti Inflammatory ● Sectoral imbalance
● Affects Capital formation

CONCLUSION ON DT
● Impact and incidence is on the same point, i.e tax payer

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 ● don't affect the price of the commodity
● It's levied on the income of a person
● Direct taxation is an important aspect of the modern financial system
● In direct tax, burden cant be shifted
● The disadvantage of DT are mainly due to the administrative difficulties and
inefficiencies
● The extent of DT should depend on the economic state of the country. A rich
country has greater scope of DT than a poor country.

Indirect Taxes:
● Tax which is initially paid by one individual, but the burden of which is passed
over to some other individual who ultimately bears it.
● Its levied on the expenditure of a person
● As opposed to DT, such a tax is levied on some specified services or some
particular goods or services
● An IDT is not levied on any particular organization or an individual.
● Almost all activities which fall within the scope of an IDT are included in the
range starting from manufacturing goods and delivery of services to those that
are meant for consumption.
● Apart from these, there are varied activities and services which are related to the
import, trading etc are also included.

Merits of IDT
● Impact and incidence are at different points
● Affect price
● Charged irrespective of income slab
● Charged on different goods and services
● Elastic -- depends on consumption, increase with consumption
● Wide Coverage -- large consumer base irrespective of income
● Influence on pattern of production -- eg if govt was to control the supply of a
good, it can increase or decrease the tax rate.
● Convenient, Wide coverage, Elastic
● Difficult to evade
● Diversity
● Influence on pattern of production

Demerits of Indirect Tax

● Increase income inequalities
● Against canon of economy

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 ● Inflammatory in nature
● Lack of social consciousness
● Uncertain revenue
● Bad effect on production and employment
● Follows the Canon of Equity
● The Amount spent by the government in collection of indirect taxes when
compared to direct tax is quite high.

DIFFERENCE B/W DT AND IDT

Point of Difference DT IDT

Incidence and A tax is said to be direct when Impact is on one person and
Impact impact and incidence of a tax incidence is on another
are on one and same person

Burden DT is imposed on the IDT is imposed on

individual or organization and commodities and allows the tax
burden of tax cannot be shifted burden to shift
to others

Viability of DT are lesser burden than IDT
payment to people as DT are based on
income earning ability of
persons
IDT are borne by the
consumers of commodities and
services irrespective of
financial ability as the MRP
includes the taxes

Administrative The administrative costs of Cost of collection IDT is very

viability collecting DT is more and less as IDT are wrapped up in
improper administration may prices of goods and services
result in tax evasion and cannot be evaded

Penalty Is levied on the assessee Is levied on supplier of G&S

Ease in collection Difficult Relatively easier

Canon Certainty Convenience

CONSTITUTIONAL PROVISIONS RELATING TO TAXATION

● Constitution is the foundation and sources of powers to legislate all laws in India

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● Parliament as well as the State Legislature gets the power to legislate various laws
from the constitution only and therefore every law has to be within the scope of
the Constitution .
● Basic provisions of the Constitution relating to taxation including the powers of
Parliament and State Legislatures to legislate regarding levy and collection of tax
● Art. 328
● There are restrictions imposed by our constitution on such powers
● Art. 109-112 and 117
● Art. 276 -- Taxes on Profession
● Art. 271 -- Surcharge on duties and taxes
● Art. 285 and 289 -- Inter govt tax
● To understand any complicated provision of law, refer to the object of the law for
which it has been legislated and also the power of the Parliament or State
Legislature unde the Constitution to legislate such law for better understanding
of the subject matter.
● Chottabhai v UoI
○ A. 265 is applicable not only for “levy” but also for the collection of taxes
and the expression “assessment” within its compass covers both aspects
carriers out by the executive functionary
● S Gopalan v State of Madras
○ Law means an act of legislature and it should be within the legislative
competence of the Legislature and it should not be in violation of FR + not
violate Art.301 and 304 (Constitutional Limitation)
● KT Moopil Nair v State of Kerala
○ The Travancore Cochin land At 1955 is violative of Art.14 and 19(1)(f) in
view of the fact that in disguise of tax a person’s property was confiscated
● Binoy Viswam v UoI
○ A.139AA of IT Act
○ Linking of Aadhaar necessary for those who must pay tax and give
Aadhaar No. to prescribed IT Authorities challenged as unconstitutional.
○ Held: Legislative power of Parliament is not discretionary/violative of Art.
14 and 19(1)(f)
● Additional Commissioner of IT v Bharat V Patel
○ Whether new tax can be imposed by circulars given by CBD?
○ No. They are binding on IT officer and not assessee. No new tax can be
introduced via circular but can be imposed via circulars.
● Indian Express Newspaper v UoI 1985
○ Levying of custom duty tax on wastepapaper

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 HISTORICAL BACKGROUND

Ancient India
● Arthashastra -- ancient indian taxation system
○ Taxes collected in cash or in-kind
○ Land tax, gambling tax, octroi, professional tax
● Kalidas -- wrote about taxation -- just as the sun expects water from the reservoir
and gives it back in form of rains, so does the ruler expects the same from the
subjects and returns back in form of benefits
● Manusmriti -- shastras mention about tax -- should be levied on income --
artisans, artists, agri, gold and silver etc -- how much % should it be levied

Medieval India:
● 1st-time income tax was introduced -- overcome the financial difficulties that
occurred during 1860s
● British govt made experiments about the taxation structure
● Roughly 23 acts passed between 1860 - 1986
● 1860 - tax rate of 2% on income of Rs.200 || Rs.500 and above then 4%
○ Ended in 1865
○ Was revived as License Tax in 1867
● 1867 -- License Tax
● 1868 -- Certificate Tax same as lic tax
● 1869 --Certificate tax converted into a general income tax
● 1873 - Income tax abolished (refer to doc)
● 1877 → Revival of DT as Licence tax and continued till 1886
● 1886 → important -- 1st-time agri income tax was defined and continued till 1919
(Act II of 1886)
○ Income heads defined and divided:
■ Salary and pension
■ Profits of companies
■ Interest on securities
■ Income from other sources such as income from household
○ Agri income
● 1918 → (Act VII of 1919 enacted) → 2nd important landmark introduction of 6
heads:
○ Heads
■ Income from Salary
■ Interest on securities
■ Income from house property

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 ■ Income derived from business
■ Income from professional earning
■ Income from other sources
○ 4%-12% was the tax slab
● 1922 → The Indian Income Tax Act (IX of 1922) came into force -- result of
recommendations of All India Income Tax committee -- Administration vested
with CG
○ Charge in yeat of Assessment of income of previous year
○ Rates to be enunciated by annual financial acts
○ 1922 → IT Act came in force (v.imp)
● 1939 → Recommendation of Aiyer Committee in 1935
○ Act VII of 1939 enacted on the basis of recommendation of an expert
Income Tax Committee appointed in 1935
○ Capital receipt and revenue receipt
○ Slab system introduced
● 1961 → IT Act saw major changes
○ Existing IT act was enacted after considering the report of The Law
Commission of India and report of the Direct taxes Administrative
Enquiry Committee headed by Sh. Mahavir Tyagi
● 1962 → IT Rules
○ CBDT introduced
● 2009 → proposal to have a DT Code

TAX AND FEE

● The Tax in an imposition made for the public purpose without reference to any
services rendered by the State or any specific benefit to be conferred upon the tax
payer. The object to levy tax is to raise the general revenue
○ A fee is a payment levied by the State in respect of services performed by it
for the benefit of the individual.
● Tax is levied for public purpose but fee is for private interest.
○ fee is service-specific and tax is levied generally to the govt
● Corp of Calcutta vs Liberty Case (GCR)

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○

15
 ○

○
● Tax has nothing in return (no quid pro quo) as a service and fee is payment for a
service for a benefit
● A tax is paid for the common benefit conferred by the Govt on all tax payers
○ A fee is a payment made for some special benefit enjoyed by the payer and
the payment is shown proportionately to the special benefit. The money
raised by a fee is set apart and appropriated specifically for the purpose fof
the services for which it has been imposed and it is not merged in the
general revenue of the State.
● Tax is paid by everyone
○ Tax has common benefit and fee has a special benefit
● If there is no strict and clear nexus between some special service and the levy
cannot be said to be a fee.
● In the case of a tax, there is no quid pro quo between the tax payer and the state

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● There is a necessary correlation between the fee collection and the service
intended to be rendered → St of Raj v Sajjan Lal (1975 SC) and reiterated
in Kishan Lal v State of Haryana (1993 SC).
● Merely because others are also getting benefitted, will not detract the character of
a fee → Delhi Municipality v Yasin (SC 1983) and SGT v St of AP (1983
SC).
● ITC v St of Kar 1985 → Where the fee is levied for special services, the fact
that others besides those paying the fee are also benefited does not detract the
character of the fee
● Biswajit Da v UoI 2019 → provisions of Section 234E of IT Act imposing fee
for delayed filing of statement of tax deducted at source are not ultra vires.
● In Commissioner, Hindu Religious Endowmenrs vs Sri Lakshmindra
Thirtha Swamiar of Sri Shirur Mutt (1954) –
○ compulsory annual payment if exceeds 5% . the court held that the
exaction was a tax and not a fee as it was not dependent upon the benefit
conferred on any particular religious institution but depended merely on
the capacity of the payer and the money levied is not earmarked or
specified for defraying the expenses that the govt has to incur in
performing the services.
○ Issue: S. 76- Compulsory annual payment not exceeding 5 % by religious
institutions to Govt – Whether tax or fee?
○
Mutt Board

● Compulsory payment - tax ● Fee and not a tax

● Beyond state legislative
competence
○ Characteristics of Tax
■ Imposed under statutory power (levy)
■ Consent not required- common benefit
■ Impositions for the public purposes
■ Element of sacrifice from citizens
■ Payment enforced by law
■ Purpose – general revenue – public revenues (consolidated fund)
■ No special benefit – no quid pro quo
■ Quantum of imposition on capacity of tax payer to pay
■ Any particular advantage – mere incidental result
■ Eg: Land tax, Income Tax – compulsion lies and incidence falls on
all persons
■ Charge for special service, special capacity, special advantage

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 ■ Could be by govt agency to individuals
■ Voluntary payment for services obtained
■ Depends on expenses incurred by Govt- correlation
■ Quantum of imposition- quantum of benefit
■ Fee is uniform
■ No foolproof of general characteristics
○ Eg: Licence fee – choice; marriage license
○ S. 76 fails:
■ Ability to pay used – not quantum of benefit
■ Amounts to consolidated funds of state
■ Absence of correlation b/w expenses with amount raised
■ No quid pro quo established
○ Held: So, HC is right in upholding tax and not fee and is ultra vires the
power of State Legislature
● Delhi Cloth and General Mills Co Ltd v Chief Comm of Del 1970 → the
SC held that if 60% of the amount collected is actually spent of services rendered
then it would be a fee and not a tax

Conclusion: Difference between Tax and fee

● The important feature of the fee is that the amounts collected by way of fees is
that the amounts collected by way of fees are not merged with the consolidated
fund and the quid pro quo element is quite strong. On the other hand, in case of
tax, the collection goes to the public revenue or to the consolidated fund and the
quid pro quo element is quite strong. On the other hand, in case of tax, the
collection goes to the public revenue or to the consolidated fund and the benefit
which the tax payer is receives is not measurable in terms of the tax is paid by
them
● To differentiate between tax and fee, one has to go to substance of the legislation
and not be merely guided by the nomenclature to it. In Govt of Madras vs
Zenith Lamps, the SC held that if there is no co-relation b/w the services and
the levvy or if the levy is so excessive and bears no reasonable relation to the
services, then what is levied is a tax and not a fee.
● However, if the legislative intention is not to raise revenue but to provide
recompose for some service rendered by the govt agency, one may not insist on
mathematical exactitude b/w the services and the fees with respect to each payer.

Difference between tax and fee(read and add from GCR article)
● Tax depends on capacity to pay || fee is uniform and not dependant on capacity
to pay
● Tax is compulsory levy enforced by law || fee is not always compul

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 ● Tax goes to consolidated fund || fee does not
● Govt has discretion to use tax revenue collected || amount collected is for the
particular service only
● No quid pro quo for tax || there is a benefit that's returned
● Tax objective is to bring social order || fee is to regulate social order

Tax v Cess:

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MODULE 2: FUNDAMENTAL NOTIONS OF
INCOME TAX
Basic concepts/Definitions – Assesse, Persons, Previous year, Assessment Year,
Distinction between Capital and Revenue Receipts,
Income,
Basis of Charge and
Scope of Total Income,
Incomes which do not form part of the Total Income,
Residential Status and Incidence of Tax,
Agricultural Income and Taxability.

INTRODUCTION:
● Revenue Receipt:
○ Receipts generated out of routine business transactions
○ Earned by sellings goods or services
○ Available for meeting all day to day expenses of a business concern
○ Repeated/recurring in nature
○ Eg: Sales proceeds received, collection from debtors, rents, buying and
selling
○ Revenue/income received in regular intervals
● Capital Receipts
○ Do not arise due to normal course of business (sale of property/assets,
gift)
■ If gift is above 50k
○ Non recurring in nature because not regularly earned by the business
○ Eg: receipt from sale of fixed assets, amount of raising of capital for
business, amount of payment towards debentures or other loans, dividend
● FOR GIFTS:
○ 80k paid in installments in a year as 20+50+10 -- would be capital receipt
as its not recurring in nature but if received from relative then not taxable
in nature
○ Eg: A gives 10k , B gives 20K and C gives 30k as gift in different months
then its taxable as capital receipt
● S.2(40) and s.45 - share will be capital if not a business. If primary buisness is
selling of shares then it's revenue receipt.

