TAXATION

Q.1. Constitutional provisions relating to collection and levy of tax.

Constitutional Provisions Regarding Taxation in India

The roots of every law in India lie in the Constitution, therefore understanding the provisions of the Constitution is foremost to
have a clear understanding of any law. The Constitutional provisions regarding taxation in India can be divided into the following
categories:

 Only by the authority of law can taxes be levied. (Article 265)

 Levy of duty on tax and its distribution between centre and states (Article 268, Article 269, and Article 270)

 Restriction on power of the states to levy taxes (Article 286)

 Sale/purchase of goods which take place outside the respective state

 Sale/purchase of goods which take place during the import and export of the goods

 Taxes imposed by the state or purpose of the state (Article 276, and Article 277)

 Taxes imposed by the state or purpose of the union (Article 271, Article 279, and Article 284)

 Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)

Article 265

Without the ‘authority of law,’ no taxes can be collected is what this article means in simple terms. The law here means only a
statute law or an act of the legislature. The law when applied should not violate any other constitutional provision. This article acts
as an armour instrument for arbitrary tax extraction.

In the case Tangkhul v. Simirei Shailei, all the villagers were paying Rs 50 a day to the head man in place of a custom to render
free a day’s labour. This was done every year and the practice had been continuing for generations. The Court, in this case, held
that the amount of Rs. 50 was like a collection of tax and no law had authorized it, and therefore it violated Art 265. Article 265 is
infringed every time the law does not authorize the tax imposed.

In the case, Lord Krishna Sugar Mills v. UOI, sugar merchants had to meet some export targets in a promotion scheme started by
the government but if they fell short of the targets then an additional excise duty was to be levied on the shortfall. The court
intervened here and said that the government had no authority of law to collect this additional excise tax. What this means in
effect is that the government on its own cannot levy this tax by itself because it has not been passed by the Parliament.

Article 266

This article has provisions for the Consolidated Funds and Public Accounts of India and the States. In this matter, the law is that
subject to the provisions of Article 267 and provisions of Chapter 1 (part XII), the whole or part of the net proceeds of certain
taxes and duties to States, all loans raised by the Government by the issue of treasury bills, all money received by the Government
in repayment of loans, all revenues received by the Government of India, and loans or ways and means of advances shall form one
consolidated fund to be entitled the Consolidated Fund of India. The same holds for the revenues received by the Government of a
State where it is called the Consolidated Fund of the State. Money out of the Consolidated Fund of India or a State can be taken
only in agreement with the law and for the purposes and as per the Constitution.

Article 268

This gives the duties levied by the Union government but are collected and claimed by the State governments such as stamp
duties, excise on medicinal and toilet preparations which although are mentioned in the Union List and levied by the Government
of India but collected by the state (these duties collected by states do not form a part of the Consolidated Fund of India but are
with the state only) within which these duties are eligible for levy except in union territories which are collected by the
Government of India.

Article 269 provides the list of various taxes that are levied and collected by the Union and the manner of distribution and
assignment of Tax to States. In the case of M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others, placing
faith in a judgement of the Apex Court in the case of Gannon Dunkerley & Co. and others v. State of Rajasthan and others, the
advocate from the appellant side submitted that to arrive at a Taxable Turnover, turnover relating to inter-State transactions,
export, import under the CST Act are to be excluded. Thus, the provision of the State Sales Tax Act is always subject to the
provisions of Sections 3 and 5 of the CST Act. Sale or purchase in the course of interstate trade or commerce and levy and
collection of tax thereon is prohibited by Article 269 of the Constitution of India.

Article 269(A)

This article is newly inserted which gives the power of collection of GST on inter-state trade or commerce to the Government of
India i.e. the Centre and is named IGST by the Model Draft Law. But out of all the collecting by Centre, there are two ways
within which states get their share out of such collection

1. Direct Apportionment (let say out of total net proceeds 42% is directly apportioned to states).

2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a selected prescribed percentage goes to
the States.

Article 270

This Article gives provision for the taxes levied and distributed between the Union and the States:

 All taxes and duties named within the Union List, except the duties and taxes named in articles 268, 269 and 269A,
separately.

 Taxes and surcharges on taxes, duties, and cess on particular functions which are specified in Article 271 under any law
created by Parliament are extracted by the Union Government.

 It is distributed between the Union and the States as mentioned in clause (2).

 The proceeds from any tax/duty levied in any financial year, is assigned to the states where this tax/duty is extractable in
that year but it doesn’t form a part of the Consolidated Fund of India.

 Any tax collected by the centre should also be divided among the centre and states as provided in clause (2).

 With the introduction of GST 2 sub-clauses having been added to this Article- Article 270(1A) and Article 20(1B7).

The Supreme Court of India has set a famous judicial precedent under Article 270 of the Constitution of India in the
case T.M. Kanniyan v. I.T.O. The SC, in this case, propounded that the Income-tax collected forms a part of the
Consolidated Fund of India. The Income-tax thus extracted cannot be distributed between the centre, union territories,
and states which are under Presidential rule.

Article 271

At times the Parliament for the Union Government (only when such a requirement arises), decides to increase any of the taxes
/duties mentioned in article 269 and Article 270 by levying an additional surcharge on them and the proceeds from them form a
part of the Consolidated Fund of India. Article 271 is an exception to Article 269 and Article 270. The collection of the surcharge
is also done by the Union and the State has no role to play in it.

Cess and surcharge

There seems to be a lot of confusion between cess and surcharge. Cess is described in Article 270 of the Constitution of India.
Cess is like a fee imposed for a particular purpose that the legislation charging it decides. Article 271 deals with a surcharge which
is nothing but an additional tax on the existing tax collected by the union for a particular purpose. Proceeds from both the cess and
surcharge form part of the Consolidated Fund of India In the case of m/s SRD Nutrients Private Limited v. Commissioner of
Central Excise, Guwahati, the Supreme Court was presented with the question: If on excisable goods an education cess can be
levied before the imposition of cess on goods manufactured but cleared after imposition of such cess. The judgement given in this
case was in favour of the manufacturer but the judges, Justice A K Sikri and Justice Ashok Bhushan observed that education and
higher education cess are surcharges.

Grants-in-aid

The constitution has provisions for sanctioning grants to the states or other federating units. It is Central Government financial
assistance to the states to balance/correct/adjust the financial requirements of the units when the revenue proceeds go to the centre
but the welfare measures and functions are entrusted to the states. These are charged to the Consolidated Fund of India and the
authority to grant is with the Parliament.

Article 273

This grant is charged to the Consolidated Fund of India every year in place of any share of the net proceeds, export duty on
products of jute to the states of Assam, Bihar, Orissa, and West Bengal. This grant will continue and will be charged to the
Consolidated Fund of India as long as the Union government continues to levy export duty on jute, or products of jute or the time
of expiration which is 10 years from its commencement.

Article 275

These grants are sanctioned as the parliament by law decides to give to those states which are in dire need of funds and assistance
in procuring these funds. These funds /grants are mainly used for the development of the state and for the widening of the welfare
measures/schemes undertaken by the state government. It is also used for social welfare work for the Scheduled tribes in their
areas.

Article 276

This article talks about the taxes that are levied by the state government, governed by the state government and the taxes are
collected also by the state government. But the taxes levied are not uniform across the different states and may vary. These are
sales tax and VAT, professional tax and stamp duty to name a few.

Article 277

Except for cesses, fees, duties or taxes which were levied immediately before the commencement of the constitution by
any municipality or other local body for the purposes of the State, despite being mentioned in the Union List can continue to be
levied and applied for the same purposes until a new law contradicting it has been passed by the parliament.

In the case Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh, the appellant was manufacturing
medicines for making which they had to use alcohol, the licenses for which were procured under the Hyderabad Abkari Act and
had to pay some fees to the State Government for the supervision. But the parliament passed the Medicinal and Toilet
Preparations Act, 1955 under which no fee had to be paid but the petitioner challenged the levy of taxes by the state after the
passing of the Medicinal and Toilet Preparations Act, 1955 because according to Article 277, entry 84 of list 1 in the 7th schedule,
the state could not levy any fee. The difference between tax and fee was explained. Proceeds from tax collection are used for the
benefit of all the taxpayers but a fee collected is used only for a specific purpose.

Article 279

This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means the proceeds which are left after deducting
the cost of collection of the tax, ascertained and certified by the Comptroller and Auditor-General of India.
Article 282

It is normally meant for special, temporary or ad hoc schemes and the power to grant sanctions under it is not restricted. In the
case Bhim Singh v. Union of India & Ors the Supreme Court said that from the time of the applicability of the Constitution of
India, welfare schemes have been there intending to advance public welfare and for public purposes by grants which have been
disbursed by the Union Government. In this case, the Scheme was MPLAD (Member of Parliament Local Area Development
Scheme) and it falls within the meaning of ‘public purpose’ to fulfil the development and welfare projects undertaken by the state
as reflected in the Directive Principles of State Policy but subject to fulfilling the constitutional requirements. Articles 275 and
282 are sources of granting funds under the Constitution. Article 282 is normally meant for special, temporary or ad hoc schemes
and the power to grant sanctions under it is not restricted. In the case Cf. Narayanan Nambudripad, Kidangazhi Manakkal v. State
of Madras, the Supreme Court held that the practice of religion is a private purpose. And donations and endowments made are
therefore not a state affair unless the state takes the responsibility of the management of such religious endowment for a public
purpose and uses the funds for public welfare measures. So it can be seen that Article 282 can be used for a public purpose but at
times in the name of public purpose it can even be misused.

Article 286

This article restricts the power of the State to tax

1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the territory of the state.

2) Only parliament can lay down principles to ascertain when a sale/purchase takes place during export or import or outside the
state. (Sections 3, 4, 5 of the Central Sales Tax Act, 1956 have been constituted with these powers)

3) Taxes on sale/purchase of goods that are of special importance can be restricted by the parliament and the State Government
can levy taxes on these goods of special importance subject to these restrictions (Section 14 and Section 15 of Central Sales Act,
1956 have been constituted to impose restrictions on the state Government to levy taxes on these goods of special importance). In
the case of K. Gopinath v. the State of Kerala, Cashew nuts were purchased and imported by the Cashew Corporation of India
from African suppliers and sold by it to local users after processing it. The apex court held that this sale was not in the course of
import and did not come under an exemption of the Central Sales Tax Act, 1956. The issue before the court was to decide whether
the purchases of raw cashew nuts from African suppliers made by the appellants from the cashew corporation of India) fall under
the nature of import and, therefore protected from liability to tax under Kerala General Sales Tax Act, 1963. The judgement here
went against the appellants.

Article 289

State Governments are exempted from Union taxation as regards their property and income but if there is any law made by the
parliament in this regard then the Union can impose the tax to such extent.

Some other tax-related provisions

1. Article 301 which states that trade, commerce and inter-course are exempted from any taxation throughout India except
for the provisions mentioned in Article 302, 303, and 304 of the Indian Constitution, 1949.

2. Article 302 empowers the parliament to impose restrictions on trade and commerce in view of public interest.

3. Article 303– Whenever there is the scarcity of goods this article comes in play. Discrimination against the different State
Governments is not permitted under the law except when there is a scarcity of goods in a particular state and this
preference to that state can be made only by the Parliament and in keeping with the law.

4. Article 304– permits a State Government to impose taxes on goods imported from other States and Union Territories but
it cannot discriminate between goods from within the State and goods from outside the State. The State can also exercise
the power to impose some restrictions on freedom of trade and commerce within its territory.

Article 366

Apart from all these provisions, there are other provisions also that require mention such as Article 366 which gives the definition
of:
  Goods;
 Services;
 Taxation;
 State;
 Taxes that are levied on the sale/purchase of goods;
 Goods and service tax etc.

Q 2. "Single taxation" and "multiple taxation" system? Discuss the advantages and disadvantages of each.

Single Tax: A single tax occurs in a system in which the tax is levied on one subject. There is only one tax which constitutes the
sources of public revenue. One simple form of a single tax is the poll tax, or the head tax which is imposed on a person
irrespective of his income, or wealth or profession, etc.
There is only one tax from the state which is on the production of agriculture, is on income or any other thing. A group of
economists called Physiocrats thought is that there should be tax on agriculture production because agriculture is the only
production business.

MERITS OF SINGLE TAX SYSTEM:

a)The greatest merit of single tax is it simplicity. Since there is only one tax work of the govt is simplified.
b)Levy assessment and collection of revenue would become very easy.
c)Levy and collection of tax can be bad if tax concerned is carefully selected.

DEMERITS OF A SINGLE TAX SYSTEM:

a.The greatest defect of the single tax system is that from the revenue point of view the tax yield may not be sufficient for the
govt.
b.Yield of any single tax does not increase rapidly as the yield from multiple taxes system.
c.Increase in the rate of tax alone cannot increase revenue.

Multiple Tax System: -When state collect revenue by imposing different types of taxes is called multiple taxes. Today, almost in
all the countries multiple tax system is popular. In these taxes, it can be justified by including the merit of progressiveness. Today,
government is adopting different types of taxes like - income tax, debit tax, property tax, gift tax, death tax, production tax, import
tax etc.

MERITS OF MULTIPLE TAX SYSTEM:

a.Multiple tax system generally results in equitable tax burden since it is compowdof direct and indirect, proportional and
progressive taxes.
b.It is difficult for individuals to evade taxes altogether.
c.It is more useful to achieve social and political objectives.
d.Tax system becomes broad based and even covers every sector in the country.

Q3. Why was there a need for GST. How does it propose to resolve the double taxation dichotomy. Advantages and limitaions of
GST act.

GST is the most remarkable and ambitious tax reform in India’s post-independence history. If asked about the What is the need of
GST in points in India then its aim and vision were to levy a single national uniform tax across the nation on all types of goods
and services. GST has replaced multiple taxes like sales tax, service tax, etc., which made India more of an integrated national
market and brought more people into the taxation net is the need for gst. By improving efficiency, it can add substantially to
finances as well as the growth of the country. Implementing a new tax regime, inculcating both goods and services by the State
and the centre in a large and complex system is perhaps unprecedented in the modern tax history of the globe.

Why does India need GST

Why India needs GST, so the answer to that is GST is a tax with a comprehensive and continuous chain of set-off benefits to the
level of retailers. It is mainly a tax only on value addition at each stage, and a supplier at each step is allowed to set off through a
credit tax mechanism. The burden of GST is ultimately borne by the final consumer which is the end-user of the commodity or
service provided is the need and importance of GST.

India and Indirect Tax Regime

Before the introduction of GST, the indirect tax regime of India suffered from various drawbacks and limitations. needs of GST is
there was a burden of tax-on-tax in the pre-GST system of central excise duty and the sales tax system of the states. GST had to
take under its wings, a profusion of indirect taxes of the states and the centre. It has integrated taxes on goods and services to set
off relief. Further, this regime has also captured value additions in the distributive trade. Currently, the service sector constitutes a
tax base with cast potential that has not been exploited yet in India. Needs for gst in India, GST is justified as it has covered
almost all the services for taxation. Since major state and central indirect taxes are included under GST, the multiplicity of taxes
has been substantially reduced, reducing the operation cost of the national tax system. The uniformity in procedures and tax rates
across the country will go a long way in reducing the cost of compliance. In crux, GST is a comprehensive indirect levy of tax on
manufacturer, consumption and sale of goods, and services at the country level. GST is an indirect tax for the whole of the nation
to make it one unified shared marketplace. It is designed to give India a world-class tax regime and improve the process and
collection. It will end the long due distortions of differential treatment of the services sector and manufacturing sector. It will also
facilitate seamless credit across the entire supply chain and all states under a joint tax base.

Why Was There a Need of GST in India?

As we discussed, the old indirect tax regime had many drawbacks and limitations. GST was able to cover, reduce, and nullify the
majority of the shortcomings by offering its advantages. Here we mentioned the need for GST in India in points that explains why
India need GST:

Seamless Flow of Credit:

As GST is a destination tax, the revenue of SGST ordinary accrues to the consuming states. The interstate supplier in the
exporting State can set off the available credit of CGST, SGST/UTGST and IGST against the IGST payable on an inter-state
supply made by him. The importing state buying is allowed to avail the credit of IGST paid on interstate purchases made by him.
Thus, unlike the earlier scenario where the credit chain used to break in case of interstate sales on account of non-VATable CST,
under the GST regime, there is a seamless credit flow in case of interstate supplies. The centre transfers to the importing State the
credit of IGST used in payment of UTGST/SGST. The revenue of interstate sales does not accrue to the exporting State, and the
exporting State transfers to the centre the credit of UTGST/SGST used in payment of IGST. Thus, the IGST needed a robust
settlement mechanism amongst the centre and the State. A central agency is needed which can act as a clearing house and verify
the claims and inform respective governments to transfer the funds. This is possible only with the help of a robust IT infra.

Boosts in exports:

Suppose the Indian marketplace is competitive in terms of pricing. In that case, more and more foreign players will try to enter,
which will result in more numbers of exporters and ultimately benefit the nation.

Competitive prices:

GST eliminates all other taxes of indirect nature, and this will effectively mean that the tax amount paid by end consumers will
reduce. As we study economics, lower the prices, more will be demand for that product, which will result in more consumption
and will benefit the entities.

Increase in revenue:

One reason behind the need for GST was also to boost the revenue from the indirect taxes in the nation. GST is easy to
understand, and a simple tax structure will bring more taxpayers and in return, it will increase the revenue for the Indian
government.

Easy and straightforward tax structure:

Before GST, taxpayers needed to pay a lot of taxes, but with GST, a single tax system, only one tax needs to be paid, which is
comparatively easy and convenient to understand. For accounting, business complexities will reduce and result in less paperwork,
saving both money and time.
How Previous Indirect Tax Regime Lead to Tax on Tax?

Meet X Ltd, the Car Manufacturer

X Ltd is a car manufacturing unit that has experienced both the Pre and Post GST times. It had to deal with multiple taxes and
compliance under previous indirect tax regime. So let’s try to understand how X Ltd paid taxes under the indirect tax system prior
to GST.
X Ltd sold cars to a car dealer in Maharashtra in one of the transactions under previous indirect tax system. Following are the
taxes levied by Centre and State Government under the previous indirect tax system:
 The Central Government levied Central Excise Duty on the manufacture of cars
 State government of Maharashtra levied VAT/CST on the sale of bicycles
 Again, the State Government of Maharashtra levied Octroi on the entry of goods into a particular state

X Ltd Sold Cars to a Car Dealer

The first stage in the supply chain is the one when X Ltd sells the cars to a dealer in Maharashtra. Following are the details of such
a sale:
 Cost of each car = Rs. 5,00,000
 Excise Duty @ 10% = Rs. 50,000
 VAT @ 12% = Rs. 66,000
 Dealer Invoice = Rs. 6,16,000
Now, the car dealer paid both the excise duty and VAT to X Ltd. Then, X Ltd deposited the excise duty with the Central
Government and VAT with the Maharashtra Government.
Car Dealer Sells to End Consumer
The second stage in the supply chain is the one where the car dealer sells the cars to the end consumer. Following are the details of
such a sale:
 Cost of car of the car dealer = Rs. 5,50,000 (Cost of the Car + Excise Duty)
 Dealer’s Margin @ 10% = Rs. 55,000
 VAT @ 12% = Rs. 72,000 [5,50,000 + 55,000] * 12%
 Invoice = Rs. 6,77,600
Now, when the car dealer sells the car to the end consumer, he takes cost of car plus excise duty as the total cost of the car. He
then adds his dealer margin to the total cost to reach at the sales price. And finally on this sales price, he charges value added tax,
to work out the invoice price for the end consumer.
This was the scenario under previous indirect tax regime. If you look carefully, the car dealer takes Rs. 5,00,000 (cost) plus Rs
50,000 (excise) as his total cost, to which he adds his dealer’s margin to get the sales price of Rs. 6,05,000. A VAT amount of Rs
72,600 is further added to this sales price, leading the end consumer to pay tax on tax. [(cost + excise + margin)] * vat%. This is
what is called the cascading tax effect. With excise duty included in the cost of the car dealer, to which he adds his margin as well
as the VAT amount, the tax on tax effect tends to increase the price of the good under question for the end consumer.

Challenges Under Previous Indirect Tax Regime

Following were challenges faced by the stakeholders in the supply chain under the previous indirect tax regime:
 the car dealer could not take input credit of excise duty paid on purchase of the car
 there was no cross – utilization facility between goods and services. This meant that tax paid on input goods could not be
used to set off taxes payable on output services and vice versa.
 Also, car dealer could not use excise duty paid on inputs to set off the VAT payable on output.
As a result, the indirect tax regime meant multiple taxes for manufacturers and dealers in the supply chain and tax on tax for the
end consumer.
Now, let’s understand how GST advocates a unified national market and overcomes the cascading tax effect.

Indirect Tax Under GST

Let’s consider the same example and understand the indirect tax under GST.
X Ltd, the Car Manufacturer Sells to the Car Dealer
Now, the first stage in the supply chain under GST regime is the one where the manufacturer sells cars to the car dealer. So
following are the details of such a sale:
 Cost of the car Rs. 5,00,000
 Then, Central GST @ 11% = Rs. 55,000
 State GST @ 11% = Rs. 55,000 and
  Dealer Invoice = Rs. 6,10,000.
Now, the car manufacturer charges only GST on the sale of cars to the car dealer. Then, he collects tax from the car dealer and and
deposits it with the respective government. Furthermore, the tax amount so collected is divided between Central Goods and
Services Tax (CGST) and State Goods and Services Tax (SGST).
Car Dealer To End Consumer
The second stage in the supply chain is the one where the car dealer sells the cars to the end consumer. Following are the details of
such a sale:
 Dealer Cost = Rs 5,00,000
 Then, Dealer’s Margin @10% = Rs 50,000
 Sales Price = Rs. 5,50,000
 CGST@11% = Rs. 60,500
 SGST @11% = Rs. 60,500
 Invoice = Rs. 6,71,000
Thus, under GST, the end user is bound to pay Rs.6,71,000 (sales price plus GST) to the car dealer.
So let’s compare previous tax regime with the GST system. As we can see, all the stakeholders in the supply chain suffered under
the previous indirect tax regime. However, under GST, only the end consumer bears the burden of tax.
Benefit of GST to the Manufacturer
The manufacturer is not required to collect and charge multiple taxes such as excise duty and VAT.
Benefit of GST to the Dealer
The car dealer paid following Indirect Taxes under the previous indirect tax regime:
 Excise Duty = 50,000
 Then, VAT = 66,000
 Therefore, Total Tax = Rs. 1,16,000

Tax Paid Under GST

 CGST = Rs. 55,000
 Then, SGST = Rs. 55,000
 Therefore, total Tax Payable = Rs 1,10,000
Since input tax credit is available under GST, the input tax can be utilized to offset the tax payable on output.
Therefore, effective GST paid by the dealer to the government will be the difference between GST on Output and GST paid on
input.
Thus, Effective GST paid = (60,500 + 60,500) – (55,000 + 55,000) = 1,21,000 – 1,10,000 = Rs. 11,000
Benefit of GST to End User
Price paid under Indirect Tax Structure = Rs. 6,77,600
Price paid under GST = Rs. 6,71,000
Therefore, total price difference = Rs. 6,600

Advantages of GST
GST eliminates the cascading effect of tax
GST is a comprehensive indirect tax that was designed to bring indirect taxation under one umbrella. More importantly, it is going
to eliminate the cascading effect of tax that was evident earlier.
Cascading tax effect can be best described as ‘Tax on Tax’. Let us take this example to understand what is Tax on Tax:
Before GST regime
A consultant offering services for say, Rs 50,000 and charged a service tax of 15%
(Rs 50,000 * 15% = Rs 7,500).
Then say, he would buy office supplies for Rs. 20,000 paying 5% as VAT
(Rs 20,000 *5% = Rs 1,000).
He had to pay Rs 7,500 output service tax without getting any deduction of Rs 1,000 VAT already paid on stationery.
His total outflow is Rs 8,500.
Under GST
GST on service of Rs 50,000 @18% 9,000

Less: GST on office supplies (Rs 20,000*5%) 1,000

Net GST to pay 8,000

Higher threshold for registration

Earlier, in the VAT structure, any business with a turnover of more than Rs 5 lakh (in most states) was liable to pay VAT. Please
note that this limit differed state-wise. Also, service tax was exempted for service providers with a turnover of less than Rs 10
lakh.
Under GST regime, however, this threshold has been increased to Rs 20 lakh, which exempts many small traders and service
providers.
Let us look at this table below:

Tax Threshold Limits

Excise 1.5 crores

VAT 5 lakhs in most states

Service Tax 10 lakhs

GST 20 lakhs (10 lakhs for NE states)

Composition scheme for small businesses

Under GST, small businesses (with a turnover of Rs 20 to 75 lakh) can benefit as it gives an option to lower taxes by utilizing
the Composition scheme. This move has brought down the tax and compliance burden on many small businesses.
Simple and easy online procedure
The entire process of GST (from registration to filing returns) is made online, and it is super simple. This has been beneficial for
start-ups especially, as they do not have to run from pillar to post to get different registrations such as VAT, excise, and service
tax.
Our ClearTax GST software is already on a roll filing GST returns
The number of compliances is lesser
Earlier, there was VAT and service tax, each of which had its own returns and compliances. Below table shows the same:

Tax Return Filing

Excise Monthly

Service Tax Proprietorship / Partnership – Quarterly Company / LLP – Monthly

VAT * Different for different states *

Some states require monthly returns over a threshold limit.
Some states like Karnataka require a Monthly return

Under GST, however, there is just one, unified return to be filed. Therefore, the number of returns to be filed has come down.
There are about 11 returns under GST, out of which 4 are basic returns that apply to all taxable persons under GST. The main
GSTR-1 is manually populated and GSTR-2 and GSTR-3 will be auto-populated.

Defined treatment for E-commerce operators

Earlier to the GST regime, supplying goods through the e-commerce sector was not defined. It had variable VAT laws. Let us
look at this example:
Online websites (like Flipkart and Amazon) delivering to Uttar Pradesh had to file a VAT declaration and mention the registration
number of the delivery truck. Tax authorities could sometimes seize goods if the documents were not produced.
Again, these e-commerce brands were treated as facilitators or mediators by states like Kerala, Rajasthan, and West Bengal which
did not require them to register for VAT.
All these differential treatments and confusing compliances have been removed under GST. For the first time, GST has clearly
mapped out the provisions applicable to the e-commerce sector and since these are applicable all over India, there should be no
complication regarding the inter-state movement of goods anymore.
Read a more detailed analysis of the impact of GST on e-commerce.

Improved efficiency of logistics

Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid the current CST and state entry
taxes on inter-state movement. These warehouses were forced to operate below their capacity, giving room for increased operating
costs.
Under GST, however, these restrictions on inter-state movement of goods have been lessened.
As an outcome of GST, warehouse operators and e-commerce aggregators players have shown interest in setting up their
warehouses at strategic locations such as Nagpur (which is the zero-mile city of India), instead of every other city on their delivery
route.
Reduction in unnecessary logistics costs is already increasing profits for businesses involved in the supply of goods through
transportation.
Visit here to read more about the impact of GST on logistics.
Unorganized sector is regulated under GST
In the pre-GST era, it was often seen that certain industries in India like construction and textile were largely unregulated and
unorganized.
Under GST, however, there are provisions for online compliances and payments, and for availing of input credit only when the
supplier has accepted the amount. This has brought in accountability and regulation to these industries.
Let us now look at the disadvantages of GST. Please note that businesses need to overcome these disadvantages to run the
business smoothly.

Disadvantages of GST

Increased costs due to software purchase

Businesses have to either update their existing accounting or ERP software to GST-compliant one or buy GST software so that
they can keep their business going. But both the options lead to the increased cost of software purchase and training of employees
for efficient utilization of the new billing software.
ClearTax is the first company in India to have launched a ready-to-use GST software called Cleartax GST software. The software
is currently available for free for SMEs, helping them transition to GST smoothly. It has truly eased the pain of the people in so
many ways.

Not being GST-compliant can attract penalties

Small and medium-sized enterprises (SME) may still not be able to grasp the nuances of the GST tax regime. They will have to
issue GST-complaint invoices, be compliant with digital record-keeping, and of course, file timely returns. This means that the
GST-complaint invoice issued must have mandatory details such as GSTIN, place of supply, HSN codes, and others.
ClearTax has made it easier for SMEs with the ClearTax BillBook web application. This application is available for FREE until
the end of September and is an easy solution to this problem. This will help every business to issue GST-compliant invoices to its
customers. These same invoices can then be used for return filing through the ClearTax GST platform.

GST will mean an increase in operational costs

As we have already established that GST is changing the way how tax is paid, businesses will now have to employ tax
professionals to be GST-complaint. This will gradually increase costs for small businesses as they will have to bear the additional
cost of hiring experts.
Also, businesses will need to train their employees in GST compliance, further increasing their overhead expenses.

GST came into effect in the middle of the financial year

As GST was implemented on the 1st of July 2017, businesses followed the old tax structure for the first 3 months (April, May, and
June), and GST for the rest of the financial year.
Businesses may find it hard to get adjusted to the new tax regime, and some of them are running these tax systems parallelly,
resulting in confusion and compliance issues.

Adapting to a complete online taxation system

Unlike earlier, businesses are now switching from pen and paper invoicing and filing to online return filing and making payments.
This might be tough for some smaller businesses to adapt to.
Cloud-based GST billing software like the ClearTax GST Billing Software is definitely an answer to this problem. The process for
return filing on ClearTax GST is very simple. Business owners need to only upload their invoices, and the software will populate
the return forms automatically with the information from the invoices. Any errors in invoices will be clearly identified by the
software in real-time, thus increasing efficiency and timeliness.

SMEs will have a higher tax burden

Smaller businesses, especially in the manufacturing sector will face difficulties under GST. Earlier, only businesses whose
turnover exceeded Rs 1.5 crore had to pay excise duty. But now any business whose turnover exceeds Rs 20 lakh will have to pay
GST.
However, SMEs with a turnover upto Rs 75 lakh can opt for the composition scheme and pay only 1% tax on turnover in lieu of
GST and enjoy lesser compliances. The catch though is these businesses will then not be able to claim any input tax credit. The
decision to choose between higher taxes or the composition scheme (and thereby no ITC) will be a tough one for many SMEs.

Q.4. Constitution, powers and functions of the GST Council.

GST Council Constitution

According to Article 279A, it is on the part of the president to give the order to constitute the council of GST within 60 days from
the 12th of September 2016 which is already notified by the Government.
Following are the designated personnel, who will form the GST Council together:-
 The Union Finance Minister who will be the CHAIRMAN of the council;
 The Union Minister of State in charge of Revenue or Finance who will be the MEMBER of the council;
 ONE MEMBER from each state who is Minister in charge of Finance or Taxation or any other Minister and any one of
them will be VICE CHAIRMAN of the GST Council who will be mutually elected by them.
Note
 The Secretary of Revenue Department will work as EX-Officio Secretary to the GST Council,
 The Chairperson of the Central Board of Excise and Customs will be the permanent invitee in all the proceedings of the
GST Council who will not have voting rights.

Functions of the GST Council

The GST council will be supposed to make the recommendation to the Union and State on the following matters:-
 principles of levy, model Goods and Services Tax Laws, the appointment of Goods and Services Tax levied on supplies
in the course of Inter-State trade or commerce under article 269A, and the principles that govern the place of supply;
 for raising resources during any natural calamity or disaster, or any special rate or rates for a specified period, to raise
additional.
 as the Council may decide, any other matter relating to the goods and services tax.
 On subsuming various taxes, cess, and surcharges in GST.
 Details of services and goods that will be subjected to GST or which will be exempted from GST.
 On the Threshold limit below which, services and goods will be exempted from GST.
 On GST rates including floor rate with bands of GST and any special rate for time being to arrange resources to face any
natural calamity.
 Making special provisions for the following states: Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.
 On model law on GST, Principal of levy of GST and the principals which will govern the Place of Supply
Power of GST council only recommendatory in nature:
As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related
to GST, like
 a) The goods and services that may be subjected or exempted from GST.
 b) Principles that govern Place of Supply.
 c) Threshold limits.
 d) GST rates including the floor rates with bands, special rates for raising additional resources during natural
calamities/disasters or RNR
 e) Special provisions for certain States, etc.
 f) Transition Provisions
.

Q. Short notes on

1. GSTN:
Introduction
  The Goods and Services Tax Network (GSTN) is a private limited corporation that is non-profit and non-government. It
was incorporated in 2013.
 The government (Central and State) holds 49% equity in GSTN while private players hold the remaining 51% equity in
the GSTN.
 It was created primarily to provide IT infrastructure and services to the federal and state governments, as well as
taxpayers and other stakeholders, in order to ensure that the Goods and Services Tax is implemented smoothly.

Services provided by GSTN

 It facilitates registration including existing taxpayer migration.
 Payment management including payment Gateways and integration with banking systems.
 Return filing and processing.
 Input Tax Credit (ITC) matching, reversal of ITC.
 Settlement of Integrated Goods and Services tax.
 Taxpayer management, including account management, notifications, information, and status tracking.
 Maintenance of interfaces between the Common GST Portal and tax administration systems.

Advantages of GSTN
 It provides a single common portal for all GST related services such as Tax payer registration (new, surrender,
cancelation, amendment etc.), Invoice upload, auto-drafting of Purchase details of buyer, GST Returns filing on
stipulated dates for each type of return, Tax payment by creation of Challan and integration with agency Banks, etc.
 It also provides linkage to all State/UT Commercial Tax departments, Central Tax authorities, Taxpayers, Banks and
other stakeholders.

b) IGST :
What is IGST or Integrated Goods and Service Tax?
The full form of IGST is Integrated Goods and Service Tax. IGST (Integrated Goods and Service Tax) is a tax levied under the
GST regime on interstate (between two states) supplies of goods and/or services, as well as imports and exports. The IGST Act
governs the IGST. The Central Government is in charge of collecting taxes under the IGST. The Central Government divides the
proceeds of taxation among the various states after they have been collected. For example, if a trader who belongs to West Bengal
sells goods worth Rs.5,000 to a consumer in Karnataka, IGST will apply because the transaction is interstate. If the GST rate on
the goods sold would then be 18%, the merchant will have to charge Rs.5,900 as the final price for the goods sold. Let us look at
some advantages of IGST:
 It is a straightforward model that is transparent.
 Increases the country’s taxpayer process’s speed.
 IGST is the total of the CGST and the SGST.
 The documents do not need to be physically checked; they can be checked via the internet.
 There is no financial blockage.
Difference Between IGST and GST
There are a few differences between IGST and GST which are as follows:
 The primary distinction between IGST and GST is that Goods and Service Tax (GST) is a portion of income tax that
must be paid to the ‘deductor’ when a gain or loss is made in the sale of goods and services. IGST, on the other hand, is a
type of GST that must be paid by the vendor in the situation of interstate delivery of goods and services.
 GST (Goods and Services Tax) is an indirect national sales tax levied on the price of specific goods and services,
whereas IGST is a combination of State and Central Goods and Services Tax.
 GST removes the hassle caused by that the Cascading Effect, whereas IGST accelerates the country’s taxpayer process.

c)CGST

Authority who Priority of tax On what transaction is it applied?

utilizes the tax when used
Types of GST Who collects?

CGST Central Government CGST IGST Central Intrastate (within the state)
Government

SGST State Government SGST IGST State Government Intrastate (within the state)

IGST Both Central and IGST CGST Central Interstate (when the transaction
State Government SGST Government takes place between two different
states or UTs)

UTGST/UGST Government of UTGST Government of When the transaction takes place

Union Territory IGST Union Territory in a single UT.

What is CGST?
Central Goods and Service Tax or CGST is collected as well as levied by the Central Government. They levy it on the supply of
all services and goods in the state. The tax is not seen to be applicable if the supply occurs outside the boundaries of the state. As
discussed previously there are three major components of GST. These have been outlined in the following.
 State Goods and Service Tax or SGST
 Central Goods and Service Tax or CGST
 Integrated Goods and Service Tax or IGST
It can be particularly seen that the SGST and CGST apply to the services and goods in the state. Moreover, IGST applies to
services and goods supplied outside the boundary of the state. If the rates of SGST and CGST are combined then it is found to be
equal to the IGST rate.
CGST features
CGST has several important features. These have been outlined in the following.
 Levying of the CGST is done by the Central Government for replacing different existing taxes such as excise, service
tax, etc.
 The CGST credit is particularly available only against IGST and CGST.
 The CGST is applicable within the state only.
 The composition scheme benefits can be used by the dealer up to a turnover rate of 50 lakh.
 A Rs 20 Lakh exemption limit is applicable.
Features of 2017’s CGST act
The Features of the CGST act have been outlined in the following
The features of the CGST act of 2017 have been outlined in the following.
 Levying of tax should be done on each Intra-State supply of services and goods.
 The broadening of the input tax credits through making it available concerning tax paid on supply of services or goods or
both that have been used or it is intended that it will be used, for facilitating the business.
 The CGST Act of 2017 provides opportunities for self-assessment of the taxes which need to be paid by the already
registered person.
 It allows imposing of obligations on the operators of electronic commerce for collection of tax at the source, though not
exceeding the 1% value of the taxable supplies, out of payment for suppliers supplying services and goods through their
portals.
 CGST further allows conducting audits for registered persons for verifying compliance with the Act’s provisions.
 To provide power concerning seizure, inspection, arrest, and search to the officers.
 The CGST Act allows for the recovery of tax through several methods such as the sale and detaining of goods,
immovable and movable property of defaulting taxpayers, and so on.
 The act looks after making provisions for contraventions and penalties of the provisions over proposed legislation.
 The Act ensures to provide elaborate provisions of transition for the smooth transition of the present taxpayers who have
been paying taxes for goods and services.
 The CGST act strives to give an anti-profiteering clause. It ensures that the business passes on the reduced tax benefits
and incidence on services or goods or even both to the respective customers.
d) Registration procedure under GST and return filing procedure

Registration
Registration of any business entity under the GST Law implies obtaining a unique number from the concerned tax authorities for
the purpose of collecting tax on behalf of the government and to avail Input tax credit for the taxes on his inward supplies.
Without registration, a person can neither collect tax from his customers nor claim any input tax credit of tax paid by him.
Liability to register
GST being a tax on the event of “supply”, every supplier needs to get registered. However, small businesses having all India
aggregate turnover below Rupees 20 lakh (10 lakh if business is in Assam, Arunachal Pradesh, Himachal Pradesh, Uttarakhand,
Manipur, Mizoram, Sikkim, Meghalaya, Nagaland or Tripura) need not register. The small businesses, having turnover below the
threshold limit can, however, voluntarily opt to register.

Nature of Registration
The registration in GST is PAN based and State specific.
Supplier has to register in each of such State or Union territory from where he effects supply. In GST registration, the supplier is
allotted a 15-digit GST identification number called “GSTIN” and a certificate of registration incorporating therein this GSTIN is
made available to the applicant on the GSTN common portal. The first 2 digits of the GSTIN is the State code, next 10 digits are
the PAN of the legal entity, the next two digits are for entity code, and the last digit is check sum number. Registration under GST
is not tax specific which means that there is single registration for all the taxes i.e. CGST, SGST/UTGST, IGST and cesses.

A given PAN based legal entity would have one GSTIN per State, that means a business entity having its branches in multiple
States will have to take separate State wise registration for the branches in different States. But within a State an entity with
different branches would have single registration wherein it can declare one place as principal place of business and other
branches as additional place of business. However, a business entity having separate business verticals (as defined in section 2
(18) of the CGST Act, 2017) in a state may obtain separate registration for each of its business verticals. Further a unit in SEZ or a
SEZ developer needs to necessarily obtain separate registration.

• Generally, the liability to register under GST arises when you are a supplier within the meaning of the term, and
also if your aggregate turn over in the financial year is above the exemption threshold of 20 lakh rupees (10 lakh
rupees in special category states except J & K). However, the GST law enlists certain categories of suppliers
who are required to get compulsory registration irrespective of their turnover that is to say, the threshold
exemption of 20 lakh rupees or 10 lakh rupees as the case may be is not available to them. Some of such
suppliers who need to register compulsorily irrespective of the size of their turnover are those who are, -

• Inter-state suppliers; However, persons making inter-state supplies of taxable services and having an aggregate
turnover, to be computed on all India basis, not exceeding an amount of twenty lakh rupees (ten lakh rupees for
special category States except J & K) are exempted from obtaining registration vide Notification No. 10/2017-
Integrated Tax dated 13.10.2017.

• A person receiving supplies on which tax is payable by recipient on reverse charge basis

• Casual taxable person who is not having fixed place of business in the State or Union Territory from where he
wants to make supply. However casual taxable persons making supplies of specified handicraft goods need not
take compulsory registration and are entitled to the threshold exemption of Rs. 20 Lakh. Handicraft goods are
specified in Notification no. 33/2017-Central Tax dated 15.09.2017 as amended by Notification no. 38/2017-
Central Tax dated 13.10.2017.
• non-resident taxable persons who is not having fixed place of business in India
• A person who supplies on behalf of some other taxable person (i.e. an Agent of some Principal)
• E-commerce operators, who provide platform to the suppliers to make supply through it
• Suppliers of goods who supply through such e-commerce operator who are liable to collect tax at source.
Persons supplying services through e-commerce operators need not take compulsory registration and are entitled
to avail the threshold exemption of Rs. 20 Lakh as per Notification No. 65/2017-Central tax dated 15.11.2017.
• • Those ecommerce operators who are notified as liable for GST payment under Section 9(5) of the CGST Act,
2017
• TDS Deductor
• Input service distributor
• Those supplying online information and data base access or retrieval services from outside India to a non-
registered person in India.
A casual taxable person is one who has a registered business in some State in India, but wants to effect supplies from some other
State in which he is not having any fixed place of business. Such person needs to register in the State from where he seeks to
supply as a casual taxable person. A non-resident taxable person is one who is a foreigner and occasionally wants to effect taxable
supplies from any State in India, and for that he needs GST registration.
Law prescribes special procedure for registration, as also for extension of the operation period of such casual or nonresident
taxable persons. They have to apply for registration at least five days in advance before making any supply. Also, registration is
granted to them or period of operation is extended only after they make advance deposit of the estimated tax liability.
In respect of supplies to some notified agencies of United Nations organisation, multinational financial institutions and other
organisations, a centralised unique identification number (UIN) is issued.

Standardisation of procedures
A total of 30 forms / formats have been prescribed in the GST registration rules. For every process in the registration chain such as
application for registration, acknowledgment, query, rejection, registration certificate, show cause notice for cancellation, reply,
cancellation, amendment, field visit report etc., there are standard formats. This will make the process uniform all over the
country. The decision making process will also be fast. Strict time lines have been stipulated for completion of different stages of
registration process.
An application has to be submitted on line through the common portal (GSTN) within thirty days from the date when liability to
register arose. The casual and non-resident taxable persons need to apply at least five days prior to the commencement of the
business. For transferee of a business as going concern, the liability to register arises on the date of transfer.
The Proper Officer has to either raise a query or approve the grant of registration within three working days failing which
registration would be considered as deemed to have been approved. The applicant would have to respond within seven working
days starting from the fourth day of filing the original application. The proper officer would have to grant or reject the application
for registration within seven working days thereafter.

Amendment of Registration
Except for the changes in some core information in the registration application, a taxable person shall be able to make
amendments without requiring any specific approval from the tax authority. In case the change is for legal name of the business,
or the State of place of business or additional place of business, the taxable person will apply for amendment within 15 days of the
event necessitating the change. The proper officer, then, will approve the amendment within next 15 days. For other changes like
name of day to day functionaries, e-mail Ids, Mobile numbers etc. no approval of the proper officer is required, and the
amendment can be affected by the taxable person on his own on the common portal.
Generally, the amendments take effect from the date of application for amendment. Commissioner, however, has been given
powers to permit amendments with retrospective effect.

Cancellation of Registration
The GST law provides for two scenarios where cancellation of registration can take place; the one when the taxable person no
more requires it (voluntary cancellation), and another when the proper officer considers the registration liable for cancellation in
view of certain specified defaults (Suo-motu cancellation) like when the registrant is not doing business from the registered place
of business or if he issues tax invoice without making the supply of goods or services. The taxable person desirous of cancellation
of Registration will apply on the common portal within 30 days of event warranting cancellation. He will also declare in the
application the stock held on the date with effect from which he seeks cancellation. He will also work out and declare the quantum
of dues of payments and credit reversal, and the particulars of payments made towards discharge of such liabilities. In case of
voluntary registration (taken despite not being liable for obtaining registration), no cancellation is allowed until expiry of one year
from the effective date of registration. If satisfied, the proper officer has to cancel the registration within 30 days from the date of
application or the date of reply to notice (if issued, when rejection is concluded by the officer).