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Immaterial Consideration -- as in what is capital or revenue (Case laws)
● “Only revenue receipts are taxable as income unless the capital receipts are
chargeable as capital gains”
● Receipt in lump sum or in installments
○ Doesn't matter if its one time or as installments.
○ Eg: Employee’s salary is 1k/month -- asked for 3 yrs salary as lump sum --
revenue receipt as its a recurring payment
○ Rajah Manyain Meenak and Shamma v CIT 1956
■ Whether its periodic or a single receipt it is irrelevant for the
purpose of determining its nature (taking whole year’s salary is a
revenue receipt)
● Nature of receipt in the hands of recipient
○ Vishnudatta Antharjanam (AKTKM) v C Ag IT 1970
■ Assessee had teak trees which were sold with roots with intention to
grow something else -- sale proceeds in this case of the trees is an
income liable to tax as a capital receipt in the hands of the assessee.
Capital as the source of income is a one time income.
○ Venugopal Verma Rajah v CIT
■ Trees not sold with roots -- here court held it as a revenue receipt
○ Whether a receipt is capital or revenue will be determined in the hands of
the person receiving the income and not the person paying for it.
○ No attention will be paid towards the source of which the amount is
coming for
● Magnitude of receipt
○ Divencha v CIT 48 1 TR 222 -- SC told magnitude is immaterial
consideration.
● Name given by parties and treatment in books of accounts
○ Chowringhee Sales Bureau P Ltd v CIT 1973 -- nature is important
and not the name given to the amount received
○ Sinclair Murray and Co P Ltd 1961
● Payment made out of capital
○ Brodie’s Trustees v IR -- No attention will be paid towards the source
from which amount is coming. Salary even paid out of a capital by a new
business will be a revenue receipt in the hands of the employee.
● Time of receipt
○ On receiving, it should be seen and not post use
● Quality of receipt
○ AKTKM vs CASIT -- The court held that the existence/ absence of profit
motive is also neither decisive nor conclusive for arriving at a decision
whether a particular receipt is income or not because even in the absence

21
 of a motive to earn income, the assessee may derive income and would still
be chargeable to tax
● Cases (imp)- guidelines were laid down to draw line b/w revenue
receipt and capital
○ H.S Ramchandra Rao vs CIT -- Related to S.4 and 56 of IT Act. Amt
received by Assessee. Ram was sec in educational society. He was removed
and some amount was given to him. Receipt considered revenue receipt as
it will fall under income from other sources.
○ The Peerless General Finance and Investment Co Ltd vs CIT --
S.4 (charging section – primary duty/ onus on IT dept to prove that
certain receipt is liable to be taxed or not) and 145 of IT Act. The true
nature has to be seen and not the entry in the books of accounts.
● (Empire jute co. ltd vs CIT (1980), IRC vs British Salmson Aero
engines ltd (1938) -- The spin of coin will decide the matter almost as
satisfactory as an attempt to find reasons
● Tests laid down by the above cases:
○ On the basis of nature of assets
■ If it is a fixed asset, sale of the same will became a capital receipt.
(eg( land, plant, machinery, building, etc.)
■ If it is circulating asset , then revenue receipt. (eg(stock and trade)
○ Termination of source of income
■ Any sum received in compensation for the termination of source of
income is a capital receipt.
○ Amount received in substitution of source of income (breach of
contract)
■ Any sum such received is revenue received. Co awarded damages
by court as compensation for profits that would have been earned is
considered as revenue receipts.
○ Compensation on surrender of a right
■ Any amount received as compensation on surrender of a right is a
capital receipt whereas any amt received to compensate for loss for
future receipt is revenue receipt. Eg: Author giving right over his
book and receives compensation for same ( capital receipt. For
royalty, surrendering of right in advance( revenue receipt.
○ Pure compensation
■ If yes, with max suffering that is, mental agony, court awards
compensation ( capital receipt. If no, compensation becomes
revenue receipt.

22
 Difference between Capital and Revenue Receipts

Basis of Difference Capital Revenue

Source Do not arise during the Arises during the normal

normal course of business course of business

Nature Capital in nature nad Revenue in nature and hence

hence are not treated as treated as items of income of
items of income of the the business
business

Occurrence Non recurring Recurring

Example Sale of fixed assets and Sale of goods, rent from

raising of loans tenants, dividends

INCOME TAX ACT, 1961 + 1962

● Total Section: 298
● Schedules XIV
● 125 rules + circulars and notifications by CBDT
● Money Bill vs Financial Bill
● Financial bill: revenue and expenditure
● Money bill: exclusively deals with matters prescribed u/ A.110(1) of Constitution.
● Features:
○ Tax imposed on all incomes except agricultural income (A.246 of
Constitution)
○ Levied by Central government (Entry 46 List II – agricultural income by
SG)
○ Considered as Direct tax
○ Annually the tax has to be paid – income chargeable to tax per year.
○ Tax is on a person
○ Tax is on income
○ Income of previous year is assessable in assessment year.
○ Charged on the prescribed rates.
○ Applicable to the whole country
● Scheme (imp)

23
 ○ Income earned by every person is chargeable to income tax provided it
exceeds the maximum amount (more that 2.5L – individual; revenue more
than one crore, 30% of profit-companies)
○ It is charged on the total income of the previous year but is taxable in the
next following assessment year at the rates applicable to such assessment
year.
○ Income tax is charged at 2 rates – finance act (general law) and IT act
(special law)
○ Total income is according to specified provisions under IT Act.
○ It is calculated on the basis of residential status (sec 6 of IT Act)
○ Although income of previous year is chargeable to tax in the assessment
year, but the assessee has to pay income tax in the same previous year he
has earned it, through TDS or advanced tax or TCS. This is also known as
prepaid tax.

KEY DEFINITIONS

Person -- Section 2(31)

● Definition:
○ an individual - natural person - male, female, person of sound mind,
person of unsound mind, major, minor, married, unmarried, trustee;
○ a Hindu undivided family - take the definition under Hindu law - karta will
be filing return on behalf of HUF - he may have personal income, for
which separate returns have to be filed -
■ Hindu includes Sikhs, Buddhists and Jains
○ (iii) a company - Section 2(17) of IT Act defines company
○ (iv) a firm - under Section 4 of Partnership Act, 1932 and LLP
○ (v) an association of persons or a body of individuals, whether
incorporated or not
■ association of persons means a group of persons who come together
for achieving a common objective and have the same mindsets
■ can be natural or artificial persons
■ however, body of individuals means a group of individuals (natural
persons) who join together for earning income
■ AoP always have a common objective - not the case with BoI
○ (vi) a local authority, and - Section 10(20) of IT Act defines local authority
■ also under Article 243 of Constitution
○ (vii) every artificial juridical person, not falling within any of the preceding
sub-clauses.

24
 ■ cooperative societies, NGOs, temples, idol in temples, Trade
Unions, Universities, Public Corporations under Special legislations
○ Explanation.—For the purposes of this clause, an association of persons or
a body of individuals or a local authority or an artificial juridical person
shall be deemed to be a person, whether or not such person or body or
authority or juridical person was formed or established or incorporated
with the object of deriving income, profits or gains
● 3(42) General Clauses Act, also defines a person. For IT Act purposes, this
definition only must be followed.
● Shiromani Gurudwara Prabandhak Committee, Amritsar V. Som
Nath Das - SC held that Guru Granth Sahib as an artificial person
● CIT V. Indira Balkrishna - AoP means two or more persons who join for a
common purpose with a view to earn an income
● Decan wine & General stores V. CIT - Tribunal held - if two or more
persons join hands to carry on a business but do not constitute they may be
assessed as an AoP
● Meera & Co. V. CIT - AoP and BoI - A business was being run by a widow on
her behalf and on behalf of her children - held - will be assessed as BoI not as AoP
● M/S. Ajay Kumar Gupta (Huf), Delhi vs Acit, New Delhi - HUF - Court
held - whether a HUF can become a partner in a firm or not - no - HUF directly
or indirectly cannot become a partner in a firm as a firm is an association of
persons - even if a person in an HUF is nominated to be a partner in a firm,
partnership is between the partners and the nominated member
● CIT v. Deepak Family - trustees of a trust or charitable trust are assessed as
individuals and not as AoP
● New Okhla Industrial Development Authority (NOIDA) V. Chief
commissioner of Income tax & ors. 2018 - Whether Nodia is a Local
Authority or not? The Court held that Noida is not a Local authority under
Section 10(20) of the IT Act.
● Is remuneration payable to member of HUF - no remuneration is payable to the
HUF - remuneration can only be paid to the karta of the HUF in his personal
capacity

Assessee -- Section 2(7)

● Assessee - means a person by whom any tax or any other sum of money is payable
under this Act, and includes - any other sum of money means penalty, interest
every person in respect of whom any proceeding under this Act has been taken
for the assessment of his income or assessment of fringe benefits or of the income
of any other person in respect of which he is assessable, or of the loss sustained

25
 by him or by such other person, or of the amount of refund due to him or to such
other person
○ IT authorities find that someone has not paid the tax (that person thought
the person was not liable to pay the tax) - assessment is done - proceedings
against the person person begins - they are an assessee - proceedings may
be with respect to Assessment of income or loss sustained by him - when I
make losses, the loss gets carried forward - a return of loss has to be filed -
this allows the loss to be carried forward for eight years - if a return of loss
is filed, then the profits from the next year will be used in setting off that
loss and then the tax is payable after the set off
○ Income or loss of any other person in respect of whom he is assessable -
eg. minor
○ Refund due to him or such other person
○ Assessment of fringe benefits - 115(wb)
● every person who is deemed to be an assessee under any provision of this Act
● every person who is deemed to be an assessee in default under any provision of
this Act

Representative Assessees:
● Sometimes a person may be assessed for income of another person. Such person
is known as a representative assessee.
● Eg: Legal Heir is assessable for the income of deceased person
● Aka Deemed assessee
● Eg: Guardian, 1st of kin, agent of NRI, (WILL example)

Assessee in default:
● Any person who does not deduct tax at source or after deducting tax fails to pay
advance tax is deemed to be assessee in default
● S.201(1) -- TDS
● S. 218 -- advance tax
● Fails to fulfil the tax liability (eg: if CU fails to pay ma’am’s TDS, then CU is the
Assessee in default OR if they fail to deposit it but have deducted it).
● S.226(3) -- attachment done for recovery on account of default

FINANCIAL YEAR, PREVIOUS YEAR AND ASSESSMENT YEAR

● Previous year -- is where the income is earned (s.3)
○ FY in which income is earned is PY
○ PY means the FY immediately preceding the AY
● Assessment year (s.2(9))

26
 ○ The year in which income is assessed to tax is AY
○ AY 2020-21 will commence on 1-4-2020 and end on 31-03-2021
○ Thus income earned during PY 2019-20 will be assessed/tax in AY
2020-21
○ 12 months always
● Financial Year (s.2(21) General clauses act 1897)
○ Means an year starting on 1st April and ending on 31st March
○ Dual Role:
■ Each FY is both PY as well as AY
■ It is PY for the income earned during the FY and AY for the income
earned during the preceding FY

27
 ○ If business starts in december, the FY would be till 31st march (so 4
months)
○ So if its june 2021 then PY would be June 2021 to 31st March 2022.

Cases where income of PY is Assessed in the same year

● Shipping Business of Non residents (s.172)
○ If a ship belonging to/or chartered by NR carries
passengers/livestock/mail/goods shipped at a port in India
○ Such ship is allowed to leave the port only when the tax has been paid or
satisfactory arrangement has been made for payment thereof
○ Income = 7.5% of the freight paid/payable to the owner or his agent
whether in India or o/s India for such carriage
○ Such income is charged to tax in the same year in which it is earned.
○ So if PY is 2021-22 then AY will also be 2021-22. (finance act 2021 will be
applicable)

28
●

29
 ●

INCOME S.2(24)

●
● Heads:
○ Salary
○ House property
○ Profit and Gains from business
○ Capital
○ Other Sources
● Person u/s 2(31)

30
●
○ Personal expense can be gas, electricity, maintenance of parents etc
○ Prerequisite -- ??????

●
○ Cap gains u/s 45 and
■ Capital asset defined under s.2(14)

31
●
○ Eg: Gift: need not be a single transaction -- so can be 30k in Jun 30k in
Dec and 30k in Feb -- falls in the same PY so it'll be taxable as income

●
● Naidu vs CIT (1956) (pin money) – imp. case – pin money is not an income
- pocket money – like household expenditure – not an income in hands of
receiving party – if 50K given, if 30K spent – every month 20K saved and if that
is deposited in bank and interest is gained – then income – earning from pin
money is income/ asset acquired from pin money is income
● Gopal Saran Narain Singh v. CIT (1935) (Significant extension was added
to the definition of Income accordingly anything which can be properly described
as income. Income is taxable under the Act unless expressly exempted under the
Act) – income is taxable under Act, except when specifically exempted – inclusive
definition
● Franklin v. IRS (1930) (disputed title) – disputed title means dispute
regarding title in court related to a property and property generates income –
who has right over income? Person who is receiving rent has right over income –
income taxable in hands of the recipient

32
● CIT v. Coral Electronics (P.) Ltd. (2005) – charges of service in future is
taxed when charge made (when amount taken is when tax is paid - in advance/ in
lump sum, even if services provided later)
● Additional cases in GCR

33
●

●
● Gist of income, not exhaustive:
○ Kind – perquisites under S. 17 (rent, obligation fulfilled by employer which
employee is originally supposed to do like car/ cook – value calculated
based on IT Rules)
○ Method of accounting irrelevant for salary/ capital gain (profit made while
transferring capital asset), only relevant for profit – what has to be
checked while accounting is whether cash/ accrual basis is followed

34
 (throughout the year same has to be followed – if it has to be shifted then
approval of assessing officer has to be taken)
○ Transfer from head office to regional office – not income
○ Daily wager and regular employee – does not matter – income being taken
is what matters
○ Capital (not taxed unless specified) and Revenue Receipt (not exempted
unless specified)
○ Income also includes negative income
○ Illegal business – Illegal expenses are allowed but for legal business, illegal
expenses are not allowed (S. 28) (can’t be claimed as expenditure)
● Income will be of the person -- person who is receiving the rent
● Double taxation – once taxed cannot be taxed again in hands of same person. Eg.
- if services not taken but charges/ salary paid in advance (on accrual basis) and
tax paid, then tax does not have to paid again when service taken
● Mutual activity – eg. Kitty party
● Embezzlement means illegal – falls within income definition
● Contingent and anticipatory income cannot be taxed – not accrued/ received so
not taxable
● Tax free income – no concept of tax free income
● Burden of Proof – BOP lies on the income tax department that income is taxable
and if exempted, then BOP on assessee

APPLICATION OF INCOME VS DIVERSION OF INCOME

● Application of Income means spending of Income after it is being earned by the
assessee. Such amount shall not be excluded from total income of the assessee as
it is merely application of earned income.
● Diversion of Income is the process of diverting income before it is earned by the
assessee. Such amount shall be excluded from the Total Income of the assessee as
the income is diverted to someone else before being earned by the assessee.
● When salary is transferred to someone else (parent, etc.) – diverting income not
allowed – taxable liability always on person who is receiving it – transferring/
diversion post paying tax is permitted but prior to paying tax, not permit.
Exception – Court diverted it
● Application is allowed – paid tax and whatever is left, then tax authorities are
least considered with how it is being applied (used) (like paying house help,
maintaining parents)

35
DEEMED TO BE INCOME
● Legal fiction - presumed to be an income
● Interpreted strictly - limited to the purpose for which it has been created and
cannot be extended beyond that purpose – to avoid injustice
● CIT v. Amarchand N. Shroff (1963) – deeming section cannot be extended
beyond the object for which it has been enacted – strictly interpreted
● Vodafone International Holding BV v. UOI - Concept of chargeability cannot be
changed – for what purpose it is being presumed – should be strictly interpreted
to only that. (eg.) S. 2(22)(e) - advance or loan taken by a person who is having a
substantial interest in company, it will be deemed to be income
● Few more examples:
○ S. 68 - Cash Credits – no explanation regarding source and nature of
income in books – such income which is credited to the books shall be
considered as deemed to be as income of assessee for that FY
○ Unexplained investment (S. 69) – If in any FY, investment (like bonds,
etc.) is not recorded and no explanation for same with assess – then value
of investment will be considered as deemed to be income for that FY –
BOP is on assessee – full amount
○ Unexplained money – not recorded in books/ caught and failed to give an
explaination – deemed to be an income for that FY
■ Fully not disclosed – same as point 2
○ Unexplained expenditure – if IT authorities come to know about
expenditure on their own, which is not through cash
● Roshan Di Hatti v. CIT (1977) and Kale Khan Mohammad Hanif v.
CIT (1963) – Law is well settled that the onus of proving the source of a sum of
money found to have been received by an assessee is on him
● Datchinamurthy v. Asstt. Director of Inspection (1984) - Court held it is
a long accepted of IT law that as assessee is obliged to explain the nature and
source of cash credits in his accounts
● If caught under deeming provisions - Rate of tax for the deemed to be income –
Such income are taxed @ 60% (earlier it was 30%) + surcharge (S. 115BBE) –
Neither expenditure nor any allowance nor set off of any loss shall be allowable
against such income