Revocation of Cancellation
In case where registration is cancelled suo-motu by the proper officer, the taxable person can apply within 30 days of service of
cancellation order, requesting the officer for revoking the cancellation ordered by him. However, before so applying, the person
has to make good the defaults (by filing all pending returns, making payment of all dues and so) for which the registration was
cancelled by the officer.
If satisfied, the proper officer will revoke the cancellation earlier ordered by him. However, if the officer concludes to reject the
request for revocation of cancellation, he will first observe the principle of natural justice by way of issuing notice to the person
and hearing him on the issue.

Physical verification in connection with registration

Physical verification is to be resorted to only where it is found necessary in the subjective satisfaction of the proper officer. If at
all, it is felt necessary, it will be undertaken only after granting the registration and the verification report along with the
supporting documents and photographs shall have to be uploaded on the common portal within fifteen working days.

RETURN FILING PROCEDURE

You can file the GST return online as follows.
Step 1: Register for GSTIN
For those taxpayers who are not registered, you need to register to get the GSTIN number. It is a 15-digit number that is
generated based on your state code of operation and PAN.
Step 2: Log in to the GST portal
You must log in to the GST portal (https://www.gst.gov.in/) using your username and password and then click on the tab
called ‘Services’.
Step 3: Returns dashboard
You will see an option called the ‘Returns dashboard’. Click on that. You will be asked to choose a financial year for
which you are filing the GST return. Choose the appropriate one from the drop-down menu provided.
Step 4: Prepare online
You must then select the return you wish to file. You will be given options of how you wish to file. For the online GST
return process, click on the ‘Prepare Online’ option.
Step 5: Enter details
You will need to enter all the details correctly in the fields provided. Note that if you have any pending late fees, you
must fill in the details of that as well when you are filing your GST returns. Next, you need to save the form and then
submit it.
Step 6: Check submission status
When the GST return form has been submitted, you need to ensure the status of the GST return has been changed to
‘Submitted’.
Step 7: Tax payment
When the status shows the return has been submitted, then you need to click on ‘Payment of Tax.’ You will see a ‘Check
Balance’ option which you need to click. The balance shown will reveal the credit and cash balance.
Step 8: Offset liability
You must click on the option that says ‘Offset Liability’ to make the GST payment online in a few minutes. You need to
then check the relevant boxes for declaration purposes. Then click on ‘File Form with DSC’/’File Form with EVC’ and
then make the payment.
There are numerous GST return forms available and filling each can have additional steps or even lesser steps than the
general steps outlined above. The details of how to fill in the details can be found on the official GST website. Before
you fill out any GST form, you should keep all the information and details close by. Using a software solution such as
TallyPrime is advised to ensure no errors are made during filing the return process.
Who Should File GST Return
According to the GST Act, a taxable person has established a business in India, in any state, and is eligible to be
registered under the act. This person must be a part of a trade or commerce or any economic activity. This includes local
authority, LLP, HUF, individuals, cooperative society, trust, and an AOP/BOI. All such entities must then file GST
returns as specified by the GST scheme.
The GST regime has stated that all businesses need to file GST returns but the frequency of the returns and when to file
depends on the total annual turnover and the type of business. The businesses that have an aggregate turnover of up to
Rs. 5 crores can choose to file their GST returns under the QRMP scheme. They will need to file 9 GST returns per year;
4 GSTR-1 returns, 4 GSTR-3B returns, and one annual return must be submitted.
The businesses that have an aggregate annual turnover of over Rs. 5 crores and those who have not chosen the QRMP
scheme are required to file GST returns twice per month. Moreover, they must file one annual return. That makes up a
total of 25 GST returns per year. Note that in many cases such as composition dealers, there are other returns required to
be filed and submitted according to the GST regime.

Q.Explain the provisions relating to computation of income under the head 'salary'

The provisions pertaining to Income under the head “Salaries” are contained in sections 15, 16 and 17.
Basis of charge (Section 15)
 Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever
is earlier.
 However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax
in the year in which it becomes due.
 If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid.
(1) Advance salary
Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so
happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the
employee is assessed may be higher than the normal rate of tax to which he would have been assessed.
(2) Arrears of salary
Normally speaking, salary arrears must be charged on due basis.
Points to consider:
a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.
b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this
head.
c) Income from salary taxable during the year shall consists of following:
i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;
ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;
iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not
charged to tax in any earlier year;
Exceptions - Remuneration, bonus or commission received by a partner from the firm is not taxable under the head
Salaries rather it would be taxable under the head business or profession.
Salary, perquisite and profits in lieu of salary (Section 17)
Meaning
The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally understood. The term
‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus,
commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest
free loans etc.).
Section 17(1) defined the term “Salary”. It is an inclusive definition and includes monetary as well as non-monetary
items.
‘Salary’ under section 17(1), includes the following:
1. wages,
2. any annuity or pension,
3. any gratuity,
4. any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
5. any advance of salary,
6. any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment,
7. Provident Fund: - the portion of the annual accretion in any previous year to the balance at the credit of an employee
participating in a recognized provident fund to the extent it is taxable and - transferred balance in recognized provident
fund to the extent it is taxable,
8. The contribution made by the Central Government or any other employer in the previous year to the account of an
employee under a pension scheme referred to in section 80CCD.
Allowances

Fully Taxable Partly Taxable Fully Exempt

(i) Entertainment Allowance (i) House Rent Allowance [u/s (i) Allowance granted to
(ii) Dearness Allowance 10(13A)] Government employees outside
(iii) Overtime Allowance (ii) Special Allowances [u/s India.
(iv) Fixed Medical Allowance 10(14)] (ii) Allowance granted to High
(v) City Compensatory Court Judges
Allowance (to meet increased (iii) Sumptuary allowance
cost of living in cities) granted to High Court or
(vi) Interim Allowance Supreme Court Judges
(vii) Servant Allowance (iv) Allowance paid by the
(viii) Project Allowance United Nations Organization
(ix) Tiffin/Lunch/Dinner (v) Compensatory Allowance
 Allowance received by a judge
(x) Any other cash allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance
Understanding the allowances
House rent allowance (HRA)
HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence
of the employee. HRA granted to an employee is exempt to the extent of least of the following:
The deduction available is the least of the following amounts:
1. Actual HRA received;
2. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
3. Actual rent paid less 10% of basic salary + DA

Children education allowance

-Rs. 100 per month per child upto a maximum of two children.
Any allowance granted to an employee to meet the hostel expenditure on his child
-Rs. 300 per month per child upto a maximum of two children.
Transport allowance
Any transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place
of his residence and the place of his duty shall be exempted to the extent of 1,600 per month. For person who is blind or
deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his
expenditure for commuting between his residence and place of duty shall be exempted to the extent of 3,200 per month.
City compensatory allowance
City Compensatory Allowance is normally intended to compensate the employees for the higher cost of living in cities. It
is taxable irrespective of the fact whether it is given as compensation for performing his duties in a particular place or
under special circumstances.
Entertainment allowance
This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. The Act gives
a deduction towards entertainment allowance only to a Government employee.
Allowances which are fully exempt
(1) Allowances granted to Government employees outside India
Allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for services
rendered outside India are exempt from tax. Students may remember that in such cases under section 9(1)(iii), the income
chargeable under the head ‘Salaries’ is deemed to accrue in India. The residential status of the recipient will, however,
not affect this exemption.
(2) Allowance to High Court Judges
Any allowance paid to a Judge of a High Court under section 22A(2) of the High Court Judges (Conditions of Service)
Act, 1954 is not taxable.
(3) Sumptuary allowance granted to High Court or Supreme Court Judges
Sumptuary allowance given to High Court Judges under section 22C of the High Court Judges (Conditions of Service)
Act, 1954 and Supreme Court Judges under section 23B of the Supreme Court Judges (Conditions of Service) Act, 1958
is not chargeable to tax.
(4) Allowance paid by the United Nations Organisation (UNO)
Allowance paid by the UNO to its employees is not taxable by virtue of section 2 of the United Nations (Privileges and
Immunities) Act, 1947.
(5) Compensatory allowance received by a judge
Compensatory allowance received by judge under Article 222(2) of the Constitution is not taxable since it is neither
salary not perquisite—Bishamber Dayalv. CIT [1976] 103 ITR 813 (MP).
Understanding annuity or pension
Meaning of annuity
As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable in respect of a particular year. It is a yearly
grant. If a person invests some money entitling him to series of equal annual sums, such annual sums are annuities in the
hands of the investor.
Annuity received from a present employer is to be taxed as salary. It does not matter whether it is paid in pursuance of a
contractual obligation or voluntarily.
Annuity received from a past employer is taxable as profit in lieu of salary.
 Annuity received from person other than an employer is taxable as “Income from other sources”
Pension
Pension is of two types: commuted and uncommuted.
 Uncommuted Pension:Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of
both government and non-government employees.
 Commuted Pension: Commutation means inter-change. Commuted pension means lump sum amount taken by
commuting the whole or part of the pension. Many persons convert their future right to receive pension into a lumpsum
amount receivable immediately.
Exemption in respect of Commuted Pension
(a) Employees of the Central Government/local authorities/Statutory Corporation/ members of the Defence Services:
Any commuted pension received is fully exempt from tax.
(b) Non-Government Employee: Any commuted pension received is exempt from tax in the following manner:
If the employee is in receipt of gratuity,
Exemption = 1/3rd of the amount of pension which he would have received had he commuted the whole of the pension.
If the employee does not receive any gratuity
Exemption = ½ of the amount of pension which he would have received had he commuted the whole of the pension.
Understanding gratuity
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee. Now-a-days,
gratuity has become a normal payment applicable to all employees. In fact, the Payment of Gratuity Act, 1972 is a
statutory recognition of the concept of gratuity. Almost all employers enter into an agreement with employees to pay
gratuity.

Exemption in respect of Gratuity

Fees, commission, perquisite or profits in lieu of or in addition to any salary or wages

Payment in the form of fees or commission by the employer to the employee are fully taxable. Commission may be paid
as fixed percentage of turnover or net profits etc. Section 17(2) and 17(3) contains the provisions relating to perquisites
and profits in lieu of salary, respectively.
Leave salary or leave encashment
Generally, employees are allowed leaves during the period of service. Employee may avail such leaves or in case the
leaves are not availed, then the leaves may either be lapsed or accumulated for future or may be allowed to be encashed
every year or at the time termination/retirement. The payment received on account of encashment of unavailed leave
would be form part of salary.

Exemption in respect of leave encashment

Understanding provident fund
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement.
Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The
employer also generally contributes the same amount out of his pocket, to the fund. The contribution of the employer and
the employee are invested in approved securities. Interest earned thereon is also credited to the account of the employee.
Thus, the credit balance in a provident fund account of an employee consists of the following:
(i) Employee’s contribution
(ii) Interest on employee’s contribution
(iii) Employer’s contribution
(iv) Interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of death of the
employee, the same is paid to his legal heirs.

Contribution under pension scheme referred to in section 80CCD

National Pension scheme is a scheme approved by the Government for Indian citizen aged between18-60 years.
Subscriber of the NPS account contributes some amount in their account. In case of any employee, being a subscriber of
the NPS account, employer may also contribute into the employee’s account.
Employer’s contribution to NPS account would form part of salary of employees.
However, while computing total income of the employee-assessee, a deduction under section 80CCD is allowed to the
assessee in respect of the employer as well as employee contribution under a pension scheme referred therein.
Profits in lieu of salary
(i) Compensation on account of termination of his employment
The amount of any compensation due to or received by an assessee from his employer or former employer at or in
connection with the termination of his employment.
(ii) Compensation on account of modification of the terms and conditions of employment
 The amount of any compensation due to or received by an assessee from his employer or former employer at or in
connection with the modification of the terms and conditions of employment. Usually, such compensation is treated as a
capital receipt. However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as salary
(iii) Payment from provident fund or other fund
Any payment due to or received by an assessee from his employer or former employer from a provident or other fund
other than Gratuity, Pension, Compensation received by a workman under Industrial Disputes Act, 1947, from provident
fund or public provident fund, from recognized provident fund, from approved superannuation fund, any House Rent
Allowance, to the extent to which it does not consist of employee’s contributions or interest on such contributions.
(iv) Keyman Insurance policy
Any sum received by an assessee under a Keyman Insurance policy including the sum allocated by way of bonus on such
policy.
(v) Lumpsum Payment or otherwise
Any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from any person –
(a) before joining employment with that person, or
(b) after cessation of his employment with that person.
UNDERSTANDING DEDUCTIONS FROM SALARY
Standard deduction
Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance
and medical allowance. The employee can now claim a flat Rs. 40,000 deduction from the total income, thereby reducing
the tax outgo.
Entertainment allowance
Entertainment allowance received is fully taxable and is first to be included in the salary and thereafter the following
deduction is to be made:
However, deduction in respect of entertainment allowance is available in case of Government employees. The amount of
deduction will be lower of:
i. One-fifth of his basic salary or
ii. 5,000 or
iii. Entertainment allowance received.
Amount actually spent by the employee towards entertainment out of the entertainment allowance received by him is not
a relevant consideration at all.
Professional tax on employment
Professional tax or taxes on employment levied by a State under Article 276 of the Constitution is allowed as deduction
only when it is actually paid by the employee during the previous year.
If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first
included as salary income and then allowed as a deduction u/s 16.
Relief under section 89
(1) On account of arrears of salary or advance salary: Where by reason of any portion of an assessee’s salary being
paid in arrears or in advance or by reason of his having received in any one financial year, salary for more than twelve
months or a payment of profit in lieu of salary under section 17(3), his income is assessed at a rate higher than that at
which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf,
grant such relief as prescribed. The procedure for computing the relief is given in Rule 21A.
(2) On account of family pension: Similar tax relief is extended to assessees who receive arrears of family pension as
defined in the Explanation to clause (iia) of section 57. “Family pension” means a regular monthly amount payable by
the employer to a person belonging to the family of an employee in the event of his death.
(3) No relief at the time of Voluntary retirement or termination of service: No relief shall be granted in respect of
any amount received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance
with any scheme or schemes of voluntary retirement or a scheme of voluntary separation (in the case of a public sector
company), if exemption under section 10(10C) in respect of such compensation received on voluntary retirement or
termination of his service or voluntary separation has been claimed by the assessee in respect of the same assessment
year or any other assessment year.
The provisions pertaining to Income under the head “Salaries” are contained in sections 15, 16 and 17.
Basis of charge (Section 15)
 Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever
is earlier.
 However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax
in the year in which it becomes due.
 If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid.
(1) Advance salary
 Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so
happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the
employee is assessed may be higher than the normal rate of tax to which he would have been assessed.
(2) Arrears of salary
Normally speaking, salary arrears must be charged on due basis.
Points to consider:
a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.
b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this
head.
c) Income from salary taxable during the year shall consists of following:
i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;
ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;
iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not
charged to tax in any earlier year;
Exceptions - Remuneration, bonus or commission received by a partner from the firm is not taxable under the head
Salaries rather it would be taxable under the head business or profession.
Salary, perquisite and profits in lieu of salary (Section 17)
Meaning
The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally understood. The term
‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus,
commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest
free loans etc.).
Section 17(1) defined the term “Salary”. It is an inclusive definition and includes monetary as well as non-monetary
items.
‘Salary’ under section 17(1), includes the following:
1. wages,
2. any annuity or pension,
3. any gratuity,
4. any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
5. any advance of salary,
6. any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment,
7. Provident Fund: - the portion of the annual accretion in any previous year to the balance at the credit of an employee
participating in a recognized provident fund to the extent it is taxable and - transferred balance in recognized provident
fund to the extent it is taxable,
8. The contribution made by the Central Government or any other employer in the previous year to the account of an
employee under a pension scheme referred to in section 80CCD.

Allowances
Fully Exempt
Fully Taxable Partly Taxable

(i) Entertainment Allowance (i) House Rent Allowance [u/s (i) Allowance granted to
(ii) Dearness Allowance 10(13A)] Government employees outside
(iii) Overtime Allowance (ii) Special Allowances [u/s India.
 (iv) Fixed Medical Allowance 10(14)] (ii) Allowance granted to High
(v) City Compensatory Court Judges
Allowance (to meet increased (iii) Sumptuary allowance
cost of living in cities) granted to High Court or
(vi) Interim Allowance Supreme Court Judges
(vii) Servant Allowance (iv) Allowance paid by the
(viii) Project Allowance United Nations Organization
(ix) Tiffin/Lunch/Dinner (v) Compensatory Allowance
Allowance received by a judge
(x) Any other cash allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance
Understanding the allowances
House rent allowance (HRA)
HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence
of the employee. HRA granted to an employee is exempt to the extent of least of the following:
The deduction available is the least of the following amounts:
1. Actual HRA received;
2. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
3. Actual rent paid less 10% of basic salary + DA
For detailed discussion and calculation of HRA exempted, Click Here
Children education allowance
-Rs. 100 per month per child upto a maximum of two children.
Any allowance granted to an employee to meet the hostel expenditure on his child
-Rs. 300 per month per child upto a maximum of two children.
Transport allowance
Any transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place
of his residence and the place of his duty shall be exempted to the extent of 1,600 per month. For person who is blind or
deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his
expenditure for commuting between his residence and place of duty shall be exempted to the extent of 3,200 per month.
City compensatory allowance
City Compensatory Allowance is normally intended to compensate the employees for the higher cost of living in cities. It
is taxable irrespective of the fact whether it is given as compensation for performing his duties in a particular place or
under special circumstances.
Entertainment allowance
This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. The Act gives
a deduction towards entertainment allowance only to a Government employee.
Allowances which are fully exempt
(1) Allowances granted to Government employees outside India
Allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for services
rendered outside India are exempt from tax. Students may remember that in such cases under section 9(1)(iii), the income
chargeable under the head ‘Salaries’ is deemed to accrue in India. The residential status of the recipient will, however,
not affect this exemption.
(2) Allowance to High Court Judges
Any allowance paid to a Judge of a High Court under section 22A(2) of the High Court Judges (Conditions of Service)
Act, 1954 is not taxable.
(3) Sumptuary allowance granted to High Court or Supreme Court Judges
Sumptuary allowance given to High Court Judges under section 22C of the High Court Judges (Conditions of Service)
Act, 1954 and Supreme Court Judges under section 23B of the Supreme Court Judges (Conditions of Service) Act, 1958
is not chargeable to tax.
(4) Allowance paid by the United Nations Organisation (UNO)
Allowance paid by the UNO to its employees is not taxable by virtue of section 2 of the United Nations (Privileges and
Immunities) Act, 1947.
(5) Compensatory allowance received by a judge
Compensatory allowance received by judge under Article 222(2) of the Constitution is not taxable since it is neither
salary not perquisite—Bishamber Dayalv. CIT [1976] 103 ITR 813 (MP).
Understanding annuity or pension
 Meaning of annuity
As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable in respect of a particular year. It is a yearly
grant. If a person invests some money entitling him to series of equal annual sums, such annual sums are annuities in the
hands of the investor.
Annuity received from a present employer is to be taxed as salary. It does not matter whether it is paid in pursuance of a
contractual obligation or voluntarily.
Annuity received from a past employer is taxable as profit in lieu of salary.
Annuity received from person other than an employer is taxable as “Income from other sources”
Pension
Pension is of two types: commuted and uncommuted.
 Uncommuted Pension:Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of
both government and non-government employees.
 Commuted Pension: Commutation means inter-change. Commuted pension means lump sum amount taken by
commuting the whole or part of the pension. Many persons convert their future right to receive pension into a lumpsum
amount receivable immediately.
Exemption in respect of Commuted Pension
(a) Employees of the Central Government/local authorities/Statutory Corporation/ members of the Defence Services:
Any commuted pension received is fully exempt from tax.
(b) Non-Government Employee: Any commuted pension received is exempt from tax in the following manner:
If the employee is in receipt of gratuity,
Exemption = 1/3rd of the amount of pension which he would have received had he commuted the whole of the pension.
If the employee does not receive any gratuity
Exemption = ½ of the amount of pension which he would have received had he commuted the whole of the pension.
Understanding gratuity
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee. Now-a-days,
gratuity has become a normal payment applicable to all employees. In fact, the Payment of Gratuity Act, 1972 is a
statutory recognition of the concept of gratuity. Almost all employers enter into an agreement with employees to pay
gratuity.
Exemption in respect of Gratuity

Fees, commission, perquisite or profits in lieu of or in addition to any salary or wages

Payment in the form of fees or commission by the employer to the employee are fully taxable. Commission may be paid
as fixed percentage of turnover or net profits etc. Section 17(2) and 17(3) contains the provisions relating to perquisites
and profits in lieu of salary, respectively.
Leave salary or leave encashment
Generally, employees are allowed leaves during the period of service. Employee may avail such leaves or in case the
leaves are not availed, then the leaves may either be lapsed or accumulated for future or may be allowed to be encashed
every year or at the time termination/retirement. The payment received on account of encashment of unavailed leave
would be form part of salary.
Exemption in respect of leave encashment

Understanding provident fund

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement.
Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The
employer also generally contributes the same amount out of his pocket, to the fund. The contribution of the employer and
the employee are invested in approved securities. Interest earned thereon is also credited to the account of the employee.
Thus, the credit balance in a provident fund account of an employee consists of the following:
(i) Employee’s contribution
(ii) Interest on employee’s contribution
(iii) Employer’s contribution
(iv) Interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of death of the
employee, the same is paid to his legal heirs.

Contribution under pension scheme referred to in section 80CCD

National Pension scheme is a scheme approved by the Government for Indian citizen aged between18-60 years.
Subscriber of the NPS account contributes some amount in their account. In case of any employee, being a subscriber of
the NPS account, employer may also contribute into the employee’s account.
Employer’s contribution to NPS account would form part of salary of employees.
However, while computing total income of the employee-assessee, a deduction under section 80CCD is allowed to the
assessee in respect of the employer as well as employee contribution under a pension scheme referred therein.
Profits in lieu of salary
(i) Compensation on account of termination of his employment
The amount of any compensation due to or received by an assessee from his employer or former employer at or in
connection with the termination of his employment.
(ii) Compensation on account of modification of the terms and conditions of employment
 The amount of any compensation due to or received by an assessee from his employer or former employer at or in
connection with the modification of the terms and conditions of employment. Usually, such compensation is treated as a
capital receipt. However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as salary
(iii) Payment from provident fund or other fund
Any payment due to or received by an assessee from his employer or former employer from a provident or other fund
other than Gratuity, Pension, Compensation received by a workman under Industrial Disputes Act, 1947, from provident
fund or public provident fund, from recognized provident fund, from approved superannuation fund, any House Rent
Allowance, to the extent to which it does not consist of employee’s contributions or interest on such contributions.
(iv) Keyman Insurance policy
Any sum received by an assessee under a Keyman Insurance policy including the sum allocated by way of bonus on such
policy.
(v) Lumpsum Payment or otherwise
Any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from any person –
(a) before joining employment with that person, or
(b) after cessation of his employment with that person.

UNDERSTANDING DEDUCTIONS FROM SALARY

Standard deduction
Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance and medical
allowance. The employee can now claim a flat Rs. 40,000 deduction from the total income, thereby reducing the tax outgo.
Entertainment allowance
Entertainment allowance received is fully taxable and is first to be included in the salary and thereafter the following deduction is
to be made:
However, deduction in respect of entertainment allowance is available in case of Government employees. The amount of
deduction will be lower of:
i. One-fifth of his basic salary or
ii. 5,000 or
iii. Entertainment allowance received.
Amount actually spent by the employee towards entertainment out of the entertainment allowance received by him is not a
relevant consideration at all.

Professional tax on employment

Professional tax or taxes on employment levied by a State under Article 276 of the Constitution is allowed as deduction only when
it is actually paid by the employee during the previous year.
If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included
as salary income and then allowed as a deduction u/s 16.

Relief under section 89

(1) On account of arrears of salary or advance salary: Where by reason of any portion of an assessee’s salary being paid in
arrears or in advance or by reason of his having received in any one financial year, salary for more than twelve months or a
payment of profit in lieu of salary under section 17(3), his income is assessed at a rate higher than that at which it would otherwise
have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as prescribed. The
procedure for computing the relief is given in Rule 21A.
(2) On account of family pension: Similar tax relief is extended to assessees who receive arrears of family pension as defined in
the Explanation to clause (iia) of section 57. “Family pension” means a regular monthly amount payable by the employer to a
person belonging to the family of an employee in the event of his death.
(3) No relief at the time of Voluntary retirement or termination of service: No relief shall be granted in respect of any amount
received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance with any scheme or
schemes of voluntary retirement or a scheme of voluntary separation (in the case of a public sector company), if exemption under
section 10(10C) in respect of such compensation received on voluntary retirement or termination of his service or voluntary
separation has been claimed by the assessee in respect of the same assessment year or any other assessment year.

Q.Concept of "income" as envisaged u/s 2 (24) of the IT Act, 1961.Explain the exempted incomes under the Income Tax Act,
1961. Is agricultural also exempted?
Income is the money an individual receives in compensation for their work, services, or investments. For businesses, Income
means revenue that a business generates by selling its goods and services. Revenue is the money earned by a company from
selling goods or services throughout its operations.

The definition and explanation of income is given 2(24) of the Income Tax Act, 1961. Income under Indian Tax law encompasses
every aspect of Gross Income, including all sources of revenue, and taxable income, which is gross income minus expenses and
other adjustments. Income from all sources and in any form, for example, money and property, is derived, adjusted, and lowered
by permissible deductions. It’s the amount of money that’s susceptible to income tax.

To make the exhaustive definition of Income under the Income tax act comprehensible. The Income can be divided into a total of
five categories.
 Income From Salary
The first category of income is salary, which includes any remuneration an individual receives in exchange for services rendered
under a contract of employment. This sum qualifies for income tax consideration only if an employer-employee relationship exists
between the payer and the payee. The salary; advance compensation, pension, commission, gratuity, perquisites, and annual bonus
should all be included in the salary. Salary is taxable on the due or received basis, whichever is earlier.
The complete amount or gross salary is taxed after making a total aggregate of the total amount of income excluding the
exemptions if any are present.
All basic salary, as well as commissions and bonuses, are subject to full taxation.
Under this head salary includes various allowances such as;
Leave travel allowance: When you go on a holiday, the expense required for travel is a leave Travel allowance or LTA. Because
this is paid, it is tax-free twice over four years.
Conveyance Allowance: Up to Rs 800 a month is exempt from tax. House rent allowance: HRA can be claimed to lower taxes by
individuals who live in a rented house.
Medical allowance: Medical expenses up to Rs 15000 per annum is tax-free. The medical expense of the individual and the
family of the individual is included.

 Income From House Property:

In terms of income tax, a vacant residential property is considered self-occupied. When a taxpayer owns more than one self-
occupied house, only one is classified as house property. Rest is regarded as let out. Taxes are imposed on any commercially
owned residence or property.
A few conditions must be met in order for income from housing property to be taxable.
1. A house, a building, or any land must be included in the house property
2. The taxpayer should be an owner of the property.
3. he taxpayer may not use the residential property for any company or professional purposes that he or she is involved
in.
4. When these conditions are met, the income generated by a home property becomes chargeable and subject to tax
deduction.

 Income from Business or Profession

The money earned through the profits of a business or profession will be included to the computation of total income. The
difference between the revenue collected and the expenses is charged.
Income derived from the practice of trade or commerce or by services of a professional is also subject to taxation. Profits
from the sale of imported goods, incentives, any interest, any wage or bonus, and a commission from a business are all taxed
under the Income Tax Act’s head of income.

The income that may be taxed under this heading.

1. All the profits earned during an assessment year.
2. Profits, salary or bonus received from working as a partner in a firm.
3. Profits from an organization’s revenue.
4. Profits made from the selling of a specific licence.
5. Cash received as a result of an individual’s export under a government scheme.

 Income from Capital Gains

Profits or gains obtained by an Individual from the sale or transfer of a capital asset are referred to as capital gains. Capital gains
are earned on an investment made by an individual for a business or profession. Capital gains includes income earned from
investments in mutual funds, equities, real estate, and other assets.
There are total two types of gains short term and long term capital gains. Short-term capital gains are profits earned when an
individual sells an asset within 36 months (3 years) of acquiring it. Long Term Capital Gains are the profits made on an asset
transfer after 36 months (3 years) from the day of acquiring it.

 Income from other Sources

This category includes all other type of income that does not fit into the above categories. This category includes income earned
through interest on bank deposits, prizes, card games, gambling, and other sports prizes. Money obtained in excess of Rs. 50,000
from a third party who is not a relative, spouse, or if the money was gained by inheritance or will. All these sources are eligible for
tax under section 56(2) of the income tax act.
Income under the above heads is considered as Income for tax purposes. The taxation and Income of an individual may vary in
each Financial year. Once it’s known under which head the Income falls, it becomes easy to understand and plan taxes.

Exempted incomes under the IT Act, 1961.

Before delving into the exemptions enumerated under Section 10 of the Act, it is crucial to clear up a common confusion between
the terms exemptions, deductions and rebate related to income tax payments. The following table briefly portrays the differences
between these terms:

Exemptions Deductions Rebate

Rebate is the percentage of the

Exemptions are claimed or provided
based on the person’s source of income
as laid down under Section 10 of the
Act.
Deductions are permitted based on
amount reduced from the total
investments or payments made as
amount of income tax payable as
laid down in Chapter VI-A of the
laid down under Chapter VIII of
Act.
the Act.

The exemptions do not fall under the
purview of total taxable income of the
assessee. In other words, for
computation of gross total income, the
exempted income is not considered at
all unlike deductions.
The deductions are permitted under
different categories of income and
they get subtracted (deducted) from
the total gross income after they
are added (computed) to the total
gross income.
Tax rebate is permitted as a
reduction to the total tax payable
by the assessee. So, basically,
rebate is allowed from the tax
payable and not from total
income.

Scope and applicability of Section 10 of Income Tax Act, 1961

The scheme of exemptions under Section 10 of the Act applies to those assessees subject to the provisions of Section 5 (scope of
total income) and Section 6 (determination of residential status in India) of the Act read with their respective income tax slabs. In
other words, any resident or non-resident of India can get the advantage of the exemptions under Section 10 of the Act, subject to
the provisions and related Income Tax Rules therein.

A brief overview of exemptions under Section 10 of Income Tax Act, 1961

Relevant
Exemptions under Section 10 of the Income Tax Act, 1961
Sections

Section 10(1) Agricultural Income

Amount accepted from the income of the HUF by an individual who is a member of the
Section 10(2)
HUF
Section 10(2A) Share of profit of a firm received by its partner

Section 10(4) Interest to Non-Residents

Section 10(4B) Interest on notified savings certificates

Section 10(5) Leave Travel Concession (LTC)

Section 10(6) Payments received by persons, who are not Indiancitizens

Tax paid in lieu of foreign company which derives or accrues income by royalty or fees for
Section 10(6A)
technical services

Section 10(6B) Tax paid in lieu of foreign company or non-resident in relation to other income

Tax paid in lieu of foreign government or foreign enterprise accruing income by the lease of
Section 10(6BB)
aircraft or aircraft engine

Section 10(6C) Technical fees accepted by a foreign company notified by the central government

Section 10 (6D) Royalty or fees for technical services payment by NTRO to a non resident

Section 10(7) Allowance or perquisites given to government employees working outside India

Section 10(8) Income of foreign government employees under a co-operative technical assistance program

Sections 10(8A), Payments received by a non-resident consultant or his foreign employees as remuneration or
(8B) fees

Income of a family member of an employee working under a co-operative technical

Section 10(9)
assistance programme

Section 10(10) Gratuity

Section 10(10A) Commuted Pension

Section
Leave Encashment
10(10AA)

Section 10(10B) Retrenchment compensation

Section
Reimbursement for Bhopal Gas Leak disaster victims
10(10BB)

Section
Compensation on account of any disaster
10(10BC)

Section 10(10C) Remuneration received at the moment of voluntary retirement

Section
Tax on perquisites that are paid by the employer
10(10CC)

Section 10(10D) Amount paid on life insurance policy

Payment from the Sukanya Samriddhi Account opened in conformation with the Sukanya
Section 10(11A)
Samriddhi Account Rules, 2014

Section 10(12A) Payment given from the National Pension System Trust to an individual employee

Section 10(12B) Partial withdrawal from NPS

Payment received from sanctioned superannuation fund in notified circumstances and

Section 10(13)
subject to certain specified limits

Section 10(13A) House Rent Allowance (HRA)

Section 10(14) Special Allowances

Section 10(15) Interest Incomes

Section 10(16) Educational scholarship

Section 10(17) Daily allowance given to a Member of Parliament (MP)

Section 10(17A) Awards

Section 10(18) Pension given to a gallantry award winner

Section 10(19) Family pension given to the family members of the armed forces

Section 10(22B) Income of a news agency

Section 10(23A) Income of a professional association

Section
Income accepted on account of Regimental Fund
10(23AA)

Section
Income of a fund set up on account of welfare of employees
10(23AAA)

Section
Income of Pension Fund
10(23AAB)

Section 10(23B) Income accruing from Khadi or cottage industry

Section 10(23C) Income of Hospital

Section 10(23D) Income of Mutual Fund

Section
Income of notified Investor Protection Fund (IPF)
10(23EA)

Section
Income of the notified investor protection fund formed by commodity exchange
10(23EC)

Section
Income of Investor Protection Fund (IPF) established by a depository
10(23ED)

Section Income of a venture capital fund or company accruing from investment in a venture capital
10(23FB) undertaking

Section
Income generated from an Investment Fund
10(23FBA)

Section Exemption in regards to some definite income of wholly owned subsidiary of Abu Dhabi
10(23FE) Investment Authority and Sovereign Wealth Fund

Section 10(24) Income of a Registered Trade Union

Section 10(25) Income arising out of Provident Fund

Section 10(25A) Income generated from the Employees’ State Insurance Fund

Section 10(26) Income of an individual belonging to a Scheduled Tribe (ST)

Section
Specified income of a Sikkimese Individual
10(26AAA)

Section 10(32) Income of Minor

Section 10(34A) Income on Buyback of Shares

Section 10(39) Income from international sporting event

Section 10(40) Income accepted in the manner of grant by a subsidiary company

Income accruing from the transfer of asset of an enterprise involved in the business of
Section 10(41)
generation, transmission or distribution of power

Section 10(42) Income of a body or authority established by two or more countries

Section 10(43) Reverse Mortgage

Section 10(44) New Pension System Trust

Section 10(46) Exemption of ‘specified income’ of some definite bodies or authorities

Section 10(47) Exemption of income of ‘infrastructure debt fund’ notified by central government
 Exemption of income of a foreign company generating income from the sale of crude oil in
Section 10(48)
India

Exemption of income of a foreign company accruing from the sale of remaining stock of
Section 10(48B)
crude oil upon termination of the agreement or arrangement with central government

Section 10(48C) Income coming out of Indian Strategic Petroleum Reserves Limited (ISPRL)

Section 10(49) Exemption of income in respect of National Financial Holdings Company

Exemptions under Section 10 of Income Tax Act, 1961

For the determination of the total gross income of any person, the following incomes mentioned under the clauses of Section 10 of
the Act shall not be included in the computation process unless otherwise stated:

Agricultural income [Section 10(1)]

In accordance with Section 10(1) of the of the Act, the agricultural income of a person shall not be considered during the
computation of an assessee’s total income. To get a better picture of the dimensions of the word ‘agricultural income’, it is
paramount to understand the wide scope of this particular word.

Scope of the term ‘agricultural income’ under Section 10(1)

 Any form of revenues or rents originating or derived from a land in India which is being used for agricultural
purposes fall under the ambit of the term ‘agricultural income’. These revenues or rents may be received by the
owner from the tenant or even from sub-tenant to tenant. The implication of this is that the ownership of the land is
not necessary to have agricultural income. It may be noted in this regard that if the agricultural land is present in a
foreign country, then the entire income will be taxable. In other words, agricultural income from foreign lands is not
exempt under Section 10(1).
 The term ‘agricultural income’ under Section 10(1) also includes any income originating from the basic
operations or subsequent operations that are used to make the agricultural produce fit for being taken for their sale
in the market. These operations include activities like tilling of the land, sowing seeds, cleaning, winnowing, drying,
crushing etc. Thus, any income derived from all these activities or operations (whether manual or mechanical) will
fall under the head of ‘agricultural income’ under Section 10(1).
 Any income originating from the sale of the agricultural produce itself comes under the ambit of ‘agricultural
income’ envisaged under Section 10(1). A pertinent point that is to be noted in this regard is that as long as the
agricultural produce is sold raw in the market or ordinary means are employed to render the agricultural produce
ready for the market, such income will come under ‘agricultural income’. In other words, whenever the agricultural
produce is subjected to operations or processes that are not ordinarily employed to make the produce ready for sale,
such incomes will be treated as a combination of both agricultural income and business income. E.g.: In the cases of
cash crops like tea, coffee, cotton, tobacco, they are subjected to further manufacturing processes before being
commercially sold and all these incomes will then be a mix of agricultural income and business income.

Case law related to exemption of agricultural income

Dy. CIT v. Best Roses Biotech (P) Ltd. (2011, ITAT Ahmedabad Bench)

Facts of the case

 The assessee had obtained a piece of land on lease from an agriculturalist and had constructed a greenhouse project.
 In this greenhouse project, he was growing roses but not in the conventional style.
  The roses were grown with the latest scientific techniques in a controlled atmosphere on a bridge of plastic trays
present a couple of feet above the ground.
 The income from the rose plants was claimed as an exemption under agricultural income under Section 10(1) but the
Assessing Officer refused the same on the grounds that the roses were not planted on earth (land) and thus not eligible
for exemption.
Judgement

 It was held that the assessee’s income falls under the ambit of ‘agricultural income’ under Section 10(1) and thus,
cannot be computed under the total income of the assessee.
 Reliance was placed on the fact that the use of the advancement of technology and advanced equipment for
cultivation purposes amounted to the agricultural operation of the assessee.
 Several other connected authorities also endorsed the assessee’s operation as an agricultural operation and as a
corollary, the income from it became exempted agricultural income.

Does income from nursery constitute agricultural income

In accordance with Explanation 3 to Section 2(1A) of the Act, income arising from nurseries indeed falls under the category of
agricultural income and is exempt from income tax. It is immaterial whether the saplings or seeds were grown on land or not.

Income tax exemption for income from farm buildings

It is pertinent to note that income accruing out of the use of farm buildings for any plans or purposes (including letting out for
residential reasons or for the objective of business or profession) other than agriculture would not constitute agricultural income
and thus would not be exempt from income tax under this clause.

Although subject to the following conditions, income from farm buildings can constitute agricultural income, viz:

1. The building should be on the agricultural land or in its immediate vicinity and the assessee should, by reason of his
relation with such agricultural land, require it as a dwelling place or as a storehouse.
2. The agricultural land should either be subject to land revenue in India or be assessed subject to a local rate and the
same be collected by government officers.
3. If the agricultural land is not subject to land revenue, then as per Income Tax Rules, such income from those farm
buildings may constitute agricultural income subject to government rules related to distance from nearby
municipalities and their population.

Income Tax Rules related to exemption of agricultural income

Business income (%
Agricultural income (%
Rules Provisions (type of income) not-exempt of such
exempt of such income)
income)

Income derived from growing and

Rule 7A 65% 35%
manufacturing of rubber

Rule Income from sale of coffee grown and

75% 25%
7B(1) manufactured in India

Income accruing from the sale of coffee

Rule
grown, cured, roasted and grounded in 60% 40%
7B(1A)
India

Rule 8 60% 40%

Income derived from sale of tea
 manufactured or grown in India

Amount accepted from the income of the HUF by an individual who is a member of the HUF [Section 10(2)]

In accordance with Section 10(2) of the Act, when a member of HUF (Hindu Undivided Family) receives his share of family
income or his share from the impartible family estate, as the case may be, such income is fully exempt from income tax. It is
pertinent to be noted in this regard that a member of HUF’s personal income is not exempt from income tax. Only the money
given to him out of the family income or impartible family estate belonging to the HUF is exempt from income tax.

ILLUSTRATION:

Mr. W is a member of a HUF (Hindu Undivided Family) and he receives from the HUF Rs. 3,00,000/- per annum as his share of
family income. He also works as an employee at a company in personal capacity and gets paid Rs. 5,00,000/- per annum. In
accordance with Section 10(2), Rs.3,00,000/- i.e. his share of family income is fully exempt from income tax but his personal
income of Rs.5,00,000/- is taxable as per his chosen income tax slabs.

Share of profit of a firm received by its partner [Section 10(2A)]

In accordance with Section 10(2A) of the Act, when a partner of a firm or LLP (Limited Liability Partnership) receives a share of
the firm’s profit, such share of profit is fully exempt from income tax. A very pertinent point which is to be noted in this regard is
that any other types of remuneration or interests on capital received by the partner from the firm are not exempt from income tax.

Interest to non-residents [Section 10(4)]

In accordance with Section 10(4)(i) of the Act, when a non-resident [defined under Section 2(w) of the Act] has income from
interests accrued from certain bonds and securities duly notified by the Central Government, such income is exempt from income
tax.

And according to Section 10(4)(ii) of the Act, when a non-resident individual has income from interest on money standing to his
credit in a Non-Resident (External) Account maintained with any banks in India as per the provisions of Foreign Exchange
Management Act, 1999 (42 of 1999), and the rules made thereunder and subject to compliance with RBI norms, such income is
exempt from income tax.

Interest on notified savings certificates [Section 10(4B)]

In accordance with Section 10(4B) of the Act, any non-resident individual who is an Indian citizen or a person of Indian origin
(PIO), who has any income in the manner of interest accruing from notified savings certificates subscribed in convertible foreign
exchanges, issued before the 1st day of June, 2002 by the Government of India is exempt from income tax.

Leave travel concession [Section 10(5)]

In accordance with Section 10(5) of the Act, any employee who has made an actual journey can claim the exemption in respect
of Leave Travel Concession (LTC) subject to these conditions under Rule 2B of the Income Tax Rules. It may be noted in this
regard that this exemption is available to all employees i.e. Indian and foreign citizens alike. An employee can use this benefit of
exemption under Section 10(5) in respect of the value of any travel concession or assistance accepted or due to him from his
current or former employer for himself and his family members in relation to his travelling on leave to any place within India.
Some of the conditions based on which Leave Travel Concession can be taken are as follows:

 Where the journey is made by air transport, the amount of exemption available under clause (5) of Section 10 will
be the lesser of the actual amount spent for such flight or the economy class airfare of the national carrier via the
shortest route.
  When the journey is made by railways, the amount of exemption under this clause will be the lesser of the actual
amount spent or the quantum of air-conditioned first-class railway fare via the shortest route.
 When the place of destination is neither connected by air travel or railways, then

 In the case where recognised public travel is availed, the exemption will be the lesser of the actual amount spent or
deluxe class or first class fare by the shortest route.
 In the case where no recognised public transport system is available, the exemption will be an amount equivalent to
the air-conditioned first class railways fare, for the distance of the journey via the shortest route, and it shall be
assumed as if such journey had been carried out by railways or the actual amount spent will be exempted, whichever
is less.

 These exemptions under Section 10(5) are available for a total of two journeys in a block of four years. The current
block year is 2022-2025 and the previous block year was 2018-2021.
 If the employee has unused exemption available under one block, he can carry forward one block to the next block
but in case of such carry over at least one travel exemption must be claimed in the first year of the block.
 Family members can also travel with the employee but family for the purposes of the exemption under this clause will
include the spouse and children of the individual employee, whether dependent or not and parents, sisters, brothers of
the individual employee or any of them who are mainly or wholly reliant on him. This exemption is restricted to only
two surviving children born after the date of October 1, 1998 (multiple births post the birth of the first single child
will be treated as one child only for this clause), however, such restriction is not applicable to children born before the
date of October 1, 1998.
 Exemptions are available only for fare incurred i.e. other expenditures related to lodgings, porter charges etc do not
fall attract exemption vide Section 10(5).
Thus, under this clause and subject to the conditions mentioned above any employee can claim exemption from Income Tax in
respect of Leave Travel Concession (LTC) or Leave Travel Allowance (LTA) for actual journeys made. Lastly, it goes without
saying that no actual journey made means no exemption.