36
 RELEVANCE OF METHODS OF ACCOUNTING FOLLOWED BY
THE ASSESSEE

● S.16 -- Deductions from salary

● S.22 -- What is HP
● S.24 -- Deductions from HP
● No deductions from CG, but they have exemptions u/s.54
● S.57 -- Deductions from IFOS

(Deductions -- Salaries (s.16), HP (24), P&G (35-38 is exemption), CG (s.54 Exempt))

● Clubbing of Income -- if given to annr person (spouse, child etc)
● Deductions in 80C to 80U -- generally available for all
(Refer to video to understand better)

37
 ● The paisa element should be ignored -- i.e if 41645 then it should be considered
off as 41,650

How to figure out taxable liability -- Tax on Net Income

Net Taxable Income (Rounded off and Deductions) * Tax Rates
+ Surcharge
+ Excess
- Prepaid Tax (TDS/TCS/Adv Tax)
Then round off taxable liability u/s 288

OTHER ASPECTS WHILE CALCULATING TAX LIABILITY

SURCHARGE
● Is an additional tax payable over and above the income tax
● Surcharge is levied as a percentage of income tax
● EG: Net.Tot.Inco is 50L then surcharge would be 10% (based on the rate under
the finance act) → 10% on X
○ Taxability of 50L would be seen 1st -- let's consider it to be X
○ Then on X the surcharge of 10% would be levied

38
MARGINAL RELIEF
● From 2019 -- New pay scale (Increased salary)
○ Arrears in 2021
○ Received in 2021
● Section 89
● Assuming in 2019 and 2020 the taxable liability is less, then u/s.89 one can send
an application requesting to paying the arrears based on the previous year’s tax
rates
● Retrospective effect
● Can be for any number of years/months

REBATE U/S 87A

● Concession
● If income is <=5L then rebate is Rs.12,500
● Flat deduction
● Just as a benefit for the weaker sections

CESS
● 4% on (IT + Surcharge)
● Educational Cess on Tax + Surcharge

CALCULATING TAX:
Eg: Income is 10L
● Taxable liability is: 2.5L is o%
● Then 2.5 -- 5%
● Then remaining 5L -20%

Eg: Income is 12L

● 1st 2.5L (out of 12L) -- Nil tax -- remaining is 9.5L
● From 9.5L we tax on 2.5L @5% -- remaining is 7L
● From 7L we tax it on 5L @20% -- remaining is 2L
● Remaining 2L we tax it @30%
If more than 50L then surcharge @10%

Eg: Income is 50L

● 2.5L (out of 50L)→ 0% → remaining is 47.5L
● 2.5L (out of remaining 47.5L) → 5% → remaining is 45L

39
● 5L (out of remaining 45L) → 20% → remaining 40L
● Remaining 40L → 30%
● Then surcharge on the whole tax

Charging Provision -- Sec. 4

● IT is charged under s.4
● Charged by CG
● Charged for any assessment year
● IT + any additional tax
● Levied on the Total Income of the previous year of every person

●
○ TI is to be calculated as per s.14 (5 heads of income)

40
 TOTAL INCOME -- Sec.5

●
○ Accrue vs. arises
● Then we'll have to check if the person is a resident first
● Check if person 2(31) → residential status under s.6 → check which income is
taxable → s.5
● Aka global income of a resident
○ Deemed to receive in india
○ Accrue or arise (deem) in india
○ Outside country accrue or arise
● For NOR:
○ Only 1st and 2nd points are there as such -- considered
○ 3rd point only if its received or deemed to be received in India -- if control
and management in india
● For NR: only 1st and 2nd -- as he’ll be paying tax elsewhere

41
●

RESIDENTIAL STATUS -- Sec.6

● What would be covered

●
● Checking residential status
○ 182 days or more in the PY then considered as a resident
■ How to calculate 182 days → whole days
● Need to calculate per hour as well to make it 24 hrs
● So days would be calculated based on 24hrs
● Place of residence does not matter

42
●
● Becomes Resident based on number of days the person stays in India
● Usually 182 days, but for PIO then its relaxed
● ROR v RNOR
● Individual:
○ Residential status → 182 days or more in PY has stayed
■ If less than 182 days then → 60 days or more in PY and 365 days or
more in the last 4 years preceding PY → then residential
■ If less than 182 days and not 60+365 then not residential

43
●
○ S.6(6)(a) and 6(1A) introduced in 2020
○ Co-relate to s.2(31)

●
○ Residential status has to be seen every financial year
○ s.6(5) -- if the person has one source of income related to india then even if
hes not staying here, he will be considered as a resident for all other
sources of income

44
 ●

NON ORDINARY RESIDENT (Individual)

● NOR: 9/10 years prior he should have been an NR (to be checked after its
confirmed that he is a resident)
○ (or) if has stayed for 729 days or less in last 7 years

45
■ Eg: in 2020 182 days is fulfilled -- then 7 yrs back would be 2013 --
then we should check if he has stayed for less than 729 days

46
(COI -- citizen of India || PIO -- Person of Indian origin)

47
HUF:
Residence in India

● Resident: s.6(2) -- stay of karta is not relevant

● so under s.6(2) to check residence we dont have to consider karta's stay in
general. But if its wrt NOR then well have to check the stay
● ‘Control’ of management should be in India
● NOR → Check karta’s position -- same as individual (9/10 yrs NR or 729 or less
in 7 yrs) || same test for OR

48
 ●

● Here there wont be OR or NOR || its merely resident or non-resident

(https://forms.gle/LYKpNX45D9kc4ao57)

49
CASE LAWS:

50
●
● K Sambasiva -- 182 days condition

Agriculture Income
● Exempted u/s.10
○ Because its a state matter
○ S.295 -- power to CBDT and CG to define what is agriculture income
● S.2(1A) -- agriculture income definition
● Clause (a) Any rent or revenue derived from land which is situated in
India and is used for agricultural purposes
○ Rent → Land is given on lease
○ Revenue → product, interest on arrears
○ Agriculture purpose (activity)
■ Basic operations -- pre-germination, expenditure of human skill
and labour
■ Subsequent operations -- till harvesting/ post-germination,
fertilizers, tilling etc

51
 ■ CIT v Raja Binoy Kumar Sahas Roy -- sold grass sold in
backyard of palace -- no basic or subsequent operation done -- not
Agri Income
■ Both have to be done by the person claiming it
● Clause (b)
○ Any income derived from such land by agricultural operations including
processing of agricultural produce, raised or received as rent in kind or
any process ordinarily employed by cultivator or receiver of rent-in-kind
so as to render it fit for the market, or sale of such produce.
○ Performance by cultivator
○ Sale by cultivator
○ Process should be ordinarily employed by cultivator or receiver
(winnowing, threshing, drying, etc)
○ In hands of cultivator -- agri income
○ Where processing is not required and can be sold directly to the market
without no-processing, then partially agri income
■ Divided into ratios
● Clause (c)
○ Any income derived from any building owned and occupied by the
(receiver)assessee, receiving rent or revenue from the land, by carrying out
agricultural operations:
■ The building must be on or in the immediate vicinity of the land. It
must be used by the assesee as a dwelling house or store-house or
an out-building, in connection with the land.
○ Land -- given to receiver -- consists of a building (farm house) -- any
income derived from the person/rent -- even that income would be agri
income. Provided that:
■ (i) Building is on or in immediate vicinity of the land
■ (i) Building which the receiver of rent/cultivator uses it as dwelling
house, store house or out-building
■ (ii) the land should either be assessed to land revenue in India or be
subject to a local rate assessed and collected by officers of the
Government. (land revenue)
○ Land should not be situated in certain areas (iii) --
■ (A) within the jurisdiction of a municipality (whether known as a
municipality, municipal corporation, notified area committee, town
area committee, town committee or by any other name) or a
cantonment board, and which has a population of more than ten
thousand (according to the last preceding census which has been
published before the first day of the previous year in which the sale
of land takes place);

52
 ■ (B) or it should not be situated:
● more than 2kms. from the local limits of any municipality or
cantonment board and which has a population of more than
10,000 but not exceeding 1,00,000; or
● not being more than 6kms. from the local limits of any
municipality or cantonment board and which has a
population of more than 1,00,000 but not exceeding
10,00,000; or
● not being more than 8kms. from the local limits of any
municipality or cantonment board and which has a
population of more than 10,00,000.
■ If the land falls in these areas, then its not Agri Income
● Explanations:
○ (2) → building and land -- agri income
○ (3) → sapling and seedling grown in nursery = agri income (deemed)
○ (4) → population = census

53
54
55
 UNIT 3 -- TAX TREATMENT UNDER
SALARIES AND HOUSE PROPERTY
Heads of Income,
Basis of Charge of Salaries,
Concept of Allowances and Perquisites,
Profits in lieu of Salary,
Computation of Salary in Tax,
Deduction from Salaries,
Basics relating to Income from House Property,
Charging Section in House Property,
Determination of Annual Value,
Deductions under the head House Property.

SALARY
● Employer employee relation
● Deductions --

56
29th 2nd session:

Components of Salary (s.17)

●
● Annuity -- periodic payment
● Pension -- two types (commuted and uncommuted)
○ beyond exemption limit (under s.10)
● Profit -- s.17(2)

57
● Gratuity -- during service or upon retirement/termination of service -- lump sum
amount
● Leaves exemption/level for encashment -- s.10
● Provident funds -- 4 types - special, recognised, unrecognised, public.

58
(to be completed)

59
21st Oct 2021
Perquisites and Salary s.17

● 80CCD
● 17(2) -- benefits which are given in addition to 17(1)
○ Value of rent free accommodation provided to the assessee.
○ Value of any concession in the matter of rent respecting any
accommodation provided to the assessee by his employer.
○ Whatever the benifit is given, the value will be added in salary.

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●

61
●

62
●

63
●

64
65
 HOUSE PROPERTY

Determination of Gross Annual Value - Sec.23

● The annual value of any property shall be the sum for which the property might
reasonably be expected to be let.
● Why income tax on house property -- efficient use of land
● It is neither actual rent nor the municipal valuation of the property. It is
something notional rent which could have been derived hand the property been
let.
○ Standard rent control act -- how much rent can be collected from tenant
● Reasonable expected Rent
○ Municipal valuation of the property
○ Fair rent of the property (based on similar property in similar locality)
○ Standard rent of property
○ Usually the higher of municipal valuation of the property and fair rent of
property would be taken
○ Computed based on:
■ Municipal valuation
■ Fair rent of the property
■ Standard rent of the property
■ Higher of municipal val or fair rent, subject to maximum of
standard rent is reasonable expected rent.
● Standard rent under the rent control act
○ Landlord cannot reasonably expect to receive from a hypothetical tenant
anything more than the act -- Shiela Kaushish v CIT || Amplak Ram
Khosla v CIT 1981.
● Burden of proof is of assess to establish the rental value of the property.
● 3 steps
○ Step 1 → Reasonable expected rent is taken if gross annual value if step 2
and 3 are not applicable
■ Check if the HP was vacant for the whole year
■ Annual value -- when HP is not given on rent, then what is the
expected rental value of the HP shall be the annual value of the HP
○ Step 2 → when HP was not vacant for the whole year → if the rent
receivable is more than the reasonable expected rent then the rent
received or receivable is taken as gross annual value.
■ Eg: if the rent received is 1.5 cr and the reasonable expected rent is
1cr then the value would be the one received which is 1.5 cr
■ Same would be in the situation where the rent is less is than what is
expected -- the basic principle is that the whatever is review is the

66
 rent that is taxable
○ Step 3 → vacancy allowance
■ The property let and was vacant for the whole year -- then expected
rental value
■ If for a period less than 1 year -- then whatever is received that
would be the rent
■ The property is let and was vacant during the whole of pary of the
previous year
■ The actual rent received or receivable is lower than the reasonable
expected rent
● Eg if tenant leaves in 3 months and the rent is for a year then
the 3 month rent
■ The decline in the actual rent is caused by the vacancy and not by
any other factor (circular no.14/2001)
■ In case of vacancy the gross annual value of such a property shall
always be nil provided the property was kept ready to be let out
■ If due to vacancy for part of the year, actual rent received or
receivable is lower than expected rent, then such rent is taken as
gross annual value

Treatment of unrealised rent [Explanation to sec.23(1)]

● The unrealised rent shall not be included in the rental income but subject to the
rules made in this behalf to check the misuse of this concession
● Rule 4 for unrealised rent
○ Tenancy is bonafide
○ The defaulting tenant has vacated or steps have been taken to compel him
to vacate the property
○ The defaulting tenant is not in occupation of any the property of the
assessee
○ The assessee has taken all reasonable steps to institute legal proceedings
for the recovery of the underpaid rent or satisfies the AO that the legal
proceedings would be useless.

How to calculate the annual value of HP:

● Net annual value = Gross Annual Value - municipal taxes actually paid
● Income under the head HP = Net annual value less specified deductions under
sec.24.

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Sec.23(2)
● Annual value shall be nil if
○ If it is self occupied or
■ Possession even if not physically staying there
○ If it is kept vacant due to owners employment business at any other place
where he has to reside in a building not belonging to him and no other
benefit is derived by the owner from such house
■ The moment the house is given on rent then the receivable would be
taxed

Sec.23(3)
● Provision of 23(2) will not apply if
○ The house or part of the house is actually let during the whole or any part
of the previous year or
○ Any other benefit therefrom is derived by the owner

WHERE ASSESSEE HAS MORE THAN ONE HOUSE FOR SELF

OCCUPATION -- Sec. 23(4)
● The other houses will be deemed to be let out and only two at the option of the
assessee shall be treated as self-occupied
● It is independent of sec.23(2)(a)

Sec.23(5)
● If a person has purchased a building for stock in trade
● Eg. If A buys 10 flats in a society -- and not is let out during the whole of the
previous year -- nil
● Where the property consisting of any building or land appurtenant thereto is
held as stock-in-trade and the property or any part of the property is not let
during the whole or any part of the previous year, the annual value of such
property or part of the property, for the period up to one year from the end of
the financial year in which the certificate of completion of construction of the
property is obtained from the competent authority, shall be taken to be nil.
●

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 UNIT 4: TAX TREATMENT UNDER
BUSINESS OR PROFESSION AND CAPITAL
GAINS
Meaning of Business or Profession,
Charging Section of Business or Profession,
Computation of Profits and Gains of Business or Profession,
Aspects of Depreciation under this head,
Deductions,
Special Provisions for Business or Profession,
Concept of Capital Gains,
Basis of Charge,
Long Term and Short Term Capital Gains,
Computation and Deductions.

INCOME FROM PROFITS AND GAINS FROM BUSINESS OR

PROFESSION

Introduction:
● Business defined under s.2(13) – business includes any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or
manufacture.
○ Concept of business presupposes the carrying of any activity for profit
○ No fixed period of time for the business to run
● Profession defined under s.2(36) – include any vocation. In the case of a
profession, the definition given in the Act is very much inadequate since it does
not clearly specify what activities constitute profession and what activities do not.
○ The meaning of the term ‘profession’ involves the concept of an
occupation requiring either intellectual skill or manual skill
controlled and directed by the intellectual skill of the operator.