Case law related to Leave Travel Concession (LTC)

Commissioner of Income tax & ANR v. M/s Larsen & Toubro Ltd. (Supreme Court, 2009)

Issue: Whether the assessee(s) was under a statutory obligation under the Income Tax Act, 1961, and/or the Income Tax Rules to
gather evidence to show that its employee(s) had actually utilised the amount(s) paid for the purposes of Leave Travel Concession
(LTCs) or Conveyance Allowance?

Judgement: It was observed by the Hon’ble Supreme Court that the individual employee is the sole beneficiary of the exemption
provided under clause (5) of Section 10. The Hon’ble Court further held that no employer is required to collect supporting
evidence for the declarations made by the employees as far as LTC/LTA is concerned. Thus, it was held that the employer is
under no obligation to gather such evidence or verify such claims related to LTC or LTA.

Payments received by individuals, who are not Indian citizens [Section 10(6)]

People, who are not Indian citizens, are entitled to avail the exemption from income tax from the provisions of Section 10(6) of
the Act. They are discussed as follows:

Payments made to specified diplomats and their staff [Section 10(6)(ii)]

In accordance with Section 10(6)(ii) of the Act, any individual who is not an Indian citizen but receives remuneration as an
official (in any position) of an Embassy, Consulate, High Commission, or Trade Representative of a Foreign State, or works as a
staff of any of such official is exempt from income tax only if their Indian counterparts in their country enjoys the same privilege.

Remuneration of a foreign employee and non-resident member of crew [Section 10(6)(vi), (viii)]
In accordance with Section 10(6)(vi) of the Act, the payments obtained by a foreign individual in his capacity as an employee of a
foreign enterprise for services rendered by him during his stay in India is exempt from income tax, if the following prerequisites
are satisfied:

(a) the foreign enterprise is not involved in any form of trade or business within India ;

(b) he has not stayed in India more than a total a period of 90 days in such year ; and

(c) such payment is not amenable to be deducted from the income of his employer

In accordance with Section 10(6)(viii) of the Act, any remuneration received by or due to a non-resident foreign individual, who
has not stayed in India more than a total a period of 90 days in such year, and has rendered services in connection with his
employment on a foreign ship, enjoys exemption from income tax.

Payment to a foreign trainee [Section 10(6)(xi)]

In accordance with section 10(6)(xi) of the Act, the payments made to a foreign trainee in his capacity of an employee of a foreign
government during his tenure of stay in India in relation with his training in any government establishment or office or any central
government or state government company, or any company which is a subsidiary of a government company or any corporation
formed by or under a statute or any co-operative society fully financed by the central or state government is exempt from income
tax.

Tax paid for a foreign company generating income by way of royalty or fees for technical services [Section 10(6A)]

In accordance with Section 10 (6A) of the Act, taxes that are paid by any Indian concern or government (central/state) for a
foreign company generating income in the mode of royalty or fees for technical services provided in accordance with an
agreement made post-March 31, 1976 but before June 1, 2002 is exempt from income tax in the hands of such foreign company
provided such agreement is in conformation with the industrial policy of the Central government or it is sanctioned by the Indian
Government.

Tax paid for a foreign company or non-resident individual in connection with other income [Section 10(6B)]

In accordance with Section 10 (6B) of the Act, taxes that are paid by any Indian concern or government (central/state) for a
foreign company or non-resident individual in connection with any income that is not salary, royalty or fees for technical services
provided is exempt from income tax in the hands of such foreign company or non-resident individual if such income is received in
accordance with an agreement entered into before June 1, 2002 by the central government with the government of a foreign
sovereign State or international organisation or any other related agreement duly sanctioned by the central government.

Tax paid for foreign government or foreign company generating income by leasing aircraft or aircraft engine [Section 10(6BB)]

In accordance with Section 10 (6BB) of the Act, taxes that are paid by an Indian company, involved in the business of operation
of aircraft, on behalf of foreign governments or foreign companies generating income by leasing such aircrafts or aircraft engines
is exempt from income tax in the hands of such foreign governments or foreign companies if such lease is approved under an
agreement which is duly sanctioned by the Indian government and entered during the phase between 31.03.1997 to 01.04.1999, or
post 31.03.2007.

Technical fees accepted by a foreign company notified by the central government [Section 10(6C)]

In accordance with Section 10(6C) of the Act, notified foreign companies can claim exemption from income tax in lieu of income
generated by way of royalty or fees for technical services rendered in pursuance of an agreement entered into with that foreign
government and Indian government for providing services in security projects inside or outside India.

Royalty or fees for technical services payment by NTRO to a non-resident [Section 10(6D)]

NTRO stands for National Technical Research Organisation and according to Section 10(6D) of the Act, when the NTRO pays
any remuneration (herein royalty) or due fees for technical services provided to such a non-resident individual, not being a
foreign company, then such individual enjoys exemption from income tax. As a corollary, the NTRO will not be obliged to
deduct tax on any such payments.

Allowance or perquisites are given to government employees working outside India [Section 10(7)]

In accordance with Section 10(7) of the Act, any allowances or perquisites provided or allowed as such outside India by the Indian
government to an Indian citizen for providing services outside India is exempt from income tax.

Income of foreign government employee working under cooperative technical assistance programme [Section 10(8)]

In accordance with Section 10(8) of the Act, remuneration received directly or indirectly by any individual, from the foreign
government in relation with a co-operative technical assistance programme and projects in conformation with an agreement
entered into by the central government and such sovereign foreign government, is exempt from income tax. Moreover, such
exemption is available in respect of any other income of such a foreign individual which accrues from working outside India and
is not deemed to accrue from his work in India, provided that such foreign individual should be required to pay income tax or
social security tax to his own (foreign) government.

Payments received by a non-resident consultant or his foreign employees as remuneration or fees [Section 10(8A), (8B)]

In accordance with Section 10(8A) of the Act, firstly, when an international organisation pays remuneration or fees to a non-
resident consultant, under a technical assistance agreement between such organisation and the government of a foreign sovereign
State and secondly, when such non-resident consultant has any other income which he obtained outside India and that is not
considered to accrue or arise in India, in respect of which he is required to pay income tax or social security tax to the foreign
government of the country of his origin or residence, enjoys exemption of such income from income tax.

Section 10(8B) provides for similar exemptions to employees of consultants enjoying exemptions under clause (8A) of Section 10
subject to certain conditions therein viz:

 The individual employee should be working as an employee of the consultant referred to in clause (8A) as mentioned
above.
 The employee’s contract of service is approved by the Additional Secretary, Department of Economic Affairs in
Ministry of Finance, Government of India, in concurrence with members CBDT.
 The remuneration is received in relation to the technical assistance programme referred to in clause (8A) above.
 Any other income which he receives outside India is subjected to any income tax or social security tax in other
countries.

Income of a family member of an employee working under a co-operative technical assistance programme [Section 10(9)]

In accordance with Section 10(9) of the Act, when a family member accompanies an individual mentioned in Sections 10(8) or
Section (8A) or Section (8B) of the Act and comes to India, then any income of such family member arising from outside India
will be exempt from income tax provided that he pays income tax or social security tax to his own government where he hails
from.

Gratuity [Section 10(10)] of Income Tax Act, 1961

In accordance with Section 10(10) of the Act, gratuity (where gratuity is voluntary payment by the employer, as an appreciation of
the long-standing services, usually more than 5 years) so received at the time of retirement or termination of employment or death
of the individual employee, is exempt as under:

1. The central or state government employees and the members of the Defence Services are eligible for full exemption
from income tax pertaining to any amount received as gratuity at the time of death or retirement.
 2. For all other employees in the private sector any death-cum-retirement gratuity is exempt from income tax to the
extent of least of the following:

 Rs. 20,00,000/-
 Gratuity actually obtained
 Fifteen days’ salary based on salary last drawn for each year of service or part thereof in excess of six months and in
case the employee is NOT covered under the Payment of Gratuity Act, 1972, this subpoint gets replaced by ‘‘half
months’ salary based on last 10 months’ average salary drawn immediately preceding the month of retirement/death,
for each completed year of service (fraction of year to be ignored).’’

Retrenchment compensation [Section 10(10B)]

In accordance with Section 10(10B) of the Act,when a workman receives any compensation at the time of his retrenchment, as per
the provisions of Industrial Disputes Act, 1947 or under any other Act or Rules or Orders in force at the time being shall be
exempt from income tax subject to the minimum of the following limits:

 Actual amount obtained;

 Fifteen days of average remuneration for every completed year of service or part thereof in excess of six months;
 Amount notified by the central government, i.e. Rs. 5,00,000.
It may be noted in this regard that beyond the limits mentioned above, any amount of retrenchment will fall under the ambit of
gross salary and thereby becoming taxable.

Compensation for Bhopal gas leak disaster [Section 10(10BB)]

Compensation received under the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 by victims of Bhopal gas leak
tragedy is exempt from income tax. Although, it may be noted in this regard that if compensation is received against a loss or
damage or expenditure for which deduction has already been claimed earlier, it shall not be exempt from income tax.

Compensation on account of any disaster [Section 10(10BC)]

In accordance with Section 10(10BC) of the Act, any amount received from the State as compensation for any disaster by any
individual or his legal heirs is exempt from income tax. Although, it may be noted in this regard that if such an individual or his
legal heirs has been allowed a deduction under the Act because of such losses from the disaster, no further exemption is allowed.

Remuneration received at the moment of voluntary retirement [Section 10(10C)]

In accordance with Section 10(10C) of the Act, when an employee obtains any compensation at the time of voluntary retirement
or termination of service, then such payment is exempt from income tax, subject to the fulfilment of the following conditions viz:

 Compensation is received by the individual employee at the time of voluntary retirement or termination or voluntary
separation in the case of a public sector company.
 The maximum amount of exemption under this clause is Rs. 5,00,000.
 The compensation granted should be as per the provision of Rule 2BA of Income-tax Rules, 1962.
 In the event an employee takes the exemption under this Section 10(10C), he shall not be entitled to any other
exemption under this section for any other assessment year.
 The amount of compensation is received or receivable by an individual who is an employee of either of the
following:
o a public sector company; or
o a local authority; or
o any other company; or
 o a co-operative society; or
o an authority established under a statute; or
o a UGC approved university; or
o an Indian Institute of Technology (IIT) as per the provisions of the Institutes of Technology Act, 1961; or
o any state government; or
o the Central government; or
o A duly notified institution.

Case law related to Section 10(10C)

R. Banumathy v. CIT [2018] (Madras High Court)

Facts of the case: In this case, an employee of ICICI bank had opted for Voluntary Retirement Scheme (VRS) and he got a
consolidated payment from the bank for the same. The Income Tax Department argued that payments received from ICICI bank
via early retirement schemes do not conform to Income Tax Rules and thus will not be exempted from income tax.

Issue: Are retiring employees of ICICI bank under Voluntary Retirement Scheme (VRS) eligible for Section 10(10C) exemption
[Assessment year 2004-05]?

Judgement: The Hon’ble Court observed that Section 10(10C) of the Act and Rule 2BA of the Income Tax Rules, do not
specifically apply to the Reserve Bank of India (RBI) alone and, thus, benefit was applicable to the assessee i.e. the retired ICICI
bank employee also. Thus, the assessee was held to be entitled to Section 10(10C) exemption benefit.

Tax on perquisites that are paid by the employer [Section 10(10CC)]

Perquisites are basically perks offered by virtue of an individual’s job by his employer. Perquisites may be monetary or non-
monetary in nature. Section 10(10CC) of the Act provides exemption from income tax to the employee for non-monetary
perquisites that are given to the employees by the employer. In other words, non-monetary perquisites are exempt from income
tax but monetary perquisites are not exempt from income tax under this clause.

Amount paid on life insurance policy [Section 10(10D)]

In accordance with Section 10(10D) of the Act, when an individual receives any money under a life insurance policy, including a
bonus, then such amount is exempt from income tax. Although, the following sum of money received under a life insurance policy
are not exempt under this clause:

1. Any sum received from a life insurance policy under Section 80DD(3); or
2. Any sum of money obtained under a Keyman Insurance Policy; or
3. Any sum of money received, under a life insurance policy issued on or post 01.04.2003 but on or before 31.03.2012
in respect of which the premium payable for any of the years during the terms of the policy is more than 20% of the
actual capital sum insured. Although, such sum received on the death of the insuree shall be exempt from income tax;
4. Any sum of money received under a life insurance policy issued on or post 01.04.2012 in respect of which the
premium payable for any of the years during the terms of the policy is more than 10% of the actual capital sum
insured; or
5. Any sum of money received under a life insurance policy issued on or after 01.04.2013 for life insurance of any
individual, who is

 an individual with a disability or an individual with severe disability as mentioned in Section 80U; or
 an individual suffering from ailment or disease as mentioned in the rules prescribed under Section 80DDB in respect
of which the premium payable is in excess of 15% of the actual capital sum insured for any of the years during the
terms of policy.
Payment from provident fund [Section 10(11)]

In accordance with Section 10(11) of the Act, any form of payment from a notified provident fund or any other provident fund
under the ambit of the Provident Funds Act, 1925 is exempt from income tax. Although, according to Amendment vide Finance
Act, 2021 if an individual makes more contribution than Rs. 2.5 lakhs in any previous year in that fund, on or post 1st day of
April, 2021, then such interest earned on contribution over Rs. 2.5 lakhs shall be subject to income tax. However, it is pertinent to
note in this regard that if the employer makes no contribution to the provident fund of the employee, then the upper limit for
income tax exemption under this clause will be raised to Rs. 5 lakhs.

Payment from the Sukanya Samriddhi Account opened in conformation with the Sukanya Samriddhi Account Rules, 2014

[Section 10(11A)]

In accordance with Section 10(11A) of the Act, any payment in the form of interest and withdrawals from an account opened in
conformation with the Sukanya Samriddhi Account Rules, 2014 formed under the Government Savings Bank Act, 1873 is fully
exempt from income tax.

Exemption of payment from the accumulated balance in a recognized provident fund [Section 10(12)]

Subject to the provision of Rule 8 of Part A of the Fourth Schedule, an employee receiving the accumulated balance from a
recognised provident fund is entitled to exemption of such payment from income tax. Although, according to Amendment vide
Finance Act, 2021 if an employee makes more contribution than Rs. 2.5 lakhs in any previous year in that fund, on or post 1st day
of April, 2021, then such interest earned on contribution over Rs. 2.5 lakhs shall be subject to income tax. However, it is relevant
to note in this aspect that if the employer makes no contribution to the provident fund of the employee, then the upper limit for
income tax exemption under this clause will be raised to Rs. 5 lakhs.

Payment given from the National Pension System Trust to an individual employee [Section 10(12A)]

In accordance with Section 10 (12A) of the Act, any form of payment is exempt from income tax made from the National Pension
System (NPS) Trust to –

 an assessee (employee or non-employee);

 on closure of account of the assessee or his opting out of the NPS scheme envisaged in Section 80CCD;
 upto the extent it does not cross 60% of the total amount payable to such assessee at the time of closing of the NPS
account; or
 his preferring out of the NPS scheme.

Partial withdrawal from NPS [Section 10(12B)]

Section 10(12B) of the Act has been effective from the assessment year 2018-19 and it was introduced to provide relief to
individuals making withdrawals from the NPS scheme. Such withdrawals from the NPS shall be exempt from income tax subject
to the following conditions:

 The amount of withdrawal from the NPS scheme should not be more than 25% of the total contribution made by the
individual in the scheme.
 Partial withdrawal by the individual should be made in conformation with the Pension Fund Regulatory and
Development Authority Act, 2013 and related regulations formed therein.
Payment received from sanctioned superannuation fund in notified circumstances and subject to certain specified limits [Section

10(13)]

In accordance with Section 10(13) of the Act, in case of superannuation funds that are approved by the Commissioner of Income
Tax, payments made from such funds are exempt from income tax in the following scenarios:

 Payment on passing away of beneficiary is exempt; or

 Payment to employee when such employee retires or becomes incapable of working or incapacitated before his
retirement is exempt;
 When a beneficiary dies, then due payment by way of refund of contributions is exempt; or
 Payment by way of transfer to the individual employee’s pension account under a sanctioned pension scheme
envisaged under Section 80CCD and duly notified by the central government is exempt;
However, it is pertinent to note in this regard that the employer’s contribution to the superannuation fund is exempt from income
tax, but, from the assessment year 2010-11 onwards any contribution made by the employer which is more than Rs. 1,50,000 per
year is taxable as perquisite. And the employee’s contribution is eligible for deduction under the provision of Section 80C and the
interest on accumulated balance is not liable to income tax.

House Rent Allowance (HRA) [Section 10(13A)]

In accordance with Section 10(13A) of the Act read with Rule 2A of Income Tax Rules, an individual employee receiving House
Rent Allowance (HRA) enjoys exemption to the extent of least of the following:

 50% of salary for metro cities (i.e. Kolkata, Delhi, Mumbai and Chennai) or 40% of salary in case of other cities;
 HRA actually received;
 Rent paid minus 10% of the salary.

Allowances for meeting business expenditure [Section 10(14)]

Section 10(14) of the Act read with Rule 2BB of Income Tax Rules allows partial exemption for special allowances. In
accordance with this provision, any such special allowance or benefit, which is not a prerequisite as envisaged under Section
17(2), explicitly given to meet expenses incurred during the carrying out of the duties of an office or employment of profit, to the
extent to which such expenses have actually been spent for that purpose is exempt from income tax.

Further, any such allowances given to the individual assessee either to meet his personal expenses where he commonly works or
at his commonplace of residence or to reimburse him for the increased cost of living is also exempt from income tax. But it may
be noted in this regard that this exemption shall not apply to any personal allowances granted to the individual assessee to
compensate him for performing any special duties specific to his office or employment unless such allowance is in relation to his
place of posting or residence.

Interest Incomes [Section 10(15)]

In accordance with Section 10(15) of the Act, interest, redemption premium on notified securities, bonds, certificate of deposits
etc. are exempt from income tax for all assessees.

Educational Scholarship [Section 10(16)]

In accordance with Section 10(16) of the Act, the recipient assessee enjoys exemption from income tax any amount that he has
received as an educational scholarship.
Daily allowance to a Member of Parliament [Section 10(17)]

In accordance with Section 10(17) of the Act, daily allowance, constituency allowance or any other form of allowance given to a
Member of Parliament and a Member of State Legislature.is fully exempt from income tax.

Awards [Section 10(17A)]

In accordance with Section 10(17A) of the Act, any payment received either in cash or in kind in pursuance of an award granted
by the central or state government or by any body approved by the central government in this behalf is exempt from income tax.

Pension given to a gallantry award winner [Section 10(18)]

In accordance with Section 10(18) of the Act, any central or state government employee who has been awarded Param Vir Chakra
or Maha Vir Chakra or Vir Chakra or any other notified gallantry award enjoys full exemption of his pension amount from income
tax and in the event of the death of such employee, the pension received by their family members is also exempt from income tax.

Family pension given to the family members of armed forces [Section 10(19)]

In accordance with Section 10(19) of the Act read with Rule 2BBA of the Income Tax Rules, when a member of the military or
paramilitary forces of India dies in the line of duty, then irrespective of his rank, the family pension given to the widow or
children or nominated heirs of such martyr is exempt from income tax. This benefit is also available to the armed forces members
who had no option but to take retirement owing to disabilities or bodily injuries incurred in the line of duty. But this benefit of
exemption is not available to those personnels of armed forces who have been retired on superannuation or otherwise.

Income of a news agency [Section 10(22B)]

In accordance with Section 10(22B) of the Act, any income of a news agency which has been duly notified, set-up in India solely
for the collection and distribution of news is exempt from income tax under the condition that such news agency uses its income
or saves it for application exclusively for the collection and distribution of news and does not disburse its income in any form to
its members.

Income of an association engaged in professional activities [Section 10(23A)]

In accordance with Section 10(23A) of the Act, any income (that is not income from house property or income from rendering any
specific service or income by way of interest or income from dividend earned on investment) of a professional institution or
association is exempt from income tax, if the following conditions are satisfied:

 Such professional associations or institutions must be established in India for the purpose of control, regulation,
supervision or encouragement of the profession of law, medicine, engineering, accounting, architecture or other
similar notified professions.
 Such association or institution has been duly approved by the central government by general or special orders.
 Such an association or institution applies their income for the sole purpose it was formed.

Income accepted on account of Regimental Fund [Section 10(23AA)]

In accordance with Section 10(23AA) of the Act, any income which is accepted by an individual on account of any regimental
fund or non-public fund formed by the armed forces of India for the welfare and benefit of the preceding and present members of
such forces or their family dependents, is exempt from income tax.
Income of a fund set up on account of welfare of employees [Section 10(23AAA)]

In accordance with Section 10(23AAA) of the Act read with Rule 16C of the Income Tax Rules, when an individual employee
receives any income from a duly notified and approved fund formed for the welfare of employees and their family dependents,
then such income is exempt from income tax. It must be noted in this regard that such a welfare fund must work for the exclusive
purpose of its formation and must invest in the modes specified in Section 11(5) of the Act.

Income of pension fund [Section 10(23AAB)]

In accordance with Section 10(23AAB) of the Act, when a pension fund is established by the Life Insurance Corporation of India
(LIC) on or post 1st August, 1996 or by any other insurer, then such income so received from the pension fund by an individual
who has contributed for getting pension from such fund, is exempt from income tax. Also, such funds must be approved by the
Controller of Insurance or the Insurance Regulatory and Development Authority of India (IRDAI).

Income accruing from Khadi or cottage industry [Section 10(23B)]

In accordance with Section 10(23B) of the Act, any income of a not for profit institution formed as a public charitable trust or
society that is involved in the development of khadi and cotton/village industries is exempt from income tax, if the following
criteria are fulfilled:

 Such income arises from the business of production, sale and/or marketing of khadi or other products of village or
cottage industries.
 Such income is solely used or accumulated for the development of khadi or village industries or both.
 Such an institution must be sanctioned by the Khadi and Village Industries Commission.

Income from fund or trust or hospital or other medical institution or university or other educational institution [Section 10(23C)

In accordance with Section 10(23C) of the Act, any income received by an individual from a fund or trust or hospital or other
medical institution or university or other educational institution is exempt from income tax subject to various related rules of the
Income Tax Rules,1962.

Income from mutual fund [Section 10(23D)]

In accordance with Section 10(23D) of the Act, any income generated from registered mutual funds (subject to the provisions
envisaged in Sections 115R to 115T) is exempt from income tax.

Income from a notified Investor Protection Fund (IPF) [Section 10(23EA)]

In accordance with Section 10(23EA) of the Act, any income received by way of contributions from a notified Investor Protection
Fund (IPF), formed by recognised stock exchanges in India is exempt from income tax. This exemption is subject to the
condition that where some contribution to such fund is pending and it was not charged under income tax during any previous year,
then when such due amount is shared in whole or in parts with the notified IPF, then the full amount so shared shall be construed
as the income of the previous year in which such amount is so shared and shall be taxed accordingly.

Income from a notified Investor Protection Fund (IPF) formed by commodity exchange [Section 10(23EC)]

In accordance with Section 10(23EC) of the Act, any income received by way of contributions from commodity exchanges of a
notified Investor Protection Fund (IPF), formed by commodity exchanges in India is exempt from income tax. This exemption is
subject to the condition that where some contribution to such fund is pending and it was not charged under income tax during any
previous year, then when such due amount is shared in whole or in parts with the notified commodity exchange, then the full
amount so shared shall be construed as the income of the previous year in which such amount is so shared and shall be taxed
accordingly.

Income of a notified Investor Protection Fund (IPF) formed by a depository [Section 10(23ED)]

In accordance with Section 10(23ED) of the Act, any income received by way of contributions from a depository of a notified
Investor Protection Fund (IPF), established by a depository, in conformation with the regulations made under the SEBI Act,
1992 and Depository Act, 1996 is exempt from income tax. This exemption is subject to the condition that where some
contribution to such fund is pending and it was not charged under income tax during any previous year, then when such due
amount is shared in whole or in parts with the notified depository, then the full amount so shared shall be construed as the income
of the previous year in which such amount is so shared and shall be taxed accordingly.

Income of a venture capital fund or company accruing from investment in a venture capital undertaking [Section 10(23FB)]

In accordance with conditions specified in Section 10(23FB) of the Act, when a venture capital fund or a venture capital company
invests in a venture capital undertaking and generates income from the same, then such income is exempt from income tax from
the assessment year 2001-02 onwards. Although, it may be noted in this regard that these provisions is not applicable in respect of
any income of a venture capital company or venture capital fund, being an investment fund specified in the provision of Clause (a)
of the Explanation 1 to Section 115UB of the Act, of the previous year relevant to the assessment year beginning on or post
01.04.2016.

Income generated from an investment fund [Section 10(23FBA)]

In accordance with Section 10(23FBA) of the Act, any income other than the income chargeable under the head “profits and gains
of business or profession” that is coming from an investment fund is exempt from income tax and here, ‘investment fund’ means
the same as envisaged in the provision of Clause (a) of the Explanation 1 to Section 115UB of the Act.

Capital gains tax by virtue of transfer of shares of an Indian company due to its relocation [Section10(23FF)]

In accordance with Section 10(23FF) of the Act, when a non-resident individual has capital gains income owing to the relocation
from the original fund to the resultant fund, then such income shall be exempt from income tax.

Income of a registered trade union [Section 10(24)]

In accordance with Section 10(24) of the Act, when a registered trade union or an association of registered unions within the
meaning of The Trade Unions Act, 1926, has income in the nature of ‘income from house property’ and ‘income from other
sources’, then such income is exempt from income tax.

Income from provident fund [Section 10(25)]

In accordance with Section 10(25) of the Act, the following is exempt from income tax:

 interest on securities which belong to any provident fund as envisaged under the Provident Funds Act, 1925 and any
capital gains from the provident fund accruing from the sale, exchange or transfer of such securities;
 any income received by the trustees from a recognised provident fund;
 any income received by the trustees from a sanctioned gratuity fund;
 any income received by the trustees from a sanctioned superannuation fund.

Income generated from the employees’ state insurance fund [Section 10(25A)]
In accordance with Section 10(25A) of the Act, when an individual employee receives any amount from the employees’ state
insurance fund of the Employees’ State Insurance Corporation formed as per the provisions of the Employees’ State Insurance
Act, 1948, then such income is exempt from income tax.

Income of a member of a Scheduled Tribe (ST) [Section 10(26)]

In accordance with Section 10(26) of the Act, income of an individual of a scheduled tribe (as envisaged under Article 366(25) of
the Indian Constitution) is exempt from income tax provided such income accrues from any area in the state of Manipur,
Mizoram, Tripura, Nagaland, Arunachal Pradesh or district of North Cachar Hills, Mikir Hills,Jaintia Hills, Khasi Hills and Garo
Hills or in the Ladakh region.

Specified income of a Sikkimese individual [Section 10(26AAA)]

In accordance with Section 10(26AAA) of the Act, any Sikkimese individual would enjoy exemption from income tax provided
his source of income originates from Sikkim or he earns by way of dividend or interest on securities. It may be noted in this regard
that a Sikkimese woman will not have this benefit of exemption who, on or post 01.04.08, marries a non-Sikkimese man.

Income of a minor [Section 10(32)]

In accordance with Section 10(32) of the Act, in the case of a minor assessee as envisaged under sub-section (1A) of Section
64 of the Act, any income that is not more than Rs. 1500 per minor child and is includible under his total income is exempt from
income tax.

Income on buyback of shares [Section 10(34A)]

In accordance with Section 10(34A) of the Act, when an individual assessee, being a shareholder, has earned some amount by
virtue of buy back of shares by the company as referred to in Section 115QA of the Act, then such income is exempt from income
tax.

Income from international sporting event [Section 10(39)]

In accordance with Section 10(39) of the Act, any notified person with specified income that he or she earned from an
international sporting event held in India from the assessment year 2006-07 onwards, is exempt from income tax, if the event is
sanctioned by the respective international body and is duly notified by the central government and has due participation by more
than two countries of the world.

Income accepted in the manner of grant by a subsidiary company [Section 10(40)]

In accordance with Section 10(40) of the Act, when any subsidiary company receives any grant from its Indian holding company
involved in the power business and if such grant is meant for the regeneration of a pre-existing power business, then such amount
is exempt from income tax. The exemption under this clause is available, if the regeneration of the power business is by means of
shifting of business to the Indian holding company as notified under the provision of Section 80 IA(4)(v)(a).

Income accruing from the transfer of asset of an enterprise involved in the business of generation, transmission or distribution of

power [Section 10(41)]

In accordance with Section 10(41) of the Act, when by virtue of transfer of a capital asset of a power business, any capital gain is
made, then such capital gains are exempt from income tax, provided that such transfer has taken place before 01.04.06.
Income of a body or authority established by two or more countries [Section 10(42)]

In accordance with Section 10(42) of the Act, when a body or authority has been formed by the central government with two or
more countries for not for profit purposes under any treaty or convention and such body or authority has any specified income,
then such income is fully exempt from income tax after the central government has duly notified about the same.

Reverse mortgage [Section 10(43)]

In accordance with Section 10(43) of the Act, any amount received by any person as a loan, in the form of lump-sum payment or
part payment, in a case of reverse mortgage envisaged in Clause (xvi) of Section 47 of the Act, is exempt from income tax.

New pension system trust [Section 10(44)]

In accordance with Section 10(44) of the Act, any income which is received by an individual from the New Pension System
Trust (formed on 27.02.08) is exempt from income tax.

Exemption of ‘specified income’ of definite bodies or authorities [Section 10(46)]

In accordance with Section 10(46) of the Act, when a government (central or state) established body or authority or board or trust
or commission, involved in non-commercial activities for public benefit has any specified income, then such income is exempt
from income tax subject to such notifications as specified by the central government for this purpose.

Exemption of income of ‘infrastructure debt fund’ notified by central government [Section 10(47)]

In accordance with Section 10(47) of the Act, any income of notified ‘infrastructure debt fund’, that is established in conformation
with the prescribed guidelines, is exempt from income tax.

Exemption of income of a foreign company generating income from the sale of crude oil in India [Section 10 (48)]

In accordance with Section 10(48) of the Act, any income of a foreign company received in India in Indian currency by virtue of
sale of crude oil to any individual in India is exempt from income tax subject to the satisfaction of the following conditions:

1. Such income accrues because of an agreement entered into by the Indian government or is duly approved by the
central government.;
2. Such agreement or arrangement has been duly notified by the central government in national interest.
3. Such foreign companies should not be involved in any activities other than the receipt of such income in India.

Exemption of income of a foreign company accruing from the sale of remaining stock of crude oil upon termination of the

agreement or arrangement with central government [Section 10(48B)]

In accordance with Section 10(48B) of the Act, income of a foreign company accruing from the sale of remaining stock of crude
oil upon expiry or termination of the agreement or arrangement with central government is exempt from income tax, subject to
conformation with the agreement terms.

Income coming out of Indian Strategic Petroleum Reserves Limited (ISPRL) [Section 10(48C)]
In accordance with Section 10(48C) of the Act, any income of the Indian Strategic Petroleum Reserves Limited (ISPRL), which is
a fully owned subsidiary company of the Oil Industry Development Board under the Ministry of Petroleum and Natural Gas,
generated as a result of an arrangement for replenishment of crude oil stored in its storage facility in accordance to directions of
the central government in this behalf shall be exempt from income tax. It may also be noted in this regard that this exemption shall
be subject to the fulfilment of the condition that the crude oil is replenished in the storage facility within a maximum of three
years from the end of the financial year in which the crude oil was removed from the storage facility at the first instance. This
clause will take effect from 1st April, 2020 and will apply to the assessment year 2020-21 onwards.

Exemption of income in respect of national financial holdings company [Section 10(49)]

In accordance with Section 10(49) of the Act, any income of the central government established National Financial Holdings
Company is exempt from income tax.

Summary chart of exemptions under Section 10 of Income Tax Act, 1961

Fully exempt under Section 10 Partially exempt under Section 10

Agricultural income Gratuity

Government awards Leave encashment

Compensation received in lieu of disasters House Rent Allowance (HRA)

NPS withdrawals in cases of closing or opting

Interest on NRE account of a person resident outside India
outs

Pension received by gallantry awards recipients Receipts from LIC

Share of partner Commuted pension

Allowances paid by Indian government to Indian citizens outside

Clubbed income
India

Received by a member of the HUF (Hindu Undivided Family) Income of member of ST (Scheduled Tribe)

– Retrenchment compensation

Q. Who are the Income Tax Authorities? Discuss the powers and functions at Income Tax Authorities?

INTRODUCTION:
In India, the Central Government has been empowered by Entry 82 of the Union List of Schedule VII of the Constitution of
India to levy tax on all income other than agricultural income. The Income Tax Law comprises The Income Tax Act 1961, Income
Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial
pronouncements by Supreme Court and High Courts. The Government of India imposes an income tax on taxable income of
all persons including individuals, Hindu Undivided Families (HUFs), companies, firms, association of persons, body of
individuals, local authority and any other artificial judicial person. Levy of tax is separate on each of the persons. The levy is
governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by CBDT and is part of the
Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government
uses to fund its activities and serve the public. The Income Tax Department is the biggest revenue mobilizer for the Government.

The Income Tax authorities are required to exercise their powers and perform their functions so as to prevent harassment of
assesses, tax-evasion, unnecessary discrimination in collection of tax. However, there have been a number of instances of misuse
of these rule- making powers which have the effect of contradicting statutory provisions that have been given binding effect,
displacing the authoritative pronouncements of the Higher Judiciary and causing an erosion of the constitutionally-mandated
effect of Supreme Court declarations under Article 141. In this scenario, for the purpose of effective financial management it
becomes imperative to understand the functioning, the powers and the limitation on the powers of these tax authorities. This
paper talks about various tax authorities under the Income Tax Act, appointment of income tax authorities, the Central Board of
Direct Taxes and it’s powers, powers of other Income Tax authorities, jurisdiction of the Income-Tax Authorities, and a
conclusive analysis of the same.

VARIOUS TAX AUTHORITIES UNDER THE INCOME TAX:

The Government of India has constituted a number of authorities to execute the Income Tax Act and to control the Income Tax
Department efficiently. There shall be the following classes of income-tax authorities for the purposes of the Act as given under
Section 116, namely:

The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),

Directors-General of Income-tax or Chief Commissioners of Income-tax,

Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),

Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax

(Appeals),

Joint Directors of Income-tax or Joint Commissioners of Income-tax.

Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),

Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,

Income-tax Officers,

Tax Recovery Officers,

Inspectors of Income-tax.

In this connection, it may be noted that under section 2(7A), the term ‘Assessing Officer’ means –

(a) The Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director; or (b) The Income-tax Officer
who is vested with the relevant jurisdiction by virtue of directions or orders issued under section 120(1) or (2) or any other
provision of the Act; and

(c) The Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under section
120(4)(b) to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer.

APPOINTMENT OF INCOME TAX AUTHORITIES:

The Central Government can appoint those persons whom it thinks are fit to become Income Tax Authorities. The Central
Government can authorize the Board or a Director-General, a Chief Commissioner or a Commissioner or a Director to appoint
income tax authorities below the ranks of a Deputy Commissioner or Assistant Commissioner, According to the rules and
regulations of the Central Government controlling the conditions of such posts.
THE CENTRAL BOARD OF DIRECT TAXES AND IT’S POWERS:

The Central Board of Direct Taxes is a statutory body constituted under the Central Board of Revenue Act, 1963. It consists of a
number of members appointed by the Central Government for the performance of such duties, as may be entrusted to the Board
from time to time. It is functioning under the jurisdiction of the Ministry of Finance. The Central Board of Direct Taxes, besides
being the highest executive authority, exercises control and supervision over all officers of the Income-tax Department and is
authorised to exercise certain powers conferred upon it by the Income-tax Act, 1961. In particular, it has the powers, subject to the
control and approval of the Central Government to make any rules, from time to time for the proper administration of the
provisions of the Income-tax Act, 1961. All the rules under the Act are framed by the Board under section 295 of the ITA, 1961
and placed before the Parliament. In addition to the general power of making rules and of superintendence, the Board has been
given specific powers on several matters.

The important powers of the Board and the relevant sections granting them have been detailed below.

Powers of the Board:

The Board has been empowered under Section 119 to issue instructions and circulars to it’s subordinates for the proper
administration of the Act. Under Section 118, CBDT shall control all the Income Tax Authorities subject to an overall framework
of Central Government. It is, in addition, obligatory for the various authorities and all other persons employed in the execution of
the Act to observe and follow such orders, instructions and directions of the Board. However, the Board is not empowered to issue
orders, instructions or directions in such a way as to –

1. Require any income-tax authority to make the assessment of a particular case in a particular manner, or

2. Interfere with the discretion of the Commissioner (Appeals) in the exercise of his appellate functions.

Further, the Board may, if it considers necessary or expedient to do so, for the purpose of proper and effective management of the
work of assessment and collection of revenue, issue general or special orders from time to time in respect of any class of incomes
or class of cases setting the Board may relax the provisions of Section 115P, 115S, 139, 143, 144, 147, 148, 154, 155, 234A,
234B, 271 and 273. Such order etc., may be issued by general or special orders in respect of any class of incomes or fringe benefit
or class of cases. Such orders are the guidelines, principles or procedures to be followed by other income-tax authorities in the
work relating to assessment or collection of revenue or the initiation of proceedings for the imposition of penalties. If the Board
thinks it is necessary for public interest to do so the Board can publish and circulate the document in the prescribed manner. Also,
the Board, to avoid genuine hardship in any case or classes of cases, may by general or specific order authorise any income tax
authority, to admit an application or claim for any exemption, deduction, refund or any other relief under the Act after the expiry
of the period specified under the Act and deal with the same on merits in accordance with law. However, such order cannot be
issued to a Commissioner (Appeals).

The Board, in addition, can relax any requirement contained in Sections 14 to 59 and 80A to 80U where the assessee has failed to
comply with any requirement. However, such default in the requirement was due to circumstances beyond their control or if
the assessee has complied with such a requirement before the completion of assessment in relation to the previous year in which
such deduction is claimed. Every such order is to be laid before each House of Parliament.

Moreover, the Board can exercise its powers to remove difficulties in the matter of Sections 201(1A), 210, 211, and 234C.

The Scope of the Rule- Making Powers of the Board Under Section 119 of the Income Tax Act:

The scope of the rule-making powers of the Board have been discussed below with respect to their binding value on the Revenue
Department, the assesses, the Courts/ Tribunals and the nature of the circulars.
With Respect to Binding Value of Circulars on the Revenue:

The present view is that all circulars issued by the CBDT under Section 119 of ITA, 1961 would be binding upon the department
even if they deviate from the provisions of the Parent Act. An earlier case decided by the Supreme Court which dealt with the
binding value of circulars on the Revenue was that of K.P. Varghese. The assessee had entered into a bona fide transaction for the
sale of a house, earning no profit, as it was a related party transaction. Despite the fact that there had been no underestimation of
its value, the Revenue sought to tax the assessee on the basis of the fair market value of the house. The assessee argued on the
basis of a circular issued by the CBDT, stating that the purpose of using fair market value in certain circumstances was to prevent
tax evasion through the understatement of the full value of consideration on the transfer of a capital asset. It came to the notice of
the CBDT that several Income Tax Officers were, in violation of Section 119 of the Income Tax Act, 1961, taxing bona
fide transactions based on their fair market value. Thus, it became necessary for the Board to issue another circular, clarifying that
Board circulars shall be binding on all Officers in view of the decisions of the Supreme Court
in Navnitlal Javeri and Ellerman Lines. In view of these decisions, the Division Bench in this case held the circulars to be binding
on the Revenue, even if they deviate from the statute, holding that fair market value must only be used in cases where
consideration has been understated.

Other cases have also reiterated that it is not open to the Revenue to argue against circulars issued by it: 'It cannot but urge the
point of view made binding by the...circular'. Similarly, in Mahavir Aluminium, the Supreme Court held the CBEC circular
exempting agricultural mechanical appliances from the payment of duty to be binding on the Board. The most recent case that
deals with the question of whether circulars issued by the CBEC shall be binding on the Department is India Cements. The
Supreme Court, in 2011, held that circulars issued for the purpose of providing sales tax deferral (to increase the production levels
of industries in the State of Tamil Nadu) that are not contrary to the provisions of the Tamil Nadu General Sales Tax Act, 1959
would be binding on the Department. In the instant case, the circular did not conflict with either the statute or the scheme
contemplated thereunder, and the question of whether they shall be binding was thus inconsequential.

While the relevant provisions of various taxing statutes all suggest that circulars issued by taxing authorities shall be binding on
Department authorities, arguments are made that the extent to which these instructions and directions shall be binding must be
restricted in certain circumstances. Thus, the assessee can challenge the issuance of circulars, and adjudicatory authorities are also
afforded the flexibility to use their independent interpretations which may deviate from Department circulars.

· With Respect to Binding Nature of Circulars on Assesses:

While the position regarding the binding nature of circulars upon the Revenue is well-settled, a related question that arises for
consideration is whether circulars shall be binding on assessees. It is well-established that circulars issued by the CBDT do not
bind assessees. Thus, the assessee has the right to challenge the correctness of a circular before a quasi-judicial authority
constituted under the relevant statute if it confers greater burden than the statue permits.

A Full Bench in Uco Bank considered the effect of a certain circular issued under Section 119 of the Income Tax Act, 1961
exempting from income the interest payable on ‘sticky loans’, whose recovery is doubtful and has not been included in the profit
and loss account of the assessee. It stated: ‘Such instructions may be by way of relaxation of any of the provisions of the sections
specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair
enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of the Income-tax Act
which are binding on the authorities in the administration of the Act. Under Section 119(2)(a), however, the circulars as
contemplated therein cannot be adverse to the assesses.’ Therefore, the settled position of law with regard to assesses is that they
can challenge the circular if it has an adverse impact on them that deviates from the statutory position.

· With Respect to Binding Effect of on Courts and Tribunals:

According to the present position taken by the Courts, CBEC circulars shall be binding on the Courts as the interpretation of the
statue will supersede the interpretation given by Courts. According to the earlier point of view held by the Courts, notifications
issued by the Government are, in the opinion of the Court, mere understandings of statutory provisions, and cannot be used to
usurp the jurisdiction of the courts in interpreting statutory provisions. Thus, Bengal Iron suggests that quasi-judicial authorities
shall be bound only by ‘law’, which does not include administrative instructions, opinions, clarifications and circulars.
Nevertheless, the same Court in Kirloskar Oil Engines held that while trade notices issued by the CBEC generally have no binding
value, in the absence of other evidence, the court must consider trade notices in deciding disputes. The argument that CBEC
circulars shall not bind adjudicatory authorities was raised in Paper Products, wherein the orders of the Customs Excise and Gold
(Control) Appellate Tribunal (CEGAT) were challenged by an assessee who argued that the circulars exempting certain products
of the printing industry include his products of manufacture. The Revenue argued that the impugned circulars, though binding on
the Department, would not bind the CEGAT. The Supreme Court, in deciding that the circulars were binding on the Department,
ultimately held that the Department does not have the option of making arguments contrary to the impugned circulars.
Unfortunately, it did not actually address this validity of the Revenue’s contention. In Hindustan Aeronautics Ltd., however, a
conclusive decision on this point was made. A government-owned company aggrieved by the Revenue’s disallowance of certain
deductions for its manufacture of aeroplanes filed a revision petition before the Commissioner of Income Tax. Since the order
disallowing the deduction had been made the subject of a separate appeal before the Appellate Tribunal, the Commissioner
dismissed the petition. This decision was challenged by the assessee, who used Navnitlal Javeri and Ellerman Lines to argue that
the circular requiring the Commissioner to examine the revision of the assessee on merits would bind him. The Revenue, on the
other hand, argued that while it is unquestionable that circulars shall be binding on the Revenue, the Judiciary cannot direct that a
circular shall be given effect to rather than the Supreme Court or High Courts’ interpretation of the law in question. The Division
Bench agreed with the Revenue’s contention that a circular shall not bind adjudicatory bodies.