Sec.28 – INCOME CHARGEABLE TO TAX UNDER THE HEAD BUSINESS

OR PROFESSION
●

69
 UNIT 5

INCOME FROM OTHER SOURCES

INTRODUCTION:
● Residuary head -- whatever is left would fall under income from other sources
● Mutually exclusive
○ Nalinikant Amabala Mody v SAL Narayan [196]
○ SG Mercantile Corporation Pvt Lted v CIT [1972]
● Income chargeable under Income-tax Act, which does not specifically fall for
assessment under any of the heads discussed earlier, must be charged to tax as “income
from other sources”.
● This head is thus a residuary head of income under which income can be
computed only after deciding whether the particular item of income is otherwise
assessable under any of the first four heads.
● Section 56(2) covers certain specific incomes which are chargeable under the
head “Income From Other Sources”.
● Section 56(1) covers all the residual incomes which are not covered by first Four
Heads of Income and Section 56(2)

Income from other sources -- sec.56

● Income of every kind which is not to be excluded from the total income if it is not
chargeable to income tax under any of the heads specified under s.14
● Section 10 says which income shall not be included in total income (eg.: Agric
Income)

56(2) – What forms a part of “Income from other Sources

● Dividends [Section 56(2)(i)] :
○ Dividend income other than divided referred under section
10(34) not exceeding Rs. 10 lakh shall be included under income
from other sources.
○ Dividends u/s.115) are exempted u/s. 10(34) in the hands of receipt
because domestic company paying out of current or accumulated profits
pay the Dividend Distribution Tax.
○ Is given because the shareholder has no business with the Company nor is
there any employment

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 ○ Earlier the company used to pay the tax, but now the person receiving it
would be liable to pay tax
● Keyman Insurance policy Sec.56(2)(iv)
○ Amount received under a Keyman insurance Policy, including bonus on
such Policy, if it is not taxable under any other head of income shall be
chargeable under Income from other sources.
● Winnings from lotteries [Section 56(2)(ib)]
○ Any winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or betting
of any form or nature shall be chargeable to tax under Income from other
sources.
○ The entire income of winnings, without any expenditure or allowance or
deductions under Sections 80C to 80U, will be taxable.
○ However, expenses relating to the activity of owning and maintaining race
horses are allowable.
○ special rate of income-tax i.e., 30% + surcharge + cess @ 4% [Sec.115BB]
● Any sum received by assessee from his employee(s) as contributions towards a
fund for the welfare of the employee.
● Contribution to Provident fund :
○ Income of the nature referred to in Section 2(24)(x) will be chargeable to
income-tax under the head “income from other sources” if such income is
not chargeable to income-tax under the head “profits and gains of business
or profession”.
○ But if the employer deposits such amount on or before due date of deposit
applicable for such contribution, he will be allowed a deduction on account
of the same. [Section 56(2) (ic)].
● Sec. 56(2)(id) – Income by way of interest on securities
○ if the income by way of interest on securities is not chargeable to
income-tax under the head,” Profits and gains of business or profession”,
then such income shall be taxable under Income from other sources.
● Income from hiring of machinery, etc. [Section 56(2)(ii)]
○ Income from machinery, plant or furniture belonging to the assessee and
let on hire; if the income is not chargeable to income-tax under the head
“profits and gains of business or profession” shall be taxable under Income
from other sources.
● Hiring out of building with machinery etc. [Section 56(2)(iii)]
○ Where an assessee lets on hire machinery, plant or furniture belonging to
him and also building and the letting of the building is inseparable from
the letting of the said machinery, plant or furniture, the income from such
letting, if it is not chargeable to income-tax under the head “Profits and

71
 gains of business or profession” shall be taxable under Income from other
sources.
● (composite -- letting it out together)
● Sec.56(2)(vii) where an individual or HUF family receives in any PY
from any person on or after 1/10/2009
○ Any sum of money without consideration, the aggregate value of which
exceeds Rs.50k, the whole aggregate value of such sum.
■ Cash/gift can be income tax free until 50,000 Rs.
■ The total amount exceeding 50k would be the income
○ Applicable to :
■ Immovable property if stamp duty is more than 50k and for
movable property is based on fair market value
■ any property, other than immovable property,
● (A) without consideration, the aggregate fair market value of
which exceeds INR 50,000, then the whole of the aggregate
fair market value of such property.
● (B) for a consideration which is less than the aggregate fair
market value of the property by an amount exceeding INR
50,000, the aggregate fair market value of such property as
exceeds such consideration.
■ Property means and includes:
● immovable property being land or building or both; (ii)
shares and securities; (iii) jewellery; (iv) archaeological
collections; (v) drawings; (vi) paintings; (vii) sculptures;
(viii) any work of art; or (ix) bullion;
■ Provided that his shall not apply to sum or property
received
● from any relative; or
● on the occasion of the marriage of the individual; or
● under a will or by way of inheritance; or
● in contemplation of death of the payer or donor, as the case
may be; or
● from any local authority as defined in section 10(2); or
● from or by any trust or institution registered under section
12A; or
● by way of transaction not regarded as transfer under certain
clauses of section 47; or
● from an individual by a trust created or established solely for
the benefit of relative of the individual.
■ Relative means:

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 ● Spouse, siblings, spouses siblings, siblings of parents, lineal
ascendant or descendants (of self or spouse)
● Sec.56(2)(viib)
○ Where a company not being a company in which public are substantially
interested receives in any PY from any person being a resident any
consideration for issue of shares that exceed the face value of such shares
the aggregate consideration received for such exceeds the fair market value
of the shares
○ Sweat equity shares would be income under salary
● Sec.56(2)(viii) income by way of interest received on compensation or
on enhanced compensation u/s 145A(b)
○ Deemed to be the income of the year in which it is received
○ Ghanshyam Dass HUF and Rama Bai’: held that the interest
received on compensation and enhanced compensation shall be assessable
on accrual basis.
○ When govt acquires property and compensates (transfer -- capital gain)
○ Court enhances compensation + interest (interest would fall here and the
primary compensation would fall under capital gain)
● Other examples:
○ Income from sub letting
○ Interest on bank deposits and IT refund
○ Agricultural income from a place outside india
○ Rent of plot of land
○ Remuneration received by MLAs and MPs
■ MLA MPs dont have employer employee relationship
○ Insurance Commission
○ Family Pension
○ Examinership fees received by teacher form institution other than
employer
○ Income received after discontinuance of business (CIT v Gaya Sugar
Mills 1986)
○ Income from granting mining rights
○ Income from royalties
○ Income from forest produce
○ Unexplained investment in the construction of HP
○ Income from lease of a factory
○ Interest paid by Govt on excess payment of advance tax
○ Income from letting Cinema Theatre

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Sec.57 -- Deductions allowable in computing income from other sources
● For the purpose of claiming deduction, it is not necessary that the expenditure
should result in income – CIT v Rajendra Prasad Moody
● From interest on securities [Section 57(i) and (iii)]:
○ any reasonable sum paid by way of commission or remuneration to a
banker or any other person for the purpose of realising such interest on
behalf of the assessee. Interest on money borrowed for investment in
securities can be claimed as a deduction.
● From the contributions received by employer from employees
towards P.F./Superannuation/ other funds [Section 57(ia)]:
○ In the case of income of the nature referred to in Section 2(24(x), which is
chargeable to income-tax under the head “Income from other sources”
deduction shall be allowable in accordance with the provisions of Section
36(1) (va), i.e., if the employer has credited the employee’s accounts in the
respective funds with the amounts of contributions received, the employer
shall be allowed credit thereof.
● Income derived from letting [Section 57(ii)]:
○ Where income is derived from letting out of machinery, plant or furniture
on hire and also buildings where the letting of building is inseparable from
the letting of such machinery, plant or furniture and the income from such
letting is not chargeable to Income Tax under the head “Profits and Gains
of Business or profession.
● Income in the nature of family pension [Section 57(iia)]:
○ Where a regular monthly amount is payable by an employer to a person
belonging to the family of an employee in the event of his death a sum
equal to 33-1/3% of the income orRs. 15,000, whichever is less, is
allowable as a deduction
● Interest on compensation or enhanced compensation [Section 57(iv)]:
○ a deduction of a sum equal to 50% of such income and no deduction shall
be allowed under any other clause of this section.
● Other deductions [Section 57(iii)]:
○ Any other expenditure (not being in the nature of capital expenditure) laid
out or expended wholly and exclusively for the purpose of making or
earning such income. [Smt. Virmati Ramkrishna v. C.I.T. (1981)
131 ITR 659(Guj)]

Amounts Not Deductible -- s.58

● In the case of any assessee:
○ Any personal expenses of the assessee.

74
 ○ Any interest chargeable under the Income-tax Act which is payable outside
India and from which income- tax has not been paid or deducted at
source.
○ Any payment which is chargeable under the head “Salaries” if it is payable
outside India unless tax has been paid thereon or deducted therefrom at
source.
○ Any expenditure referred to in Section 40A of Income-tax Act.
● No deduction is allowed in respect of any expenditure or allowance in computing
the income by way of winnings from lotteries crossword puzzles races (including horse
races) card games and other games of any sort or from gambling or betting of any form
or nature whatsoever.
○ The prohibition however will not apply in respect of income of an assessee
who is owner of horses maintained for running in horse races [Section
58(4)].

Sec.59 – Deemed Income

● Where any allowance or deduction has been provided in the assessment of
Income under the head “Income From Other Sources” in any Assessment Year in respect
of loss or expenditure or trading liability incurred by the assesse and later on during any
previous year any amount or any remission or any benefit is obtained by assesse
(whether in cash or otherwise) then such amount or remission or benefit shall be taxable
under the head “ Income From Other Sources” in the previous year in which it is so
obtained.

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 80C - 80U DEDUCTIONS
● The aggregate of income computed under each head after giving effect to the
provisions of clubbing of income and set-off of losses is the gross total income.
In computing the total income of an assessee certain deductions are
permissible under section 80C to 80U.
● Deductions not permitted for:
○ LTCG
○ STCG for transfer of equity shares u/s.111A
○ Winnings of lotteries, races, crosswords etc
○ For incomes under the 115 series.
● Deductions cant exceed GTI
● 80A -- deduction from gross total income and total income should not be
more than gross total income
○ If any AOP or BOI has claimed deduction once then the individual from
the AOP or BOI cant claim again individually
○ Deductions can be claimed upon filing of return
● 80C -- investment in insurance or PF or similar types (debentures,
subscription to equity shares, LIP etc)
○ Only for individuals and HUF
○ Cannot exceed rs. 1,50,000/-
● 80CCC -- pension funds
○ Permissible deduction is Rs. 1L
● 80CCD -- pension scheme by employee and employer
○ Permissible deduction is Rs. 1L
○ Not more than 10% of salary of PY
○ Not exceeding 20% of his GTI of PY with respect to contributions made
○ 80CCD(1B)
■ Additional deduction is 50k can be claimed
■ As per section 80CCD (1), employees contribution towards the
notified pension scheme is deductible, but upto maximum of 10% of
the salary of employee. As per section 80CCD (1B), an additional
deduction of maximum Rs. 50,000 can also be availed
● 80CCE -- aggregate of 80C + 80CCC + 80CCD(1)
○ Should not be more than 1.5L
○ As per section 80CCD (1B), an additional deduction of maximum Rs.
50,000 can also be availed. This deduction is out of the focus of section
80CCE
● 80E -- loan for education
○ And loan is being taken by individual (himself/spouse/child/any child
legal guardian)

76
 ○ Whole amount of interest
○ Until interest is paid or 7yrs
○ Section 80E provides deduction to an individual for amount actually paid
during the previous year out of his income chargeable to tax by way of an
interest on loan, taken by him from any financial institution or any
approved charitable institution for the purpose of pursuing higher
education of self or any of the relative (i.e. spouse, children of the assessee
or student for whom the individual is the legal guardian).
○ The deduction will be available in computing the total income in respect of
initial assessment year and the seven assessment years immediately
succeeding the initial assessment year or until the interest thereon is paid
by such individual in full, whichever is earlier.
● 80EE -- loan for residential house property
○ Claim deduction on interest or 1L whichever is less
○ Conditions:
■ The loan has been sanctioned by the financial institution including
housing finance company during the period 01.03.2016
-31.03.2017;
■ The amount of loan sanctioned for acquisition of the residential
house property does not exceed 35 lakh rupees;
■ The value of the residential house property does not exceed 50 lakh
rupees;
■ The assessee does not own any residential house property on the
date of sanction of the loan
● 80G -- donations to certain funds or charitable institutions etc
○ Individual or co
○ If non-government → upto 50% of the donated amount which should not
exceed 10% of the GTI
○ If paid in cash then cant be more than 10k
○ Further, where an assessee has claimed and has been allowed any
deduction under this section in respect of any amount of donation, the
same amount will not again qualify for deduction under any other
provision of the Act for the same or any other assessment year. Donations
in kind is not eligible as per the Supreme Court Ruling (Vijaipat
Singhania v. CIT
● 80GG -- deduction with respect to rent paid
○ Only available to an individual who is self employed
○ Who does not get house rent allowance
○ Pays rent privately
○ Form 12BA – declaration

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 ○ Should not have any other residential property where resides/works/pays
tax
○ Section 80GG provides deduction to an individual for rent paid if in case
the individual does not receive HRA exempt u/s 10(13A) or rent free
accommodation from his employer. The accommodation should be
occupied by the assessee for the purpose of his own residence
○ Upto rs. 2k or 25% of actual rent over 10% of total income
whichever is less
● 80GGA -- Deduction in Respect of Certain Donations for Scientific
Research
○ GTI includes income chargeable under the head of profit or gain of
business then cant claim deduction
○ Approved research u/s.35
○ Deduction claimed is 100% – in cash or cheque
○ If cash then not more than 10k
● 80D -- health insurance
○ Section 80D provides deduction to an individual or a Hindu undivided
family towards medical insurance premium and preventive health
check-sup or contribution to Central Government Health Scheme (CGHS)
or any scheme notified by the Central Government on the health of the
assessee, his family, parents or members of the HUF.
○ If premium paid is 15 -- deduction is allowed (individual)
■ Senior citizen is 20k
■ Family is 30k
■ Senior citizen is 30k if no insurance
○ Normal health checkup then 5k
● 80DD -- medical treatment wrt disability of dependant
○ Individual or HUF
○ 75k in normal disability
○ 1.5L otherwise
● 80DDB -- prescribed disease
○ Max 40k or actual expenditure which ever is less
○ Individual or HUF
○ Certificate is to be submitted from govt hosp – Deduction is allowed only
when a certificate in Form No. 10-I
○ Senior citizen can be 60k or 80k

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 CLUBBING OF INCOME PROVISIONS
● income of other person is included in the income of the taxpayer is called as
clubbing of income.
● E.g., Income of minor child is clubbed with the income of his/her parent.
● Section 60 to 64 of the Income-tax Act, contains various provisions relating to
clubbing of income
● Sec.60 to 64 is to counteract/prevent the avoiding or reduction in tax
liability when there is a transfer of income/assets.