In 2002, this decision was effectively overruled by a Constitution Bench requested in Dhiren Chemicals. Here, a notification had
been issued by the CBEC exempting certain products from excise duty, where duty was ‘already paid’ on the raw materials used
in their manufacture, thus preventing the payment of double duty. The construction of this exemption had, for some time, been the
subject of controversy, raising the question of whether imported raw materials which are either not liable to excise duty, or have
the benefit of nil duty payable, shall be included within the ambit of this notification. The CBEC had, consequently, issued a
number of circulars clarifying that the benefit shall not apply unless excise duty had actually been paid on the raw materials
utilised. On the other hand, a Full Bench of the Supreme Court had already, in Usha Martin, decided that the notification would
apply even when a nil rate of duty was applicable. Thus, the Court in Dhiren Chemicals was required to choose whether to follow
the precedent set by its Full Bench earlier, or the interpretation rendered by the CBEC circular issued in this regard. The Court
ultimately held: 'We need to make it clear that, regardless of the interpretation that we have placed on the said phrase, if there are
circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said
phrase, that interpretation will be binding on the revenue.” This decision was the first to reflect a marked shift in the Judiciary’s
perspective on the extent to which circulars issued by the CBEC shall be binding. In effect, by holding the Department strictly to
the position adopted by it in the circulars it issues, the Court unwittingly weakened the impact of its own decisions by disregarding
the interpretation of the Full Bench in Usha Martin in favour of the interpretation rendered by the CBEC in the impugned order.
This precedent-setting statement, negating the impact of the decision rendered by a weaker bench earlier in Hindustan Aeronautics
Ltd., was subsequently followed in 2004 in Maruti Foam, when the Supreme Court reaffirmed that CBEC circulars shall be
binding notwithstanding their conflict with the judgment rendered in Usha Martin.

· With Respect to Benevolent Circulars:

Benevolent circulars issued by the Board even if they deviate from the legal position are required to be followed by the
department since such circulars would go to the assistance of the assessee. Apart from the fact that the circulars issued by the
Board are binding on the department, the department is precluded from challenging the correctness of the said circulars even on
the ground of the same being inconsistent with the statutory provision.

In Navnitlal Javeri, a Constitution Bench of the Supreme Court addressed the question of whether a circular issued by the Board
of Revenue, granting an exemption from income tax on genuine loans advanced by companies to their shareholders, would be
binding on the Board, notwithstanding that its contents violated the parent statute. Section 2(6A) of the Income Tax Act, 1961
made no distinction between bona fide transactions and devices used for tax avoidance (by providing shareholders tax-free loans
instead of taxable dividends). The Court held that since the circular was conferring a benefit upon assessees and diluting the
stringent requirements of the Act, the Board was required to comply with its own instructions, and could not itself contend that the
circular could not be enforced. The decision in Navnitlal Javeri was affirmed by the Division Bench in Ellerman Lines, in which
the impugned notification laid down the principles to be followed in assessing the Indian income of foreign shipping companies.
Accordingly, Ellerman Lines, a British shipping company, was by the said notification assessed by way of a certificate issued by
U.K. authorities (declaring the income of the company), allowing an investment allowance which had been recognised by the
Revenue in India as equivalent to the development rebate made available under the Income Tax Act, 1922. Interestingly, the Court
recognised the difficulties faced by shipping companies in complying strictly with the income tax provisions of various countries
in which they operate, and, as a result, considered the notification, waiving strict compliance with the requirements of the Act, to
be valid and binding on the Revenue

· With Respect to Aid to Construction:

Further a circular provides extraneous aid to construction being contemporanea exposito.

· With respect to Earlier Orders:

Where a circular is issued after the date on which the particular order is passed, the later issued circular can have no application to
the earlier passed order unless there is something in the circular making itself applicable even retrospectively.

· With Respect to Withdrawn Circulars:

Sometimes a circular is withdrawn or the section concerned

is amended. In the case of Ellerman Lines Ltd. vs CIT, the

Supreme Court held that instructions issued by the Board

prior to the amendment of a section will hold good even if

they are not strictly in accordance with the related section

but merely lay down certain just and fair methods of approach to a difficult problem. In Tata Iron and Steel Co.

Ltd. vs Upadhyaya, it was made clear that the withdrawal of

a circular, subsequent to an assessment or any other action

in pursuance of the same, will not affect the legal position.

POWERS OF OTHER INCOME TAX AUTHORITIES:

Powers of the Income Tax Authorities vary with the nature of the position acquired. Given below are the various tax authorities
along with the powers they hold under that position.

Director General/ Director:

The Director General/ Director, appointed by the Central Government, are required to perform such functions as maybe assigned
by the Central Government, are required to perform such functions as may be assigned by the Central Board of Direct Taxes. This
position enjoys the following powers under different provisions of the Act:

a. To give instructions to the Income-Tax officers

b. To enquire or investigate into concealment

c. To search and seizure

d. To requisite books of account

e. To survey
f. To make any enquiry

Commissioners of Income Tax:

Commissioners are appointed by the Central Government. Generally, they are appointed to head income-tax administration of a
specified area. As the head of administration, a Commissioner of income-tax enjoys certain administrative as well as judicial
powers. A commissioner may exercise powers of an assessing officer. It has the power to transfer any case from one or more
assessing officers to any other assessing officer. It can grant approval for an order issued by the assessing officer. Prior approval is
required for reopening of an assessment. Its, also, has the power to revise an order passed by an assessing officer in addition to
many other powers as given in the Income Tax Act, 1961.

Commissioner (Appeals):

Commissioners of Income-Tax (Appeals) are appointed by the Central Government. It is an appellate authority vested with the
following judicial powers:

a. Power regarding discovery, production of evidence etc.

b. Power to call information.

c. Power to inspect registers of companies.

d. Power to set off refunds against tax remaining payable.

e. Power to dispose of appeals.

f. Power to impose penalty.

Joint Commissioners:

Joint Commissioners are appointed by the Central Government. The main function of the authority is to detect tax- evasion and
supervise subordinate officers. Under the different provisions of the Act, the Joint Commissioner enjoys the power to accord
approval to adopt fair market value as full consideration, instruct income tax officers, exercise powers of income tax officers, the
power to call information, to inspect registers of companies, to make any enquiry among other powers.

Income-Tax Officers:

While Income-Tax officers of Class I services are appointed by the Central Government, Income-tax Officers of Class II services
are appointed by the Commissioner of Income-Tax. Powers, functions and duties of Income-Tax officers are provided in many
sections, some of which are Power of search and seizure, Power of assessment, Power to call for information, Power of Survey
etc.

Inspectors of Income-Tax:

They are appointed by the Commissioner of Income-Tax. Inspectors of Income-Tax have to perform such functions as are
assigned to them by the Commissioner or any other authority under whom they are appointed to work.

THE SCOPE OF EXERCISE OF THE POWERS GIVEN TO THE INCOME-TAX AUTHORITIES:

The Income Tax Act, 1961 specifies the scope of the powers handed to the income-tax authorities. Given below are some of the
important powers of the Income Tax Authorities and their scope as given in the Sections provided under the Income Tax Act,
1961:
· Power to Transfer Cases [Section 127]:

CBDT can transfer the case from Assessing Officer to another A.O. subordinate to him after giving a reasonable opportunity of
being heard to the concerned assessee. However, no opportunity of being heard shall be required if the case is to be transferred
from one A.O. to another A.O. within the same city, town or locality. Disputes regarding jurisdiction shall be resolved by the
concerned CCIT or CIT on mutual understanding. However, for any disagreement, the matter shall be referred to CBDT and
CBDT shall resolve the dispute by way of issuing a notification in the Official Gazette of India.

· Opportunity of Being Reheard [Section 129]:

Whenever, an Income Tax Authority ceases to exercise jurisdiction over a particular case and is being succeeded by another
Income Tax Authority, then the successor Income Tax Authority shall continue the pending proceeding from the same stage at
which it was left over by the predecessor Income Tax Authority. There shall be no requirement on the part of the successor
Income Tax Authority to reissue any notice already issued by his predecessor. However, if the concerned assessee demands that
before the successor Income Tax Authority continues the proceeding, he shall be given an opportunity of being reheard to explain
his case to the successor Income Tax Authority, then in such case, an opportunity of being reheard has to be given to the assessee.
(However, such an opportunity of being reheard is required to be given only if the concerned assessee demands for it and not
otherwise).The time of A.O. lost in giving such opportunity of being reheard to the assessee, shall be excluded while calculating
time limit to complete the assessment.

· Discovery, Production of Evidence etc. [Section 131]:

The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals), the Chief Commissioner
and the Dispute Resolution Panel referred to in section 144C have the powers vested in a Civil Court under the Code of Civil
Procedure, 1908 while dealing with the following matters:

(i) discovery and inspection;

(ii) enforcing the attendance of any person, including any officer of a banking company and examining him on oath;

(iii) compelling the production of books of account and documents; and

(iv) issuing commissions

· Search and Seizure [Section 132]:

Today it is not hidden from income tax authorities that people evade tax and keep unaccounted assets. When the prosecution fails
to prevent tax evasion, the department has to take actions like search and seizure. Under this section, wide powers of search and
seizure are conferred on the income-tax authorities. The provisions of the Criminal Procedure Code relating to searches and
seizure would, as far as possible, apply to the searches and seizures under this Act. Contravention of the orders issued under this
section would be punishable with imprisonment and fine under section 275A.

· Power to Requisition Books of Account etc. [Section 132A]:

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

· Application of Retained Assets [Section 132B]:

This section provides that the seized assets can be appropriated against all tax liabilities of the assessee. However, if the nature of
source of acquisition of seized assets is explained satisfactorily by the assessee, then, such assets are required to be released within
a period of 120 days from the date on which last of the authorisations for search under section 132 is executed after meeting any
existing liabilities. For this purpose, it has been provided that the assessee should make an application to the Assessing Officer
within a period of 30 days from the end of the month in which the asset was seized. The assessee shall be entitled to simple
interest at ½% per month or part of a month, if the amount of assets seized exceeds the liabilities eventually, for the period
immediately following the expiry of 120 days from the date on which the last of the authorisations for search under section 132 or
requisition under section 132A was executed to the date of completion of the assessment under section 153A or under Chapter
XIV-B.

· Power to call for information [Sections 133]:

The Commissioner The Assessing Officer or the Joint

Commissioner may for the purpose of this Act:

(a) Can call any firm to provide him with a return of the addresses and names of partners of the firm and their shares;

(b) Can ask any Hindu Undivided Family to provide him with return of the addresses and names of members of the family and the
manager;

(c) Can ask any person who is a trustee, guardian or an agent to deliver him with return of the names of persons for or of whom he
is an agent, trustee or guardian and their addresses;

(d) Can ask any person, dealer, agent or broker concerned in the management of stock or any commodity exchange to provide a
statement of the addresses and names of all the persons to whom the Exchange or he has paid any sum related with the transfer of
assets or the exchange has received any such sum with the particulars of all such payments and receipts;

· Power of Survey [Section 133A]:

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

(a)To discover new assessees;

(b)To collect useful information for the purpose of assessment;

(c)To verify that the assessee who claims not to maintain any books of accounts is in-fact maintaining the books; (d)To check
whether the books are maintained, reflect the correct state of affairs.

· Power to Collect Certain Information [Section 133B]:

For the purpose of collection of information which may be useful for any purpose, the Income tax authority can enter any building
or place within the limits of the area assigned to such authority, or any place or building occupied by any person in respect of
whom he exercises jurisdiction.
· Power to Inspect Registers of Companies [Section 134]:

The Assessing Officer, the Joint Commissioner or the Commissioner (Appeals), or any person subordinate to him authorised in
writing in this behalf by the Assessing Officer, the Joint Commissioner or the Commissioner (Appeals), as the case may be, may
inspect and if necessary, take copies, or cause copies to be taken, of any register of the members, debenture holders or mortgagees
of any company or of any entry in such register.

· Other Powers [Sections 135 and 136]:

The Director General or Director, the Chief Commissioner or Commissioner and the Joint Commissioner are competent to make
any enquiry under this act and for all purposes they shall have the powers vested in an Assessing Officer in relation to the making
of enquiries. If the Investigating officer is denied entry into the premises, the Assessing Officer shall have all the powers vested in
him under sections 131(1) and (2). All the proceedings before Income tax authorities are judicial proceedings for purposes of
section 196 of the Indian Penal Code, 1860, and fall within the meaning of sections 193 and 228 of the Code. An income-tax
authority shall be deemed to be a Civil Court for the purposes of section 195 of the Criminal Procedure Code, 1973.

JURISDICTION OF INCOME-TAX AUTHORITIES:

Income Tax authorities are required to exercise their powers and perform their functions in accordance with directions given by
the Board. Tax authority higher in rank, if directed by Board, shall exercise the powers and perform tie functions of the Income-
Tax authority lower in rank. The directions of CBDT include direction to authorize any Income Tax authority to issue instructions
to their subordinates. In issuing instruction or orders, the Board or the Income-Tax authority may adopt any one or more of the
following criteria -

(a) Territorial area

(b) Person or classes of persons

(c) Incomes or classes of incomes

(d) Cases or classes of cases

The Board can also authorize Director General or Chief Commissioner or Commissioner to issue orders in writing to the effect
that the functions conferred or assigned to the Assessing Officer in respect of the above four criteria shall be exercised or
performed by Joint Commissioner or Joint Director.

Also, the Assessing Officer has been vested with jurisdiction over any area or limits of such area -

1. If a person carries on business or profession only in that area. In respect of that person; or

2. If a person carries on business or profession in more than one place, then the principal place of business or profession situated
in that area; or

3. In respect of any other person residing within that area.

Any dispute relating to jurisdiction to assess any person by an Assessing Officer shall be determined by Director General /Chief
Commissioner/Commissioner of Income Tax If the dispute is relating to areas within the jurisdiction of different Director General
/Chief Commissioner/ Commissioner, then such issue is to be solved mutually among themselves. If the above authorities are not
in agreement among themselves such matter has to be decided by the Board or Director General/ Chief Commissioner/
Commissioner authorized by the Board.
Q. Special provisions relating to income of non- residents and certain companies.

The provisions of “Chapter XII A of Income Tax Act – Special provisions relating to certain incomes of non-residents”contains
sections 115C, 115D, 115E, 115F, 115G, 115H and 115-I. These provisions are applicable to a Non-resident Indian who has
certain investment from which he derives : –

1. Certain investment income; and/ or

2. Long term capital gains on transfer of such investment.

Various provisions covered under Chapter XII-A of Income tax act are as under : –

Meaning of certain terms for the purpose of Chapter XIIA of Income Tax Act

Non Resident Indian :-

“Non-resident Indian” means an individual, who is either a citizen of India, or a person of Indian origin, and who is not a
“resident“.
A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided
India.

Investment Income :-

Investment income” means any income derived [other than dividends referred to in section 115-O ] from a foreign exchange
asset.

Foreign Exchange Asset

“Foreign exchange asset” means any of the following specified assets which assessee has acquired or subscribed to in
convertible foreign exchange:-

1. Shares in an Indian Public Company or Private Company) ;

2. Debentures issued by an Indian company which is not a private company (i.e., Public Indian Company)
3. Deposits with an Indian Public company ;
4. Any security of the Central Government ;
5. Such other assets as the Central Government may specify.

Meaning of Convertible Foreign Exchange

“Convertible foreign exchange” means foreign exchange which is for the time being treated by the RBI as convertible foreign
exchange for the purposes of the Foreign Exchange Management Act, 1999, and any rules made thereunder .

Meaning of Long Term Capital Gains

“Long-term capital gains” means income chargeable under the head “Capital gains” relating to a capital asset, which is both
a long term capital asset and a foreign exchange asset .
Computation of Total Income of Non Resident Indian – Section 115D – Deduction of Expenditure/Chapter VIA

The following provisions will be applicable, in computing the income of a non-resident Indian : –

1. No deduction of any expenditure or allowance

No deduction of any expenditure or allowance shall be allowed in computing the investment income of a non-resident Indian.

2. No indexation benefit and no deduction under Chapter VIA :-

Where the gross total income of the NRI, consists only ofinvestment income, or long-term capital gains, or both investment
income and long-term capital gains–

1. No deduction shall be allowed to the assessee under Chapter VI-A ; and

2. Benefit of indexation shall not be available for computing capital gains.

Tax Rate (Excluding Surcharge and Cess) of NRI – Section 115E

Income of a non-resident Indian, would be chargeable to tax that the following rates : –

 Investment income from foreign exchange asset would be chargeable to Tax at 20%.
 Long term capital gains from foreign exchange asset would be chargeable to Tax @ 10%.
 Any income other than the above two income would be chargeable to Tax at the rate applicable to individual taxpayers.

Exemption from Long Term Capital Gains – Section 115E

Conditions to be satisfied to claim benefit of Section 115E :-

Where the NRI satisfies the following conditions , long-term capital gains shall be exempt from tax : –

1. Assessee should be a non-resident Indian at the time of sale of capital asset . If the assesse was an NRI at the time of
acquisition, but not at the time of sale, exemption shall not be available ;
2. Long-term capital gains should arise from the transfer of a foreign exchange asset (original asset), and
3. The assessee should, within 6 months from date of transfer, invest the whole or any part of the net consideration [i.e.,
Sales consideration – Expenses on transfer] in any of the following assets :

 Shares in an Indian company (Public or Private Company) ;

 Debentures issued by an Public Indian company ;
 Deposits with an Indian Public company ;
 Any security of the Central Government ;
 National Saving Certificates VI and VII issue.

Amount of Exemption
Where the assessee , invest in any of the specified assets, the amount of exemption would depend upon,cost of acquisition of new
asset , as compared to the Net Sales consideration as under :-

When cost of acquisition of new asset ≥ Net consideration

Entire Capital gains shall be exempt from tax.

When cost of acquisition of new asset ≤ Net consideration

Exemption shall be computed by following formula : –

= (Capital gains/Net Consideration) x Cost of acquisition of new asset

Withdrawal of exemption on transfer of new asset

Capital gains exemption claimed by the assesse on original asset shall be deemed to be income chargeable under the head
“Capital gains” in the year which the new asset is transferred or converted into money, where the new specified asset, in
which the investment is made by the assesse is : –

 Transferred by the assessee within a period of 3 years from the date of its acquisition ; or
 Converted (otherwise than by transfer) into money, within a period of 3 years from the date of its acquisition,

Chapter XII A of Income tax act – Example 1

Mr. James, a non-resident Indian acquired 50,000 preference shares on 1.1.2014 @ 10 per share by utilizing foreign
currency.These shares are sold on 30.03.2017 @ 30 per share. Brokerage @ 1 per share is paid on sale of these shares. He
purchased 1,45,000 preference shares @ Rs 10 per share on May 1, 2017.Analyze tax implications ?

Solution –

Computation of Long-term Capital gains for the AY 2017-18

Particulars Amount
Sale consideration (Rs 50,000*30) 15,00,000

Brokerage (Rs 1 * 50,000) (50,000)

Net Consideration 14,50,000

Cost of Acquisition (50,000*10) [Note 1] (5,00,000)

Capital Gains 9,50,000

Exemption u/s 115F [Note 2] (9,50,000)

Long-term capital Gain Nil

Notes : –

1. Benefit of indexation is not available under chapter XII-A of Income tax act.
2. James is entitled to full exemption from capital gains u/s 115F as he has invested the entire net consideration of Rs
14,50,000 for investment in new shares.

Chapter XII A of Income tax act – Example 2

Discuss the tax implication in previous Example, assuming that Mr. James has purchased only 1,00,000 preference shares @ Rs
10 per share for the purpose of investing sale consideration.

Further, if Mr. James has sold such 1,00,000 shares on April 30, 2018, what would be the tax implication ?

Solution –

Computation of long-term capital gains for the AY 2017-18

Particulars Amount

Net Consideration 14,50,000

Cost of Acquisition (50,000*10) (5,00,000)

Capital Gains 9,50,000

Exemption u/s 115F [Note] (6,55,172)

Long-term capital Gain 2,94,828

Note : –
Computation of exemption u/s 115F

= (Capital Gains/Net Consideration) x Cost of new asset purchased

= (9,50,000/14,50,000) x 10,00,000

If Mr. James has sold such 1,00,000 shares on April 30, 2018, the specified asset would have been transferred within a period of
3 years from the date of its acquisition . This would result in long-term capital gains of Rs 6,55,172 being taxable in AY 2018-19.

Exemption from filing returns of Income – Section 115G

Anon-resident Indian, may chose not to file his return of income u/s 139(1) if —

1. his total income consisted only of investment income or income by way of long-term capital gains or both; and
2. the tax deductible at source has been deducted from such income.

Benefits of Chapter XIIA available even after Non resident Indian becomes Resident – Section 115H

Where a person, who is an NRI in any previous year, subsequently becomes assessable as resident,he has the following options :
–

a) Through a written declaration to the Assessing Officer, along with his return of income, NRI can opt to continue to be governed
by provision of Chapter-XIIA of Income tax act, in relation to the investment income from any foreign exchange asset. Such
provision shall then apply to him for that and all subsequent assessment year until the transfer or conversion (otherwise than by
transfer) into money of such assets.
b) An NRI may elect to opt out from the provisions of Chapter XII-A while filing his return of income . Thereafter, such
provisions shall then apply to him for that and all subsequent assessment year until the transfer or conversion (otherwise than by
transfer) into money of such assets.

Q. Canons of Taxation. Different Cannons of Taxation. Also, the modern principles of taxation. Also Distinguish between direct
and indirect tax with merits and demerits of it.

Canons of Taxation
Meaning of Canons of Taxation:
By canons of taxation we simply mean the characteristics or qualities which a good tax system should possess. In fact, canons of
taxation are related to the administrative part of a tax. Adam Smith first devised the principles or canons of taxation in 1776.
Even in the 21st century, Smithian canons of taxation are applied by the modern governments while imposing and collecting
taxes.

Types of Canons of Taxation:

In this sense, his canons of taxation are, indeed, ‘classic’. His four canons of taxation are:
(i) Canon of equality or equity
(ii) Canon of certainty
(iii) Canon of economy
(iv) Canon of convenience.

Modern economists have added more in the list of canons of taxation.

These are:
(v) Canon of productivity
(vi) Canon of elasticity
(vii) Canon of simplicity
(viii) Canon of diversity.