Sec.60 – Transfer of Income

● Income is clubbed when transfer of income is done without transfer of
assets.
● Transferred income shall be included in the total income of the transferor
● Transfer includes – settlement, trust, covenant, undervalued lease
● Conditions:
○ Taxpayer (Transferor) owns an asset +
○ only income from asset is transferred and not the asset itself +
○ such transfer is by means of settlement or agreement
○ = Section 60 applicability
● If asset producing the income is transferred then wont be under s.60 → CIT v
Ram Prasad Mehta 1975 Bombay
● Illustration: If I have debentures worth 1L and get an interest of Rs.10k and
transfer only the interest to Amruth then the income would be taxable on
me. (But if i transfer my debentures to Amruth then it wont be u/s.60)

Sec.61 – Revocable Transfer of Assets

● There is a transfer of assets and/or the income
● transferor of asset assumes a right to re-acquire asset or income from such an
asset, either whole or in parts at any time in future, during the lifetime of
transferee.
● Where a person transfers any asset to any person with a right to revoke the
transfer, all income accruing to the transferee from the asset shall be
included in the total income of the transferor.
● Shall start even when a part of the the asset/income from the transferred asset
has been applied for the transferee.
● Examples:
○ If there is an express clause of revocation in the instrument of transfer; or
○ If there is a sale with a condition of re-purchase; or

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Exception to Sec.61 – Sec.62: Transfer irrevocable for a specified period
● (1) The provisions of section 61 shall not apply to any income arising to any
person by virtue of a transfer–
○ (i) by way of trust which is not revocable during the lifetime of the
beneficiary, and, in the case of any other transfer, which is not revocable
during the lifetime of the transferee; or
○ (ii) made before the 1st day of April, 1961 , which is not revocable for a
period exceeding six years: Provided that the transferor derives no direct
or indirect benefit from such income in either case.

Sec.63 – when transfer shall be deemed to be revocable

● it contains any provision for the re-transfer directly or indirectly of the whole or
any part of the income or assets to the transferor; or
● it, in any way, gives the transferor a right to reassume power directly, or
indirectly over the whole or any part of the income or assets.

Sec.64 – Income of Spouse and Child

//What would amount to ‘adequate consideration’ (used in the following

sections)
● Natural love and affection is not adequate consideration
● Hence where the asset is transferred without adequate consideration then the
income from such asset would be clubbed in the hands of the owner.

Sec.61(1)(ii) – Income to spouse from a concern in which such individual

has substantial interest
● arises directly or indirectly, to the spouse of an individual by way of salary,
commission, fees or any other remuneration, whether in cash or kind from a
concern in which such individual has a substantial interest, shall be included in
the income of the individual.
○ Except those that arise due to the technical or professional knowledge’s
application by the spouse the income shall not be included in the
income of the other spouse (assessee)
● Substantial interest in a concern – if holds shares >20% of the voting
powers at any time during the PY and the same is owned beneficially by such
person (either wholly or partly) || or is entitled to >20% of the profits.
○ Eg: X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd.
without any technical or professional qualification to justify the

80
 remuneration. In this case, salary income of Mrs. X shall be taxable in the
hands of X.

Sec.61(1)(iv) – Income to spouse from the assets transferred

● Where any individual transfers directly or indirectly any asset (other than a house
property) to the spouse, the income from such asset shall be included in the
income of the transferor.
● Transfer of house property – In case of transfer of house property, the
provisions are as per Sec.27. If an individual transfers a house property to his
spouse, without adequate consideration or otherwise than in connection with an
agreement to live apart, the transferor shall be deemed to be the owner of the HP
and its annual value will be taxed on his hands.
● Asset can also be converted and conversion is immaterial and not essential that
the transfer must have taken place directly between the spouses
○ Eg: Mukesh Ambani’s preferential shares in a company when transferred
to Neeta Ambani as equity shares would fall under this section and the
income would be taxed on Mukesh Ambani. And if Neeta sells the shares
and makes capital gains then its taxed in Mukesh’s hands.
● Exceptions:
○ If the consideration was inadequate, proportionate income shall be
included in the income of the transferor.
○ The transfer has been made in connection with an agreement to live apart.
○ The income from the assets transferred shall not be included in the income
of transferor after the death of spouse, either transferor or transferee
○ If any asset has been transferred before marriage, the income from such
asset cannot be included in the income of the transferor
○ Any indirect income to the transferee from the transferred assets shall not
be included in the income of the transferor.

Sec.64(1)(vii) – Income to Spouse through a third person

● Asset transferred directly or indirectly – to a person or AoP – without adequate
consideration – for the immediate or deferred benefit of his or her spouse,
○ all such income as arises directly or indirectly from assets transferred shall
be included in the income of the transferor.
● If only a portion is reserved for the benefit of spouse and a portion is utilised for
the benefit of others, only the portion reserved for the spouse shall be included in
the income of the transferor.
● KT Doctor v CIT 1980 → Where a trust was created by assessee’s mother for
the benefit of the assessee, his wife and the trustees were authorised to carry on
business, the income from the business was held to be income of the trust and the

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 share of wife could not be added to the income of the spouse because neither the
trust was created by the assessee nor the business done in the partnership

Sec.64(1)(vi) – Income from assets transferred to Son’s wife

● Income from assets transferred to son’s wife shall be taxable in hand of taxpayer
who has transferred the assets when:
○ Taxpayer is an individual +
○ Asset transferred after 31/05/1973 +
○ Transferred to son’s wife +
○ Asset is transferred without adequate consideration

Sec.64(1)(viii) – Transfer for immediate or deferred benefit of son’s wife

● Any income arising, directly or indirectly, to any person or association
of persons from assets transferred directly or indirectly after June 1,
1973, otherwise than for adequate consideration to the person or
association of persons by such individual shall, to the extent to which the income
from such assets is for the immediate or deferred benefit of his son’s wife be
included in computing the total income of such individual.
● included in the total income of the individual in that previous year.

Sec.64(1A) – Clubbing of income of minor child

● All income which arises or accrues to the minor child (except Section 80U) shall
be clubbed in the income of his parent.
● However, any income which is derived by the minor from manual work or from
any activity involving application of his skill, talent or specialised knowledge and
experience will not be included in the income of his parent.
● Once the income of the minor is included in the total income of any one parent,
clubbing of income of the minor with the same parent will continue in
subsequent years also
● individual shall be entitled to exemption of the amount of such
income or Rs. 1,500 whichever is less.

Sec.64(2) – Income from the converted property

● What is converted property :
○ Has to be a member of HUF
○ Transfers his self-acquired property after 31/12/1969 to the HUF
(or common stock)
○ Or transfers it directly to the fam
○ Without adequate consideration (i.e adequate consideration is not a must)

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 ● The income derived from the converted property or any part thereof, shall be
included in the income of the transferor
● When converted property is subjected to partition:
○ the income derived from such converted property as is received by the
spouse of the transferor on partition shall be included in the income of the
individual
○ Shall fall under income from other sources
● However, the income from house property transferred to spouse shall be
computed under the head ‘Income from house property’ in the hands of
transferor and not in the hands of the transferee.

Summary of Clubbing Provisions:

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84
Dual liability:
● The tax on the income of the other person which has been included in the income
of the assessee can either be recovered from the assessee or from the other
person.
● The liability of other person is limited to the portion of the tax levied on the
assessee which is attributable to the income so included.
● Eg: Mr Sharma invests Rs 10 lakh in a fixed deposit (FD) at a bank, in his wife’s
name. Interest of Rs. 1 lakhs arises on this income. Mrs Sharma invests the
interest on periodic basis and interest for an amount of Rs. 5,000 arises on the
interest deposited by her in bank.
○ Rs. 1 lakhs in the Now Interest income on FD will be clubbed with his (Mr.
Sharma) income. Interest of Rs. 5,000 aroused out of Investment made
by Mrs. Sharma will be taxed as her own income.

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 SET OFF AND CARRY FORWARD OF LOSSES

Introduction:
● Losses can occur in normal course of business and cannot be ruled out
● Apart from salary, the other 4 heads may have losses
● Hence under the IT Act, there is a scope for the adjustment of and utilisation of
losses
● Hence, if loss exists → recover the loss → pay the tax after the adjustment
○ Losses can be adjusted through profits
○ Intra-head and inter-head
○ If despite adjusting from profits the losses exists – then the same can be
carried forward.
● loss incurred by the assessee is to be set-off against any income, the net
result of the assessee’s activities during the particular accounting year cannot be
ascertained and consequently the tax payable would also be incapable of
determination

Sec.70 – Set-Off of Losses from One Source Against Income from Another
Source under the Same Head of Income (Intra-head)
● The process of adjustment of loss from a source under a particular
head of income against income from other source under the same
head of income is called intra-head adjustment,
○ e.g. Adjustment of loss from business A against profit from business B.
○ Same head different source.
● ‘Sources’ of income derived by an individual may be many but yet they could be
classified under the same head.
● in general, if the net result for any assessment year in respect of any source falling
under any head of income is a loss, the assessee is entitled to set off the
amount of such loss against his income from any other source under
the same head
● Exceptions:
○ Speculative Business Losses → cant be set off from a non-speculative
business but loss from non speculative can be set off against speculative
income
○ Long-term capital Loss – cant be set off from STCG but STCG can be set
off from LTCG
○ Casual Income (income from lotteries, crossword, race, card gaes etc). No
expenses can be claimed against casual income

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 ○ Losses from the activity of owning and maintaining race horses
○ Loss from an exempted source cannot be set off against taxable Income

Intra-head set off for income losses (introduction)

● Loss from business or profession:
○ Any loss from business or profession (other than speculation business or
loss from the activity of owning and maintaining race horses) can be set off
against the income from any other business or profession including the
income from speculation business or income from the activity of owning
and maintaining race horses.
○ If business discontinued the same can be set off from the income of other
business or profession
○ CIT v Handicraft Handloom Export Corp. 1982
■ Loss from wholly owned subsidiary cant be set off from parent co as
both are separate businesses.
● Loss from speculation business:
○ Such loss can be set-off only against the income from speculation business.
○ It is not essential that the nature of the other speculation transaction must
be the same.
○ However, a loss from an illegal speculation business cannot be set-off
against income from any lawful speculation. C.I.T. v. K.J. Kotecha

Section 71 – Set-off of Loss from one head against income from another
head (Inter-head)
● After making intra-head adjustment (if any) the next step is to make inter-head
adjustment.
● E.g., Loss under the head of house property to be adjusted against salary income.
● A person may have various sources of income computed under different heads of
income. Loss under one head of income is generally allowed to be set off against
income under another head.
○ For instance, X has only one property, which is occupied by him and the
loss is Rs 1.50 lakh. He derives salary of Rs 10 lakh during the year. Here,
he can set off the loss of Rs 1.50 lakh against his salary income by making
appropriate declarations to his employer, thereby making his net taxable
income Rs 8.50 lakh.
● Conditions/Situations;
○ loss under the head “capital gains” cannot be set off against income under
any other head. It must be set off only against income from “capital gains”.
○ Loss under the head “Profits and gains of business or profession” cannot
be set off against the head “income from Salaries”.

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 ○ Where the assessee incurs any loss under the head income from “house
property” it can be set off against the assessee’s any other income under
other head during the previous years where such loss is not fully adjusted
under other heads of income in the same assessment year, then the
balance loss shall be allowed to be carried forward and set off in
subsequent years subject to a limit of eight assessment years against
income from house property
■ Adjustment cant exceed Rs.2L for a AY. remaining loss can be
carried forward as per Sec.71(3A)
○ Loss incurred by an assessee from a source, income from which is exempt,
cannot be set-off against income from a taxable source.
○ Loss from speculative business cannot be set off against any other income.
However, non-speculative business loss can be set off against income from
speculative business.
■ For Example: House property loss can be set-off against Speculative
Incomes but speculation loss cannot be set off against House
property)
○ Business loss cannot be set-off against salary income. (It can be set-off
against other incomes)
○ Loss under the head Capital Gains (LTCL or STCL) cannot be set-off
against any other head however Loss from other heads can be set-off
against Capital Gains.
○ No loss can be set off against Casual income
○ No expenses can be claimed against casual income
○ Loss from the business of owning and maintaining race horses cannot be
set off against any other income.
○ Loss from an exempted source cannot be set of (eg agri income)

Carry forward of losses:

● unadjusted loss can be carried forward to next year for adjustment against
subsequent year(s)’ income.
● Losses can be set-off against the income of following years provided that they
have been suffered by assessee and determined in pursuance of a return
filed by the assessee.

What can be carried forward

● Loss in non-speculation business or profession. – Sec.72
○ It shall be set-off against the profits and gains, if any, of any business or
profession carried on by him and assessable for that assessment year.

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 ○ The loss can be carried forward to a maximum of eight consecutive
assessment years immediately succeeding the assessment year for which
the loss was first computed.
○ The right of carry-forward and set-off is available to the same assessee who
has sustained the loss. A holding company however, cannot claim to carry
forward the losses. → Dwarkadass Leeladhar v CIT 1963
● Loss in speculation business. – Sec.73
○ Any loss computed in respect of a speculation business has not been
wholly set-off against the profits of another speculation business, it shall
be carried forward to the following assessment year and shall be set-off
against the profits of any speculation business carried on by him and
assessable for the assessment year.
○ This loss can be carried forward to a maximum of four consecutive
assessment years immediately succeeding the assessment year for which
the loss was first computed.
○ However, the loss from an illegal speculation business or loss incurred in
speculation business in banned items can be neither set-off against income
from any lawful speculation business nor can it be carried forward for
being set-off in the subsequent year against income even from an illegal
speculation business because the law assumes that any illegal business
dies with all its losses in the same year CIT v. K.J. Kotecha (1977)
● Carry Forward and Set Off of Losses by Specified Business – Sec.73A
○ Any loss of any specified business in section 35AD shall not be set off
except against profits and gains of any other specified business.
● Set-off and Carry forward of capital losses – Sec.74
○ Loss in transfer of capital assets [whether short-term or long-term].
○ the net result of the computation under the head “Capital gains” is a loss to
the assessee, it can be carried forward to the following assessment year.
○ The short-term and long-term losses shall be separately carried forward.
○ short-term capital loss it can be set off against income.
○ long-term capital loss, it can be set off only against long-term capital gain.
○ While losses on transfer of capital assets, cannot be set off against any
other income of the assessee under other heads of income i.e. heads other
than ‘capital gains’ in the previous year in which such loss was incurred, it
can be carried forward to be set off against capital gains if any during the
next eight assessment years
● Loss from activity of owning and maintaining of race horses. –
Sec.74A
○ Where an assessee who is the owner of race horses sustains a loss in the
activity of owning and maintaining race horses, he can carry-forward and
set-off such loss against his income (Prize money received on a race horse

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 or race horses) from the activity of owning and maintaining race horses in
subsequent years.
○ This loss can be carried forward to a maximum of four assessment
years immediately succeeding the assessment year for which
the loss was first computed.

SUBMISSION OF RETURN FOR LOSS – Sec.80

● An assessee is not entitled to carry-forward a loss unless he has filed a
return of loss to the Department in time and in the prescribed form.
● It is obligatory on the part of the assessee to file such return, otherwise
he will be deprived of the benefit of carry-forward of losses.
● In fact, only that amount of loss is allowed to be carried forward which has been
computed by the Assessing Officer and not by the assessee.
● However losses under the head ‘Income from House Property’ and
‘Unabsorbed depreciation’ shall be carried forward even if the return
of income is furnished after the due date.

Loss Set off Carry Forward and Set-off

Loss from house (a) Income from any other house In following eight years, income
property property from house property.
(b) Any other head of income upto
maximum of Rs. 2,00,000

Loss from business or (a) Income from any other In following eight years, income
profession business or Profession. from business or profession.
(b) Any other head of income
except under the head “Salaries”

Loss from speculation (a) Income from speculation In following four years (w.e.f. A.Y.
2006-07), income from
speculation.

Short-term capital loss (a) Short-term capital gain (b) In following eight years STCG and
Long-term capital gain LTCG

Long-term capital loss (a) Long-term capital gain In following eight years,
Long-term capital gain.

Loss from activity of (a) Income from activity of owing In following four years, Income
owning and maintaining and maintaining race horses from activity of owing and
race horses maintaining race horses

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 REBATE:
● Section 87A
● Section 87A provides rebate of income tax to resident individual, whose total
income does not exceed Rs. 5,00,000. The amount of rebate is Rs 12,500 or 100%
of income tax whichever is less. It is deductible from income tax before
calculating health & education cess.
● Generally a tax rebate is a refund that one is eligible for in case the taxes paid
exceeds liability.
● It helps to lower the income tax payment
● Upto Rs.12.5k if the gross taxable income post deductions does not exeed
rs.5L.
● For resident indian citizen only
● If more than 5L then taxed under the tax slab

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 UNIT 6: DETERMINATION OF TAX LIABILITY
AND INCIDENTAL CONCEPTS
Types of Returns,
Permanent Account Number,
Types of Assessment,
Income Escaping Assessment,
Tax Deduction at Source,
Tax Collection at Source,
Provisions of Advance tax,
Income Tax Authorities and their Powers including search and seizure,

RETURN OF INCOME U/S.139

Sec.139(1) – Return of Income

● The procedure under the Income-tax Act for making an assessment of income
begins with the filing of a return of income.
● Section 139 of the Act contains the relevant provisions relating to the furnishing
of a return of income.
● According to that section, it is statutorily obligatory for
○ every person being a company or a firm
○ A person other than a company or a firm (in PY whose income exceed
income which is not chargeable to income tax)
○ A person in receipt of income derived from property held under a trust
○ CEO of every political party
○ Research association, news agency, associations, University
○ to furnish a return of his total income or the total income of any other
person in respect of which he is assessable under the Income-tax Act, in all
cases where his total income or the total income of any other person for
which he is liable to be assessed before claiming any deduction under
chapter VI-A exceeds, in any relevant previous year, the maximum amount
which is not chargeable to income-tax.
● It is mandatory to file a return of income where a person, being a resident other
than not ordinarily resident in India and who during the previous year has any asset or
is a beneficial owner of any asset or is a beneficiary of any asset (including any financial
interest in any entity) located outside India or signing authority in any account located
outside India.
○ To file return of income if

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 ■ deposited an amount or aggregate of the amounts exceeding one
crore rupees in one or more current account maintained
■ incurred expenditure of an amount or aggregate of the amounts
exceeding two lakh rupees for himself or any other person for travel
to a foreign country;
■ has incurred expenditure of an amount or aggregate of the amounts
exceeding one lakh rupees towards consumption of electricity;
■ fulfils such other prescribed conditions, as may be prescribed.
● Bulk Filing of income – s.139A
○ According to the new provisions, any person, being an individual who is in
receipt of income chargeable under the head “Salaries” may, at his option,
furnish a return of his income for any previous year to his employer, in
accordance with such scheme as may be specified by the Board in this
behalf
○ Basically filing of returns by employers

Return of Loss – Sec. 139(3)

● obligatory for the assessee to file a return of his total income even in cases where
the assessee has incurred a loss under
○ Business loss
○ Capital loss
○ loss from maintenance of race horses
● However, loss under the head “Income from house property” under section 71B
and unabsorbed depreciation under section 32 can be carried forward for set-off even
though return of loss has not been filed before the due date.
● Unless the assessee files a return of loss in the manner and within the same time
limits as required for a return of income, the assessee would not be entitled to set off
and carry forward

Belated Return – Sec. 139(4)

● If return is not furnished within the time allowed under s.139(1) or
● If return is not furnished within the time allowed under notice issued under
s.142(1)
● Any person who has not filed the return within the time allowed under section
139(1) may file a belated return
○ at any time before the end of the relevant assessment year or
○ before the completion of the assessment whichever is earlier
● An assessee is liable to pay interest @ 1% for every month or part thereof
comprised in the period intervening between the expiry of 30 days w.e.f. serving of the

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notice of demand and actual payment of tax for the delay in making the payment of tax
demanded beyond 30 days from the date of receipt of the demand notice.

Revised Return – Sec. 139(5)

● An assessee who is required to file a return of income is entitled to revise the
return of income originally filed by him to make such amendments, additions or
changes as may be found necessary by him.
● Such a revised return may be filed by the assessee at any time
○ before the expiry of the relevant assessment year
○ before the completion of assessment whichever is earlier.
● Presently, if any person having furnished the return u/s 139(1) or sub-section (4)
discovers any omission or any wrong statement therein, he may furnish a revised return
at any time before the end of the relevant A.Y. or before the completion of the
assessment, whichever is earlier.
● Completion of assessment means date on which order of assessment is passed
and not the date when the assessee got the order
● Consequences
○ Liable to pay interest
○ Penalty of 5k
○ Cant claim deductions
● Balchand v ITO
● To rectify omissions made
● Numerous revised returns can be filed within the prescribed time

Defective Return – Sec. 139(9)

● If the Assessing Officer considers that the return of income furnished by the
assessee is defective, he may intimate the defect to the assessee and give him an
opportunity to rectify the defect within 15 days from the date of such intimation or
within such further period as may be allowed by the Assessing Officer on the request of
the assessee.
● If the assessee fails to rectify the defect within the aforesaid period, the return
shall be deemed to be invalid and further it shall be deemed that the assessee had failed
to furnish the return.
● However, where the assessee rectifies the defect after the expiry of the aforesaid
period but before the assessment is made, the Assessing Officer may condone the delay
and treat the return as a valid return.
● If the Assessing Officer considers that the return of income furnished by the
assessee is defective, he may intimate the defect to the assessee and give him an
opportunity to rectify the defect within 15 days from the date of such intimation or
within such further period as may be allowed by the Assessing Officer on the request of

94
the assessee. If the assessee fails to rectify the defect within the aforesaid period, the
return shall be deemed to be invalid and further it shall be deemed that the assessee had
failed to furnish the return. However, where the assessee rectifies the defect after the
expiry of the aforesaid period but before the assessment is made, the Assessing Officer
may condone the delay and treat the return as a valid return.

Penalty:
● Section 234A – Delay/default in filing ITR
○ If not filed within the due date – 1% interest for every month of default.
■ This 1% is calculated on final tax amount that has to be paid.
○ If assessee had to file ITR and assessee did a self-assessment to file ITR –
■ if any default found out by the officials
■ the officials conducted a best judgment assessment and completed
it on 31st October and gave time till 31st November for the assessee
to rectify the default and file the ITR.
■ For that period, no interest will be charged. Any delay after 31st
November, will have to pay interest for each month of default.
○ If there is any differences in the tax due by the assessee and the AO
■ then a demand notice will have to be sent by the AO to the assessee
as per Section 156 read with Rule 119A. This demand notice applies
in cases of refund as well.

Signing of Return – Sec.140

● By individual himself
● For HUF by Karta
● Local authority then Principal Officer
● Firm – Managing partner
● LLP – designated partner
● Company – director
● NRI – power of attorney holder
● If winding up company then official liquidator

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 ASSESSMENTS AND TYPES OF ASSESSMENTS

Self Assessment – Sec.140A

● first step in the process of assessments.
● Self Assessment is simply a process where a person himself assesses his tax
liability on the income earned during the particular previous year and submits Income
Tax Return to the department
● Every person, before furnishing return under sections 139, 142, 148 and 153A
shall make self assessment of his income and pay the tax, if due on the basis of such
assessment.
● total tax payable is calculated on the total income of the assessee after
considering the following amount
○ the amount of tax already paid under any provision of this Act;
○ any tax deducted or collected at source;
○ any relief of tax or deduction of tax claimed under section 90 or section 91
on account of tax paid in a country outside India;
○ any relief of tax claimed under section 90A on account of tax paid in any
specified territory outside India referred to in that section; and
○ any tax credit claimed to be set off in accordance with the provisions of
section 115JAA or section 115JD.
○ any relief u/s 89
● In case in delay in furnishing of return of income, self assessment tax shall also
include interest for delay and fee for delay in filing return under section 234F.

Summary Assessment – Sec.143

● Assessment completed on basis of submitted ITR.
● First – an intimation to the assessee regarding the Tax, interest and fee payable
by the assessee or amount which is to be refunded by the assessee. It is considered as a
demand notice under Section 156.
● Under this assessment no detailed scrutiny of income tax return is carried out but
total income or loss is computed after making the adjustments
● Once the demand notice is acknowledged, it is deemed to be intimation.
● The time limit for intimation is within the expiry or 1 year from end of FY in
which the ITR was filed.
● Time limit for intimation under section 143(1): No intimation for tax or
interest due under section 143(1) shall be sent after the expiry of 1year from the end of
financial year in which return of income is made.

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Scrutiny Assessment – Sec. 143(2) and (3)
● It is necessary for the AO to find that the assessee has:
○ Understated the income
○ Overstated loss
○ Underpaid tax
● Scrutiny assessment is made after ITR filed under Section 139(1) or a notice is
give under Section 142(1).
● Limitation period is 8 years.
● The AO sends a notice under Section 143(2) to the assessee to furnish evidence.
● The time limit for intimation is within expiry of 1 year from the end of the
financial year in which the ITR was made.
● The AO can accept or reject the evidence – pass an order in writing – determine
tax, interest and fee.

Best Judgement Assessment – Sec.144

● Assessment made at the best of the judgment of the assessing authority.
● It is the discretionary assessment of the AO because of the faulty assessment by
the assessee.
● It is done when:
○ ITR not filed in time by the assessee
○ Fails to comply with the notice under Section 142(1)
○ Fails to comply with the notice under Section 143(2) after having filed the
ITR.
● Prior to the proceedings the AO should issue a show cause notice to the assessee.
● Further AO cannot assess the income below returned income and cannot assess
losses higher than the returned losses.
● A refund cannot be granted under section 144.

Income Escaping Assessment or reassessment – Sec.147

● If the Assessing Officer has reason to believe that any income chargeable to tax
has escaped assessment for any assessment year, he may, subject to the provisions of
sections 148 to 153,
○ assess or reassess income which has escaped assessment or
○ recompute the loss or the depreciation allowance or any other allowance,
as the case may be for the relevant assessment year.
● Section 147, the Assessing Officer shall serve on the assessee a notice requiring
him to furnish, within such period, as may be specified in the notice, a return of his
income or the income of any other person in respect of which he is assessable under this
Act during the previous year corresponding to the relevant assessment year, in the

97
prescribed form, and verified in the prescribed manner and setting forth such other
particulars, as may be prescribed; and the provisions of this Act shall, so far as may be,
apply accordingly as if such return were a return furnished as per the requirements of
Section 139.
● Provided that in case a summary assessment or reassessment has been made for
the relevant assessment year, no action shall be taken under this section after the expiry
of four years from the end of the relevant assessment year, unless any income
chargeable to tax has escaped assessment for such assessment year by reason of the
failure on the part of the assessee to make a return under section 139 or in response to a
notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and
truly all material facts necessary for his assessment, for that assessment year.
● The following shall also be deemed to be cases where income chargeable to tax
has escaped assessment, namely :
○ (i) where no return of income has been furnished by the assessee although
his total income or the total income of any other person in respect of which
he is assessable under this Act during the previous year exceeded the
maximum amount which is not chargeable to income-tax ;
○ (ii) where a return of income has been furnished by the assessee but no
assessment has been made and it is noticed by the Assessing Officer that
the assessee has understated the income or has claimed excessive loss,
deduction, allowance or relief in the return ;
○ (iii) where the assessee has failed to furnish a report in respect of any
international transaction which he was so required under section 92E ;
○ (iv) where an assessment has been made, but ;
■ income chargeable to tax has been under assessed ;
■ or such income has been assessed at too low a rate ; or l such
income has been made the subject of excessive relief under this Act
■ or excessive loss or depreciation allowance or any other allowance
under this Act has been computed ;
○ (v) Where a return of income has not been furnished by the assessee or a
return of income has been furnished by him and on the basis of
information or document received from the prescribed income-tax
authority, under sub-section (2) of section 133C, it is noticed by the
Assessing Officer that the income of the assessee exceeds the maximum
amount not chargeable to tax, or as the case may be, the assessee has
understated the income or has claimed excessive loss, deduction,
allowance or relief in the return.
○ (vi) where a person is found to have any asset (including financial interest
in any entity) located outside India.

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Inquiry before assessment: s.142
● Issue of notice to the assessee to submit return (if not submitted earlier)
○ Assessing Officer may serve a notice after the end of the relevant
assessment year under said sub-section requiring such person to furnish
his return of income.
○ The Assessing Officer may ask to produce, or cause to be produced, such
accounts or documents and to furnish in writing and verified in the
prescribed manner information in such form and on such points or
matters (including a statement of all assets and liabilities of the assessee,
whether included in the accounts or not).
● Make Inquiry and give opportunity of being heard u/s 142(2)
● Give direction to get books of accounts audited u/s 142(2A) to (2D)

Section 174 - Assessment of persons leaving India

● Those persons who are planning to leave India before the AY with no intention to
return – AA – pay tax before they leave the country.
● Section 174(3) – summary assessment will be done. Also, a rough estimated
income will be subjected to tax and accordingly refunded or demanded more afterwards.
● Section 174(4) – 30 days notice to be given by AO to the assessee or vice versa
typically. However, in Section 174, it is reduced to 7 days. Hence, if AO gives notice,
within 7 days assessee has to file ITR. If failed to do so, then AO will do best judgement
assessment.
● Section 174(5) – Section 174 supplements all other provisions of the Act.
● Section 174(6) – The notice under Section 174(4) is a mandatory notice – 7 days
notice must be given before leaving the country.
● Section 271(1)(b) – Rs. 10,000 additional penalty for non-compliance of notice.
● Section 276CC – penalty for tax evasion – Rs. 25L and or 6 months
imprisonment – min – 7 years max imprisonment.

Section 175 - Assessment of persons likely to transfer property to avoid tax

● X has salary income – invested in HP – HP registered in the name X’s husband.
● Husband didn’t invest anything but receives rent.
● Hence AA is done before the alienation of property
● Has to be read along with Section 174(2) to 174(6).

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 PERMANENT ACCOUNT NUMBER (PAN) - S.139A [6M]
● What is PAN
○ PAN is a ten-digit unique alphanumeric number issued by the Income Tax
Department.
● What is PAN used for
○ PAN enables the department to identify/ link all transactions of the PAN
holder with the department. These transactions include tax payments,
TDS/TCS credits, returns of income, specified transactions,
correspondence etc, and so on. It facilitates easy retrieval of information of
PAN holder and matching of various investments, borrowings and other
business activities of PAN holder.
● Condition to get PAN
○ Every person if his total income or the total income of any other
person in respect of which he is assessable during the year exceeds the
maximum amount which is not chargeable to tax.
○ A charitable trust who is required to furnish return under Section
139(4A)
○ Every person who is carrying on any business or profession whose
total sale, turnover, or gross receipts are or is likely to exceed
five lakh rupees in any year
○ Every person who intends to enter into specified financial transactions in
which quoting of PAN is mandatory.
○ Every non-individual resident persons and persons associated with
them shall apply for PAN if the financial transaction entered into by
them during the financial year exceeds Rs. 2,50,000.
● Linking of PAN and Aadhar
○ The Finance Act, 2017 had inserted a new section 139AA in the
Income-tax Act, 1961, requiring every person who is eligible to obtain
Aadhaar to quote his Aadhaar number while applying for PAN or
furnishing return of income with effect from July 1, 2017.
○ In case of failure to intimate the Aadhaar number, (non linking)
PAN allotted to the person shall be made inoperative after the
date so notified.
● PAN and Aadhar -- interchangeability and mandatory quoting in
prescribed transactions
○ Every person who is required to furnish or intimate or quote his PAN
under the Act, and who has not been allotted PAN but possess the Aadhar
number may furish/intimate/quote his Aadhar number in lieu of PAN

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○ Every person who has been allotted a PAN and who has linked his Aadhar
Number winder s.139AA may furnish/intimate/quote his Aadhar in lieu of
PAN.
○ Penalty: 10k u/s. 272B

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 TCS and TDS

TDS:
● Collect tax from the very source of the income. A person (deductor) who is
liable to make payment of specified nature to any other person (deductee) shall
deduct tax at source and remit the same into the account of the Central
government
● Tax deducted at source (TDS) is an indirect mechanism of collecting tax which
combines twin concepts of “pay as you earn” and “collect as it is being earned.”
● The payer of income deducts tax from the income of the receiver
● Tax is levied at the very source where the payer of the income deducts the tax at
the very source before giving the income to the recipient
● This TDS is required to be deposited to CG within prescribed period

Objectives of TDS:
● Collection of tax prior to the income being received
● Improved cash flow to the govt
● Prevents tax evasion
● Widening and deepening of tax net
● Sharing of tax collection responsibility
● Prevent tax evasion
● Saves cost to govt. And time wrt collection of tax
● Helps in cross verification
● Shifts responsibility
● Changing concept of TDS – Sec.194N: monitoring of cash economy

Method:
● Pre-assessment collection or Pre-paid taxes
○ TDS + advance tax + self assessment tax
○ TDS paid by employer and not the assessee
○ Advance tax and self assessment tax is paid by the assessee
● Post assessment tax
○ regular demand for the collection of demand of prepaid taxes

Difference between TDS and Other Prepaid Taxes

● Advance tax and self assessment tax are paid by assesee || TDS is paid by others
on behalf of assessee

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Need for TDS and TCS:
● If assessee pays tax on income and tax collection is delayed
● Concealment of income to evade tax
● To overcome this issue TDS and TCS was implemented
● Amount deducted and collected at source – advance payment of tax (not advance
tax per se)

Role of deductor:
● Mandatory to obtain TAN

●
● Obtain TAN (1st time TDS and within 1 month from the end of the month in
which tax was collected or deducted by the Deductor)
● Register on the departmental website – TRACES
● Deduct tax at the applicable rate
● Deposit tax in government account using challan no.281
● Collect PAN of deductee and quote it correctly in the quarterly statements
● Furnish particulars of Book Identification No, Challan identification number,
mark relevant flags for lower deductions
● Issue TDS/TCS Certificates to deductee

TDS provisions:
● Sec.192 to 196D – rates for various payments
● Sec 197 to 206A – procedure for TDS
● Rules 26 to 37B – deduction at source
● Circulars and notifications issued by CBDT

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● Case laws

TDS on Salary – Sec.192

● An employer paying any income chargeable under head ‘salary’ is responsible for
deducting TDS on an average rate of income tax based on the prevailing rate during the
particular Financial Year by considering the estimated Income of assessee. Accordingly
all employers making such payments like Individual, HUF, Partnership Firms,
Companies, Co-operative societies, trust, and artificial judicial persons are liable to
deduct TDS.
● Conditions:
○ There exist an employer – employee relationship between deductor and 1
deductee and the payment is in the nature of salary
○ Any person responsible for making payment to resident / non-resident
employees
○ Payment is made by the employer to the employee
○ The income under the head salaries is above the maximum amount not
chargeable to tax

TCS provision:
● Sec.206 – TCS definition
● Rules 37C to 37H

Date of filing TDS (Forms 24Q, 26Q,27Q and 27EQ)

● Q1 (Apr to Jun) – 31st July of FY ( 24Q, 26Q,27Q) || 15 July for 27EQ
● Q2 (Jul to Sept) – 31st Oct of FY ( 24Q, 26Q,27Q) || 15 Oct for 27EQ
● Q3 (Oct to Dec) – 31st Jan of FY ( 24Q, 26Q,27Q) || 15 Jan for 27EQ
● Q4 (Jan to Mar) – 31st May of FY ( 24Q, 26Q,27Q) || 15 May for 27EQ

TCS – Tax Collected at Source:

● A seller at the time of debiting the amount payable by the buyer to the account of
the buyer or at the time of receipt of such amount, whichever is earlier, collects a sum
equal to the prescribed percentage as income tax
● Exemption – form 27C

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●

Difference between TDS and TCS

TDS TCS
TDS is tax deducted at source by any company TCS is a tax collected by the seller, at the
or individual making a payment if the payment time of sale.
exceeds the thresholds mentioned under
respective sections.

TDS is applicable on interest, salaries, TCS is applicable on the sale of timber, scrap,
brokerage, professional fees, commission, minerals, liquor, tendu leaves, forest produce,
purchase of goods, rent, etc. cars, toll tickets.

Under Section 194Q, TDS is applicable on the Under Section 206C (1H), TCS is applicable
purchase of goods, if the amount exceeds Rs. on the sale of goods, if the amount exceeds
50 lakhs. Rs. 50 lakhs.

The tax deduction rate (TDS) for the purchase The tax collection rate (TCS) for the sale of
of goods is 0.1% of the sum exceeding Rs. 50 goods is 0.1% of the sale sum exceeding Rs.
lakhs. 50 lakhs.

TDS is deducted whenever a payment is due TCS is collected by the seller at the time of
or made, whichever is earlier. sale.

TDS is to be deducted by the individual (or TCS is to be collected by the individual (or
company) making the payment. company) selling the specified goods.

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Due date of depositing TDS is 7th of every
month while TDS returns have to be submitted
quarterly.
There are three different returns to be filed for
TDS – Form 24Q (on salaries), Form 26Q
(other than salaries), and Form 27Q (payments
made to NRIs).
As per sec 206 AA, those who fail to provide
Permanent Account Number (PAN) to the
person making the payment will be charged
TDS at the following rate, whichever is
higher:
· rate specified in the corresponding
provision of the Act;· rate of 20%.
TCS will be deducted during the month in
which the supply is made. It will be deposited
within 10 days from the end of the month of
supply to the credit of the government.
There is one quarterly return in Form 27EQ
for collection of tax at source (TCS).
Section 206CC requires anyone paying an
amount liable to TCS to provide their (PAN)
to the person responsible for collecting the tax
(hereafter, referred to as the collector);
otherwise, the tax will be collected at the
following rate, whichever is higher:
twice the rate specified in the corresponding
provision of this Act;· rate of 5%
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 ADVANCE TAX
● Section 207-219 of the Income Tax Act deals with the issues relating to advance
payment of tax. In advance payment of tax, the assessee has to pay tax in a financial year
on estimated income which is to be assessed in the subsequent assessment year.
● It follows the doctrine known as pay as you earn scheme.
● It is obligatory for an assessee to pay advance tax where the advance tax payable
is Rs. 10,000 or more (Section 208).
● In order to reduce the compliance burden on senior citizens exemption from
payment of advance tax section 207 has been amended to provide that resident
individual
○ not having any income chargeable under the head “Profits and gains of
business or profession” and
○ of age 60 years or more need not pay advance tax and are allowed to
discharge their tax liability (other than TDS) by payment of
self-assessment tax
● Under Section 219, the total advance tax paid by an assessee other than for
interest be adjusted against the total tax liability computed under regular assessment.
● Under Section 234B of the Act where an assessee, who is liable to pay advance
tax, under Section 208 has failed to pay such tax or where the advance tax paid under
Section 210 is less than 90% of the assessed tax, he shall be liable to pay interest @ 1%
for every month or part of the month.

Role of Assessing Officer in relation to Advance Payment of Tax

● Can order for payment of advance tax if:
○ The assessee has already been assessed by way of regular assessment in
respect of total income of any previous year
○ Failure to pay advance tax by such assessee, inspite of legal obligation
○ The AO is of the opinion that such person is liable to pay advance tax on
current year’s income.
○ The order must specify the amount of advance tax and installments in
which advance tax has to be paid.
○ Such order may be passed during the previous year but not later than last
day of February.
○ xThe order must be made in writing.
● The assessee can pay advance tax at a rate lower than assessment made by the AO
and the department cannot object to such assessment, but the assessee has to furnish
his own estimate of lower current income in Form No. 28A - Punjab Tractors Ltd. v.
CPIT (2004) 137 Taxman 211 (Punjab & Haryana).

107
108
 UNIT 7: INTERPRETATION OF FISCAL
STATUTES

INTRODUCTION
● Revenue law is the sole creation of statute and cannot be imposed out of common law.
This means that it is a statute alone which can impose an obligation upon citizens to pay
a specified tax.
● Considered to be a special class of statutes, but warrant no special or own rules of
interpretation.
● Attorney General vs. Caltin Ban 1989
○ There was no apparent reason for taxing statutes to warrant principles of
construction distinct from those applicable to other statutes. Once a court has
ascertained the subject-matter to which a taxing statute intended to be applied,
there is no scope for the court to go beyond such a conclusion.
● Tax vs Fees
○ A tax is imposed for public purpose for raising general revenue of the State.
○ A fee in contrast is imposed for rendering services and bears a broad
co-relationship with the services rendered.
● Tax laws are highly complex, complicated and beyond the understanding of a tax-payer.
The words and expressions used are not simple.
● No one can be taxed by implication.
○ A charging section has to be construed strictly
● Keshavji Ravji & Co. vs. CIT – [(1990) 183 ITR 1 (SC)
○ The need of interpretation arises only when the words used in the statute are on
their own term, ambivalent and do not manifest the intention of the legislature.

Constitutional Provisions
● Article 265 of the Constitution provides: “No tax shall be levied or collected except by
authority of law”
● Article 366(28) of the Constitution which defines Taxation and Tax reads: “Taxation
includes the imposition of any tax or impost whether general or local or special and ‘tax’
shall be construed accordingly”.
● A scrutiny of Lists I and II would show that there is no overlapping anywhere in the
taxing power and the Constitution gives independent sources of taxation to the Union and
the States.
● A taxing statute is not per se a restriction on the freedom under Article 19 (1) (g) of the
Indian Constitution.

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 ● A taxing statute if divisible in nature and partly falls within and partly outside the
Constitution should not be declared wholly ultra vires. The principle of severability
includes separability in enforcement and this principle should be applied in cases of all
taxing statutes
○ Cibatul Ltd v Union of India
■ the court held that while the charging section may not be ultra vires , the
procedural section could be held to be ultra vires if it exceeded the
constitutional competence of the legislature which enacted it. It was held
that while section 3, the charging section of the Central Excise and Salt
Act 1944 was valid, section 4, the machinery or procedural section, was
invalid as it impinged upon the legislative authority of the state.

CANONS/PRINCIPLES OF INTERPRETATION

Strict Construction
● Statutes which impose taxes or monetary burdens must be construed or interpreted as per
the principle of strict construction.
● Logic: Imposition of taxes is also a kind of imposition of penalty, which can only be
imposed if the language of the state unequivocally states so.
● No scope for intendment, presumption, inference or analogy as to tax.
● Rowlatt J. in Cape Brandy Syndicate v. IRC (1921 1 KB 64)
○ "In a taxing statute one has to look merely at what is clearly said. There is no
room for any intendment. There is no equity about a tax. There is no presumption
as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly
at the language used.”
○ Also held in the case of CIT v. Ajax Products Ltd. [1965] 55 ITR, 741
● No tax can be imposed by inference or by analogy or by trying to probe into the intention
of the legislature and by considering what was the substance of the matter.
● CIT v. Elphinstone Spg & Wvg Mills Co Ltd.
● CIT v Motors & General Stores Ltd.
○ Subject cannot be taxed unless he comes within the letter of the law. “spirit” of
the law argument is invalid.
● Tarulata Shyam v. CIT [1971] 108 ITR 345 (SC)
○ There is no scope for importing into the statute words which are not there.
○ The rule of literal construction is widely accepted rule for interpreting the taxing
statutes.
○ If the language of the statute is clear and unambiguous, we have to accept the
plain meaning even if it leads to some harshness or injustice to the assessee.

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 ○ As long as there is no ambiguity in the statutory language, the rule of literal
interpretation has to be applied.
○ A dealer or assessee cannot be subjected to tax without clear and unambiguous
words for the purpose of levying the tax which is authorised by law, enacted by
the Parliament or by the State Legislature.
● Mathuram Agrawal v.State of Madhya Pradesh AIR 2000 SC 109
○ In the taxing statute a person or a transaction cannot be subjected to tax on the
ground of spirit of the law or by inference or by analogy.
● CIT vs. Calcutta Knitwears (2014) 362 ITR 673 (SC)
○ A taxing statute should be strictly construed even if the literal interpretation
results in hardship or inconvenience, common sense approach equity, logic and
morality have no role to play.
● Vidarbha Irrigation Devs. Corpn. vs. ACIT [(2005) 278 ITR 521 (Bom)
○ While interpreting tax statute, the function of the court of law is not to give words
in the statute a strained and unnatural meaning to cover and extent its applicability
to the areas not intended to be covered under the said statute.
● CIT vs. Vadilal Lallubhai [(1972) 86 ITR 2 (SC)
○ It is not permissible to construe any provision of a statute, much less a taxing
provision, by reading into it more words than its contains

Strict Construction of Charging Sections

● Charging sections – strict construction
● Benevolent And Procedural Sections – liberal construction
○ Bajaj Tempo Ltd. 196 ITR 188 (SC)
■ A provision in a taxing statute granting incentives for promoting growth
and development should be construed liberally, and since as provision for
promoting economic growth has to be interpreted liberally, the restriction
on it too has to be construed so as to advance the objective of the
provision and not to frustrate it.
● The rule of construction of a charging section is that before taxing any person, it must be
shown that he falls within the ambit of the charging section by clear words used in the
section. No one can be taxed by implication.
○ Upheld in WT Commissioner, Ahmedabad v. Ellis Bridge Gymkhana. AIR 1998
● Practical rule of interpretation and generally resorted to while interpreting the sections
pertaining to incentives, exemptions and deductions etc. A provision for appeal should
also be liberally construed.
● Gursahai Saigal v. CIT 1963 AIR 1062.
○ Held: Those sections which impose the charge or levy should be strictly
construed; but those which deal merely with the machinery of assessment and
collection should be construed in a way that makes the machinery workable.

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 ● Commissioner Trade Tax vs. DSM Group of Industries
○ The object of provisions of taxing statute being to promote the setting of the new
units and to increase the production of goods such provision has to be interpreted
liberally so that the object can be achieved.
● Vodafone International Holdings V. UOI
○ Issue- taxability in India of offshore transfer of shares of a Cayman Islands
company by the Hutchison Group to the Vodafone Group.
○ Sec 9- charging section for capital gains
○ Direct and indirect transfer
○ Literal rule and purposive rule of construction

Beneficial Construction
● When construing a fiscal statue, courts must lean their interpretation toward, or in favour
of, the subject rather in favour of the state.
● Thus, where two interpretations are possible, the one which is beneficial to the assessee
would be preferred.
● IRC v. Duke of Wesminister (1936 AC 1)
○ Laid down above principle.
○ Held: An assessee may arrange his affairs within the bounds of the law so as to
minimize the incidence of tax.
○ In cases where there are two interpretations possible, the one which is
beneficial to the assessee would be preferred.
● A statute which is intended for the benefit of the tax-payer must be construed liberally in
favour of the tax-payer with a view to ensuring that benefit to him and not in a narrow
and pedantic manner with an eye to deprive him of the benefit.
○ There is thus no equitable construction permitted in a taxation statute, and the
benefit of the doubt in such statutes invariably goes to the subject.

Construction of Penal Provisions

● Strict interpretation
● Prospective in operation and not retrospective
○ Reliance Jute & Industries Ltd v. CIT, West Bengal,1980 AIR 251.
■ The cardinal principle of tax laws is that the law to be applied to the
assessee is the law in force in the assessment year unless otherwise
provided expressly or by necessary implication. No retrospective effect to
fiscal statute is possible unless the language of the statute is very clear and
plain and allows for the same.
● Presumption of mens rea

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 ○ Concealment of income may be presumed by the department (without mens rea)
and the onus of proof lies on the assessee to show that there is no concealment.

Meaning in Common Parlance

● Meaning in common usage, parlance special in commercial and trade circles must be
considered.
● Annapurna Biscuit Manufacturing Co. v. Commissioner of Sales Tax, UP. 1981
○ Held: Taxing statutes should be construed in the way in which they are
understood in ordinary language in the area in which the law is in force.
● Dunlop India Pvt Ltd v. Union of India. 1977 AIR 597.
○ Supreme Court held “latex” to fall within the meaning of “rubber” for the purpose
of tax.

Fiscal Statute to be Read as a Whole

● The entire content of a fiscal or taxing statute has to be read as a whole, and not in
piecemeal, to find out the intent of the legislature.
● Grasian Industries Limited v. State of Madhya Pradesh. 1964 AIR 1179.
○ Held: Any exemption notification in a fiscal statute must be read in its entirety
and not in parts, to find out the meaning

No Presumption as to Tax
● Presumption of tax does not exist with regard to imposition of taxes.
● Mohammed Ali Khan v. Commissioner of Wealth Tax
○ Held that no tax can be imposed by inference, analogy or probing into the
intention of the legislature.

Intention of the Legislature

● Doypack Systems Pvt. Ltd. vs. UOI [1998 (2) SCC 299
○ It has to be reiterated that the object of interpretation of a statute is to discover the
intention of Parliament as expressed in the Act.
● GEM Granites vs. CIT (2004) 271 ITR 322 (SC)
○ the Hon’ble court observed that what one may believe or think to be the intention
of Parliament cannot prevail if the language of the statute does not support that
view, thus object of the statute has to be gathered from language and not on what
one believes or thinks.

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Harmonious Interpretation
● Wherever it is possible to do so, the provision must be harmoniously constructed by
avoiding a conflict. A construction which reduces the statute to a futility has to be
avoided.
● CIT vs. R. M. Amin (1971) 82 ITR 194 (Guj)
○ Every clause of a statute should be construed with reference to the context and
other clauses of the statute so as, as far as possible, to make a consistent
enactment of the whole statute
● CIT vs. West Bengal Industrial Development Corporation Ltd. – [(1993) 203 ITR 422,
430 (Cal)
○ Parliament is normally presumed to legislate in the knowledge of, and having
regard to, relevant judicial decisions.
○ If, therefore, Parliament has a subsequent opportunity to alter the effect of a
decision on the legal meaning of an enactment, but refrains from doing so, the
implication is that Parliament approves of that decision and adopts it.
○ That was amply demonstrated by the amendment of Sec. 36 (1) (viii) made in
1985.

Mischief Rule
● This rule is also one of the cardinal rules of interpretation when the words of a taxing
statute are ambiguous and incapable of a literal interpretation.
● CIT vs. Shahzada Nand & Sons. (1966 ) 60 ITR 392 (SC)

Purposive Interpretation (Golden Rule)

● However the application of this rule in the interpretation of taxing statutes is rather
limited since the literal rule is more often applicable and it is oft remarked that equity and
taxation are strangers
● Vikrant Tyres Ltd vs. ITO (2001) 247 ITR 821, 826 (SC)

EXTERNAL AIDS TO INTERPRETATION

Finance Minister’s speech

● There is no bar in resorting to or referring to speech of FM.
● Interpretation of a statute being an exercise in the ascertainment of meaning, everything
which is logically relevant should be admissible – Chunnilal Onkarmal (P.) Ltd. v. UOI
[1996] 221 ITR 459 (MP)

114
 ● In Builders Association vs. Union of India (1994) 209 ITR 877 (SC) the court held that
the opinion of law minister and reply of minister in Parliament regarding a taxing
provision cannot be treated as binding on the Court.

Circulars and Interpretation by Tax Authorities

● Navnitlal Zaveri vs. K.K. Sen (1965) 56 ITR 198 (SC)
○ The circulars issued by the CBDT would be binding on officers and persons
employed in the execution of the Income-tax Act and the effect of the circular was
taken into account in deciding the constitutionality of a provision contained in the
Act.
● CIT vs. K. Srinivasan and K. Gopalan (1953) 23 ITR 87 (SC)
○ The interpretation placed by the department in the Income-tax Manual has been
held not to be a proper guide when the construction of a statute is involved.

Generalia Specialibus Non Derogant

● In the case of overlapping provisions- freedom of the assessee to chose the one imposing
a lighter burden
● CIT v. Shahzada Nand and Sons 60 ITR 392 (SC)
○ The Courts have held the expression to mean that when there is a conflict between
a general and special provision, the latter shall prevail.

EXEMPTION FROM TAXATION

● They have to be interpreted strictly and in its entirety and not in parts.
● CIT vs. Dungarmal Tainwala (1991) 191 ITR 445 (Patna)
○ An exemption clause in a taxing statute must be, as far as possible, liberally
construed and in favour of the assessee, provided no violence is done to the
language used.
● Where an exemption is conferred by a statute by an exemption clause, that clause has to
be interpreted liberally and in favour of the assessee but must always be without any
violence to the language used.
● The rule must be construed together with the exemption provision, which must be
regarded as paramount.
● If the tax-payer is within the plain terms of the exemption it cannot be denied its benefit
by calling in aid any supposed intention of the exempting authority.
● In Grasim Industries Limited v State of Madhya Pradesh,
○ the Supreme Court held that an exemption notification in connection with a fiscal
statute has to be read in its entirely and not in parts.
● In Tata Oil Mills Company Collector of Central Excise,

115
 ○ there was a notification which exempted imposition of excise duty on ‘such soap
as is made from indigenous rice bran oil’. This oil can be used in making soap
only after it get converted into fatty acid.
○ The Supreme Court held that the exemption applied to both rice bran oil and rice
bran fatty acid.

DOCTRINE OF FAIRNESS
CIT v. Vatika Township Pvt. Ltd. (2014)
The SC in this case dealt with the aspect of retrospective application of Tax
Amendments. The notable points are as under:
● The principle of “lex prospicit non respicit” which translates as “the law looks forwards
and not backwards” was duly considered and upheld by the Supreme Court.
● Any retrospective legislation would be contrary to the general principle of law and would
go against the principle under Art.20
● The court relied on the principle of fairness which stands against the surmise of
retrospective application of laws.
● Any law which modifies any accrued right or would impose disabilities should be treated
as prospective laws unless they were covering up for any previous omission.
● The doctrine of fairness is a relevant factor when construing a statute that confers a
benefit without the infliction of any corresponding or allied detriment, and then the it
could be given a retroactive effect.
● The Supreme Court stated that until there is evidence to the contrary, law is believed not
to be meant to have a retroactive effect. The Supreme Court has pointed out that
confidence in the essence of the rule is based on the bedrock that any human being is
entitled to organise his affairs in accordance with current law and should not be surprised
when his arrangements are disrupted retroactively
● In this case, the Court referred to the case of Govt. of India & others v. Indian tobacco
Association (2005) 7 SCC 396 wherein the Doctrine of fairness was held a relevant factor
to construe a statute conferring a benefit, in the context of it to be given a retrospective
operation.

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 UNIT 8 - GST (GUEST LECTURE)

INTRODUCTION
● Prior GST
○ Central and State based taxes to augment revenue
○ Direct and Indirect taxes -- Center
○ Central Excise duty and service tax -- primary indirect tax
○ State Level -- tax on goods only and not services -- VAT and Sales Tax
● Issues recognised to tackle the tax law
○ Manufacturer had to pay central excise on manufacture of the goods and
then to sell he had to pay VAT for the same goods -- double incidence
■ Hence need to reduce the incidence was felt imperative
■ Octroi, cess, luxury tax etc was hectic
■ Request from the TRADE -- one law, one incidence
○ Interstate Tax -- CST was asked to be abolished
● Is it possible to have a single law???
○ India being a Federal Nation -- possible but difficult to impose due to
centre-state relations.
○ Constitutional amendment to curb power of one side
○ Single tax wont be possible -- therefore dual tax -- CGST and SGST
■ Rate of tax shall remain uniform post GST across the state -- no
differential tax system based on the geographical boundaries
○ Single tax not possible == single law not possible
○ 29 laws -- all would be the same -- state wise GST (ex, KarGST, TNGST….)
■ Multiple law -- only name but the law will remain same
(mirror)
■ Incidence should be the same and single -- 50% to Centre
and 50% to State
● Interstate Tax was asked to be abolished by TRADE
○ Govt agreed to allow purchaser to neutralise the taxes (input tax credit and
output tax credit)
● GOVT’s need/PoV
○ Conceptual change was required from origin based tax (as tax was
collected by the State)
○ “Origin based to destination based tax” (destination based
consumption tax)
● All previous taxes were subsumed by the GST
● IGST has 19 sections that is different from CGST (ec. Chagring sections)
● Inclusive definition of supply

117
 ○ Certain exclusions were nevertheless mentioned -- certain activities
(negative listing) even though may look like to be a supply, won't be
considered

CONCEPT OF SUPPLY, SCOPE OF SUPPLY AND PLACE OF

SUPPLY

Scope of Supply
● Section 7 -- the ‘expression supply includes’
○ All forms of supply of goods or services or both
■ Has given examples -- “...such as…” sale, barter, license, etc…
■ Made or agreed to be made for consideration by a person in
the course or furtherance of business
● Elements of Supply:
○ Persons -- supplier and receiver
○ Goods and/or services to be present
○ Supply to be taxed should be a transaction in course or furtherance of
business -- presence of business intention is necessary
○ There has to be a consideration connected to the business
■ Exception for consideration -- All those mentioned in sch.1
● Sec.7 is inclusive definition
● Exception:

○
○ Import of service -- even if for personal use would attract GST if
consideration given

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Schedule 1 and Scope of Supply

●
○ GST Registration and PAN number interconnection
○ Stock transfer is also supply under the scope of GST

Sec.7(2) and Schedule 3

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●

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 ●
○ High sea sales does not attract GST but attracts custom duty in the hands
of the the importer
○ Rationale???

Schedule 2 -- to overcome the ambiguity

Sec.9 CGST ACT -- Power of Govt to levy GST

● Govt has power to impose tax called CGST/SGST
● Applicable on all supplies, except 5 goods which is kept in abeyance
(petroleum pdts -- crude oil, high speed diesel, petrol (motor spirit), aviation
fuel, natural gas)
○ State VAT law is applicable for these
● Alcoholic liquor for human consumption -- not under GST -- State excise
is exercised post GST as well

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 Important Topics and Revision

UNIT 1
● Historical Background of Taxation in India -- 15 marker
● Canons of a Good Taxing System - 15
● Reasons for Taxation - 6 marker
● Merits and Demerits of Direct and Indirect taxes -- 15 marker
● Tax and Fee - 15 marker
● Constitutional Provisions relating to Taxation - meaning of tax, 265 - 15 marker
● Impact and incidence and merits and demerits of tax - 15 marker
● Section 115 BAC - tax slabs - 6 marker

UNIT 2
● Basic concepts/Definitions – Assessee, Persons, Previous year, Assessment Year -
15 marker
● Capital and Revenue Receipts -- 15
● Calculation of Gross Total income and Net total income and tax -- 15
● Incomes which do not form part of the Total Income - exemptions - Section 10 -
Agri and retirement (learn separately as well)
● Residential Status and Incidence of Tax - Section 6 full - cases also -- 15
● Agricultural Income and Taxability -- 15
● Exemptions -- 15 marks
● Representative Assessee - 6 marker
● Person - 6 marker

UNIT 3
● Salaries and deductions - 10 marker
● Concept of Allowances and Perquisites - Section 17(2), medical treatment not
forming part of perquisites - 10 marker
● Profits in lieu of Salary - 6 marker
● Charging Section in House Property - Section 22 - 6 marker
● Determination of Annual Value - 10 marker
● Accrued rent - Section 23 explanation, 25A - application based
● Deductions under the head House Property - 6 marker

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● Rent not received from house property - how to calculate

UNIT 4
● Meaning of Business or Profession, Charging section - 6 marker
● Depreciation - objective and kinds - 10 marker
● Deductions - 30, 33, 35 - 10 marker
● Concept of Capital Gains
● Section 54 - 10 marker
● Basis of Charge - Section 45 - 6 marker
● Capital asset - 6 marker

UNIT - 5
● Diversion and application of income
● 2(24) -- 10 marker
● Set off and carry forward - 10 marker
● Rebate -- short note -- 6 marker
● Interpretation of charging sections -- 6 marker
● Representative assesee -- 6 marker
● Clubbing of income -- 10 marker
● 80c-80u (only video) deduction -- 10 marker
● Income from other sources -- 10 marker
● Relief -- skipped
● Aggregation 68 to 69D -- 6 marker

UNIT - 6
● Kinds of assessment -- 15 marks
● Powers of IT Aut -- 15 marks
● TDS -- 15 marks
● Returns -- 15 marks
● Adv tax -- 6
● Diff between TDS and TCS -- 6
● PAN + adhaar -- 6

UNIT 7 - 10 markers
● Vatika Township

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● Interpretation of circulars and notifications
● Principles of Interpretation - literal and strict interpretation
● Interpretation of charging section
● Westminster and Ramsay principles
● Retrospective provisions

UNIT 8 - 10 markers
● Legislative Background and basic concepts
● Registration
● Input credit
● Scope of supply
● Interstate supply

Computation of Gross Total Income:

●
● Start with the classification of income under 5 heads
● Till step 8 (Deductions under 80c to 80u) will be GTI, then post that it would be
Net Total Income
● 10 marker question (GTI and NTI -- same question)

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 Sec.25A
● Application based question
● Refer to s.23 Rule 4
● So if payable in 2017 and received in 2020 -- then taxed in 2020 (deemed to be
income)
●

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