Now we explain all these canons of taxation:

i. Canon of Equality:
Canon of equality states that the burden of taxation must be distributed equally or equitably among the taxpayers. However, this
sort of equality robs of justice because not all taxpayers have the same ability to pay taxes. Rich people are capable of paying
more taxes than poor people. Thus, justice demands that a person having greater ability to pay must pay large taxes.
If everyone is asked to pay taxes according to his ability, then sacrifices of all taxpayers become equal. This is the essence of
canon of equality (of sacrifice). To establish equality in sacrifice, taxes are to be imposed in accordance with the principle of
ability to pay. In view of this, canon of equality and canon of ability are the two sides of the same coin.
ii. Canon of Certainty:
The tax which an individual has to pay should be certain and not arbitrary. According to A. Smith, the time of payment, the
manner of payment, the quantity to be paid, i.e., tax liability, ought all to be clear and plain to the contributor and to everyone.
Thus, canon of certainty embraces a lot of things. It must be certain to the taxpayer as well as to the tax-levying authority.
Not only taxpayers should know when, where and how much taxes are to be paid. In other words, the certainty of liability must be
known beforehand. Similarly, there must also be certainty of revenue that the government intends to collect over the given time
period. Any amount of uncertainty in these respects may invite a lot of trouble.

iii. Canon of Economy:

This canon implies that the cost of collecting a tax should be as minimum as possible. Any tax that involves high administrative
cost and unusual delay in assessment and high collection of taxes should be avoided altogether.
According to A. Smith: “Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as
little as possible, over and above what it brings into the public treasury of the State.”

iv. Canon of Convenience:

Taxes should be levied and collected in such a manner that it provides the greatest convenience not only to the taxpayer but also to
the government.
Thus, it should be painless and trouble-free as far as practicable. “Every tax”, stresses A. Smith:
“ought to be levied at time or the manner in which it is most likely to be convenient for the contributor to pay it.” That is
why, after the harvest, agricultural income tax is collected. Salaried people are taxed at source at the time of receiving salaries.
These canons of taxation are observed, of course, not always faithfully, by modern governments. Hence these are basic and classic
canons of taxation.

We now present other canons of taxation:

i. Canon of Productivity:
According to a well-known classical economist in the field of public finance, Charles F. Bastable, taxes must be productive or
cost-effective. This implies that the revenue yield from any tax must be a sizable one. Further, this canon states that only those
taxes should be imposed that do not hamper productive effort of the community. A tax is said to be a productive one only when it
acts as an incentive to production.
ii. Canon of Elasticity:
Modern economists attach great importance to the canon of elasticity. This canon implies that a tax should be flexible or elastic in
yield.
It should be levied in such a way that the rate of taxes can be changed according to exigencies of the situation. Whenever the
government needs money, it must be able to extract as much income as possible without generating any harmful consequences
through raising tax rates. Income tax satisfies this canon.

iii. Canon of Simplicity:

Every tax must be simple and intelligible to the people so that the taxpayer is able to calculate it without taking the help of tax
consultants. A complex as well as a complicated tax is bound to yield undesirable side-effects. It may encourage taxpayers to
evade taxes if the tax system is found to be complicated.
A complicated tax system is expensive in the sense that even the most honest educated taxpayers will have to seek advice of the
tax consultants. Ultimately, such a tax system has the potentiality of breeding corruption in the society.

iv. Canon of Diversity:

Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic or diverse in nature rather than having a
single or two taxes. Diversification in a tax structure will demand involvement of the majority of the sectors of the population.
If a single tax system is introduced, only a particular sector will be asked to pay to the national exchequer leaving a large number
of population untouched. Obviously, incidence of such a tax system will be greatest on certain taxpayers. A dynamic or a
diversified tax structure will result in the allocation of burden of taxes among the vast population resulting in a low degree of
incidence of a tax in the aggregate.
The above canons of taxation are considered to be essential requirements of a good tax policy. Unfortunately, such an ideal tax
system is rarely observed in the real world. But a tax authority must go on maintaining relentlessly the above canons of taxation so
that a near- ideal tax structure can be built-up.

Characteristics of Canons of Taxation:

A good (may be a near-ideal) tax system has to fulfil the following characteristics:
i. The distribution of tax burden should be equitable such that every person is made to pay his ‘fair share’.
This is known as the ‘fairness’ criterion which focuses on two principles:
Horizontal equity— equals should pay equal taxes; and vertical equity—un-equals should pay unequal taxes. That is to say, rich
people should pay more taxes.

ii. But equity must not hamper productive efficiency such that burdens should be provided to correct inefficiencies.
This ‘efficiency’ criterion says that it should raise revenue with the least costs to the taxpayers so that tax system can allocate
resources without distortion.
:
iii. The two other criteria are: ‘flexibility’ and ‘transparency’.
A good tax system demands changes in tax rates whenever circumstances change the system. Further, a good tax must be
transparent in the sense that taxpayers should know what they are paying for the services they are getting.

iv. A good tax system is expected to facilitate the use of fiscal policy to achieve the goals of
(a) stability
(b) economic growth.
For the attainment of these goals, there must be built-in-flexibility in the tax structure.

From the above discussion, it follows that taxation serves the following purposes:
(i) To raise revenue for the government
(ii) To redistribute income and wealth from the rich to the poor people
(iii) To protect domestic industries from foreign competition
(iv) To promote social welfare.

The modern principles of taxation are:

1. The rational combination of direct and indirect taxes, which implies the utilization of various types of taxes, taking
into consideration both the wealth and the income of the taxpayer. In periods of economic crisis it is better to have many
sources of budget revenue with a relatively low rate and a large taxation basis then to have 1-2 types of income with high
deduction rates.
2. The universalization of taxation which implies equivalent efficiency requirements to all payers and an equivalent
approach to the deduction of the tax amount irrespective of the income source, type of activity, or economic sector. It is
not acceptable to introduce additional taxes, increased and differentiated rates, or tax allowances for different types of
ownership, organizational or juridical structure of the entity, citizenship of natural persons or other factors. In addition,
taxes should not be established or applied on basis of political, economic, and ethnic factors, or other criteria of this type.
3. One-time taxation implies that one object can only be taxed once through one tax type for a specific period of time
indicated in the law.
4. The scientific approach for the determination of the exact tax rate, which implies setting the deduction rate at a level
that would allow the subject to have an income necessary for normal development. The magnitude of the tax burden
should allow the normal functioning of the taxpayer after paying the tax amount. It is not acceptable to set the tax rates
on basis of short-term interests of insuring state revenues and to the detriment of economic development or to the
interests of the taxpayer.
5. Stability, or the endurance of taxation for a long period of time and the simplicity of deducting the payment. Tax rates
should be determined by law and should not be revised frequently.
 6. Differentiation of tax rates in accordance to the level of income, which should not develop into an inhibitive
progression (i.e. a significant increase in tax rates), nor should it be transformed into an individualization of rates, which
contradicts the basic principles of the market.
7. The application of a tax allowances system, which would lead to an actual stimulation of investments into
entrepreneurship activities and would, at the same time, comply with the principle of social justice, including the
insurance of a minimum living standard of the citizens. Allowances should not be established for certain payers only–
they should be the same for everybody.

Parameter Direct tax Indirect tax

This tax on taxpayers for the goods and services

Tax Imposition This tax is directly the taxpayer’s income.
availed or purchased.

This tax is indirectly paid to the government

Payment course This tax is directly paid to the government.
through an intermediary.

These taxes are paid by individuals and

Paying Entity These taxes are paid by end-consumers.
businesses.

The rate of tax is decided by the government

Rate of Payment Tax rates are the same for everyone.
based on profit and income.

Transferability
This type of tax is non-transferrable. This type of tax is transferable.
of tax

This is a progressive type of tax. This tax rate This is a regressive type of tax, which means the
Nature of Tax increases with an individual’s profit and tax rate is not affected by the individual's
income. income.

Types of tax Income tax, wealth tax, corporate tax, etc. Sales tax, service tax, value added tax, etc.

Tax Collection Collecting this type of tax is difficult. Tax collection is relatively easier.

Benefits of Direct and Indirect Taxes

The key benefits of direct taxes are as follows:
1. Helps in establishing economic and social balance: The direct taxes are charged according to tax slabs. Individuals earning
lower income have to pay less tax and the individuals earning higher income have to pay more tax. Thus, this category of tax
helps in establishing social and economic balance.
2. Helps in reducing the rate of inflation: The tax rates are increased by the government when the economy faces inflation.
This eventually results in pulling down demand for goods and services, thus, reducing the rate of inflation.

The key benefits of indirect taxes are as follows:

1. Contribution is equal: Every individual pays some amount of indirect tax to the state government. Even the lower income
groups who are exempted from direct tax payment, are charged indirect tax on the goods and services they avail themselves.
2. Unavoidable tax: These taxes are charged on the goods and services consumed. That is why these taxes are unavoidable.

Disadvantages of Direct and Indirect Taxes

The disadvantages of direct taxes are as follows:
1. Can be avoided: The Government of India has framed stricter rules and policies in order to curb tax evasion. However,
fraudulent practices are still prevailing and many individuals are paying lower taxes than they should.
2. Investment restraints: A lot of individuals avoid making investment to escape from the imposition of direct taxes like
capital gains tax and securities transaction tax.
3. Viewed as burden: Direct taxes are often viewed as a burden as they require to be paid in single lump-sum amount annually.

The disadvantages of indirect taxes are as follows:

1. Unawareness: This type of tax is added to the product price and individuals are mostly unaware of the amount they are
paying.
2. Regressive:This type of tax is considered regressive in nature. Though they ensure that everyone pays taxes irrespective of
their income, they are not equal. Individuals from all income groups have to pay indirect taxes at the same rate.
3. Increases the price of goods and services: Indirect tax is charged on all the goods and services availed or consumed in
society. Thus, this type of tax increases the end price of goods and services.
Both direct and indirect taxes are important for the country as they are intricately linked with the overall economy. As such,
collection of these taxes is important for the government as well as the well-being of the country. Both direct taxes and
indirect taxes are collected by the central and respective state governments according to the type of tax levied.

Q. What is taxable event under GST? Discuss the concept of "composite supply" and "mixed supply" under the GST regime.
What is the tax treatment of composite supply and mixed supply under GST?

WHAT IS A TAXABLE EVENT?

A taxable event is one that occurs and results in tax liability. The occurrence of a taxable event is a crucial event in any law since
the levy and collection of tax is dependent on it. Although the taxable event occurs at a specific time, the levy and collection of the
tax may be postponed for administrative reasons.
The taxable event, or the moment in time when the tax will be imposed, is the basic pillar for the charging of tax under every
taxation act.
Previously, each indirect tax had its own taxable event (for example, manufacture in the case of Excise Duty, provision of services
in the case of Service Tax, sale of products in the case of VAT/CST, and so on). The provision of goods or services, or both, is a
taxable event under the GST framework.
Article 366 (12A) of the Constitutional (101st Amendment) Act, 2016 defines “Goods and Services Tax” as any tax on supply of
goods, or services or both, except for taxes on the supply of alcoholic liquor for human consumption

COMPONENTS OF A TAXABLE EVENT

 All forms of supply of goods and services like sale, transfer, barter, exchange, licence, rental, lease or disposal.
 Made or agreed to be made for a consideration by a person
 In the course or furtherance in the business.
In order to fully grasp the concept of a taxable event under GST, it is important to understand supply under GST. The
next section talks about supply under GST in great detail.

WHAT IS A SUPPLY UNDER GST?

Sale, transfer, exchange, barter, licensing, renting, lease, and disposal are all examples of supply. If a person engages in either of
these transactions for a consideration in the course or advancement of their business, they will be included by the GST definition
of supply.

ELEMENTS OF SUPPLY

The supply consists of two essential elements:

  Supply done for a consideration
 Supply done in course of furtherance of business
CHARACTERISTICS OF SUPPLY

SUPPLY OF GOODS OR SERVICES

If there is a transfer of title of commodities during a transaction, it is termed a supply of goods.

A provision of service occurs when a transfer of rights of commodities occurs without a transfer of title.

If you use transportation services, for example, the right to use the service is passed to you, but ownership remains with the
transportation firm.

SUPPLY SHOULD BE TAXABLE

A taxable or tax-exempt supply of goods or services exists. Goods and services that are subject to GST are known as taxable
supplies.

Tax-exempt supplies are those that fall into one of the GST Act’s specified categories of goods or services.

SUPPLY SHOULD BE MADE BY A TAXABLE PERSON

A taxable person is someone who is registered, or who is required to register, or who has voluntarily registered under the GST.
Under GST, a supply between two non-taxable individuals is not deemed as a supply.

If a person provides products or services in many states or has several corporate verticals, they must register for each state or
vertical separately. Each of these registered entities will be treated as a separate taxable entity.

SUPPLY SHOULD BE MADE WITHIN A TAXABLE TERRITORY

Except for the state of Jammu & Kashmir, taxable territory refers to any region in India.

SUPPLY SHOULD BE MADE IN EXCHANGE FOR CONSIDERATION

Consideration is described as a barter of products or services or a monetary or in-kind payment for a supply. The government
accepts an advance payment or deposit toward a supply as a kind of consideration.

The following actions shall be considered as a supply under the CGST Act, even if they are performed without consideration:

 When an enterprise disposes or transfers its assets permanently for which it has received input tax credits.
 For commercial purposes, a supply is made between separated or two related individuals.
 Products received by an agent on behalf of a client or goods supplied by an agent on behalf of a supplier.
 In case a taxable person gets services for commercial reasons from a related person or from his or her own business that’s
not situated in India.
SUPPLY SHOULD BE MADE IN THE COURSE OF BUSINESS OR IN ORDER TO ENABLE A COMPANY TO
EXPAND.

Only commercial transactions are subject to GST. As a result, a transaction must be performed for business objectives in order to
be deemed a supply under GST. When supplies are provided for personal use, they are not considered supplies under GST.

While these six elements outline the definition of supply, there are a few exceptions to the requirement of supply be made for
consideration and in the course of business.

Except in a few cases where a transaction is regarded to be a supply even without compensation, any transaction involving the
supply of goods or services without consideration is not a supply.

Furthermore, whether or not in the conduct or furtherance of business, the import of services for consideration is recognized as
supply.

THREE COMPONENTS OF SUPPLY UNDER GST

Place, value, and time are three elements of a GST supply that are used to determine the tax due for that transaction.

 Place of Supply: This tell if you any transaction is an intra-state supply, inter-state supply, or a foreign trade, in turn,
telling you the type of GST to apply.
 Value of Supply: This sections tell you the taxable value of a supply and, the final amount of the tax that one needs to
pay.
 Time of Supply: It tells you when the applicable taxes and GST returns are due.
TYPES OF SUPPLY UNDER GST

Supplies of goods and/or services are divided into two categories under the GST: taxable supplies and non-taxable supplies. Based
on the nature of the supply, these are further categorized into several kinds.

TAXABLE SUPPLIES

These are supplies of products and/or services that are subject to the GST. Refunds on tax paid during purchases are available to
registered taxpayers.

1. Regular taxable supplies

When you offer an item or service within India that has a GST rate of more than 0%, it is considered a regular taxable supply.

2. Nil rated supplies

Nil-rated supplies are when you supply items that are subject to a 0% GST rate by default.

3. Zero-rated supplies

When you make exports, supplies to an SEZ unit, or considered exports, the GST on the goods or services involved is zero, even
though they would be subject to a GST rate higher than 0% if sold within India. These are referred to as zero-rated supplies.

NON TAXABLE SUPPLIES

1.Exempt Supplies

Even if they are subject to GST, the supply of exempt products or services is not subject to it. The registered taxpayer, however,
cannot claim ITC on the inputs used to make such supply.

2. Non-GST supplies

This refers to the sale of goods that are not covered by the GST act.

COMPOSITE SUPPLY AND MIXED SUPPLY

There are a few products that are manufactured from two or more other items. Composite supply and mixed supply are two types
of such supplies.

A supply that consists of two or more goods/services must be delivered together in accordance with common business procedures
in that area.

To put it another way, these goods can’t be ordered separately. In the entire transaction, there is a principal supply and a
secondary supply. The tax rate on the principal supply will apply to the entire supply in such instances.

A mixed supply is a supply that consists of two or more items or services that are not always required to be sold together and are
independent of one another.

“It should not be a composite supply,” is the first criteria for mixed supply. The tax rate that is greater of the two supplies will be
applied to the entire supply in such instances.
Q. What is total income of an assessee as per the IT Act, 1961? Explain in brief, the Scheme of computation of total income of an
assessee under various heads of income. Is there any provision for set off and carry forward of losses of an assessee while
computing total of an assessee for the determination of his tax liability under the act?

As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise requires, the term “assessee” means a person by whom
any tax or any other sum of money is payable under this Act, and includes,-
(a) 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 by him or by
such other person, or of the amount of refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this Act.

a) Double taxation relief under the IT Act.

Double taxation is a situation where an income is subject to tax twice. This can occur in one of two ways - economic or juridical.
Economic double taxation occurs if an income or a part of it is taxed twice in the same country, in the hands of two individuals.
Alternatively, juridical double taxation occurs if income earned outside India is taxed two times in the hands of the same
individual, once abroad and once in their home country. This unique situation puts an undue burden on the taxpayer when their
income is taxed twice.

Types of Double Taxation

There are mainly two types of double taxation:

1. Corporate Double Taxation - This refers to the taxation on corporate profits through corporate taxation and dividend
taxation (imposed on dividend pay-outs).
2. International Double Taxation - This refers to the taxation of foreign income in both the country where the income is
derived and the country where the investor resides.

b) Incomes forming part of total income on which no income tax is payable.

Various categories of income are exempt from income tax under section 10. The assessee has to establish that his case clearly and
squarely falls within the ambit of the said provisions of the act.

1. Agriculture Income:

We can still consider India is the country mostly depending upon the agriculture and income generated from the activities of
agriculture. Agriculture income shall be excluded from the assessee total income (section 10, (1)) however, it shall be taken for
considering rate to tax non-agriculture income.

2. Share Of Profit From A Firm:

A partners share in the total income of the firm is totally exempted from the total income of the hands of the partner because firm
is separately assess as such. However, any salary interest commission paid or payable to the partner which was deductible from
the total income of the firm shall be included in the income of the partners total income as his business.

3. Leave Travel Concession:

If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by the employer, then such
reimbursement is fully exempted. But some provisions for it was as bellow;

1) Journey may be performed during service or after retirement.

2) Employer may be present or former.

3) Journey must be performed to any place within India.

4) In case, journey was performed to various places together, then exemption is limited to the extent of cost of journey from the
place of origin to the farthest point reached, by the shortest route.

5) Employee may or may not be a citizen of India.

6) Stay cost is not exempt.

4. Allowance Or Perquisite Paid Outside India [Sec. 10(7)]:

Any allowance or perquisite paid outside India by the Government to a citizen of India for Rendering Services Outside India.

5. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:

Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10) deals with the
exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity received by an assessee other
than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India is not eligible for
exemption u/s 10(10) as agents are not employees of LIC of India.

6. Compensation For Any Disaster [Sec. 10(10bc)]

Any amount received or receivable from the Central Government or a State Government or a local authority by an individual or
his legal heir by way of compensation on account of any disaster, except the amount received or receivable to the extent such
individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage caused by such disaster.

7. Sum Received Under A Life Insurance Policy [Sec. 10(10d)]:

Any sum received under a life insurance policy including bonus on such policy is wholly exempt from tax. However, exemption is
not available on – 1. any sum received u/s 80DD(3) or u/s 80DDA(3); or 2. any sum received under a Keyman insurance policy;
or 3. any sum received under an insurance policy issued on or after 1-4-20121 in respect of which the premium payable for any of
the years during the term of the policy exceeds 10%2 of the actual capital sum assured.

8. Payment From National Pension Trust [Sec. 10(12a) & 10(12b)]:

Any payment from the National Pension Scheme Trust to an assessee on closure of his account or on his opting out of the pension
scheme referred to in sec. 80CCD, to the extent it does not exceed 60% of the total amount payable to him at the time of such
closure or his opting out of the scheme [Sec. 10(12A)] Any payment from the National Pension System Trust to an employee
under the pension scheme referred to in sec. 80CCD, on partial withdrawal made out of his account in accordance with the terms
and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013, to the extent it does not
exceed 25% of the amount of contributions made by him [Sec. 10(12B)]

9. Payment From Approved Superannuation Fund [Sec. 10(13)]:

Any payment from an approved superannuation fund made – • on the death of a beneficiary; or • to an employee in lieu of or in
commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement;
or • by way of refund of contributions on the death of a beneficiary; or • by way of refund of contributions to an employee on his
leaving the service (otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such
retirement) to the extent to which such payment does not exceed the contributions made prior to 1-4-1962 and any interest
thereon. • by way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and notified by the
Central Government.

10. Income Of Mutual Fund [Sec. 10(23D)].

Any income of – a. A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulation made
thereunder; b. A Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of
India and subject to certain notified conditions.

11. Income Of Business Trust [Sec 10(23FC)]:

Any income of a business trust by way of a) interest received or receivable from a special purpose vehicle; or b) dividend referred
to in sec. 115-O(7) Ø “Special purpose vehicle” means an Indian company in which the business trust holds controlling interest
and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted
registration.

12. Income Of Specified Boards [Sec. 10(29A)]:

Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The Marine
Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products Export Development
Authority and The Spices Board.

13. Subsidy Received From Tea Board [Sec. 10(30)]:

Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea bushes or for
rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may specify, is exempt.

14. Awards And Rewards [Sec. 10(17A)].

Any payment made, whether in cash or in kind – a. in pursuance of any award instituted in the public interest by the Central
Government or any State Government or by any other approved body; or b. as a reward by the Central Government or any State
Government for approved purposes.

15. Income Of Scientific Research Association [Sec. 10(21)]:

Any income of a scientific research association [being approved for the purpose of Sec. 35(1)(ii)] or research association which
has its object, undertaking research in social science or statistical research [being approved and notified for the purpose of Sec.
35(1)(iii)], is exempt provided such association— a. applies its income, or accumulates it for application, wholly and exclusively
to the objects for which it is established; and b. invest or deposit its funds in specified investments.

16. Expenditure Related To Exempted Income [Sec. 14A]:

For the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee
in relation to income, which does not form part of the total income under this Act. Where the AO is not satisfied with the
correctness of the claim of such expenditure by assessee, he can determine the disallowable expenditure in accordance with the
method prescribed by the CBDT.

Q. Appeals under the IT Act

Income tax liability is determined by the Assessing Officer first. A tax payer aggrieved by various actions of Assessing Officer
can appeal before Commissioner of Income Tax (Appeals). Further appeal can be preferred before the Income Tax Appellate
Tribunal. On substantial question of law, further appeal can be filed before the High Court and even to the Supreme Court.
Various appellate procedures at different levels of appellate authority are defined hereunder:

 Appeal to Commissioner of Income-tax (Appeals)

 Appeal to Income-tax Appellate Tribunal
 Appeal to High Court
 Appeal to Supreme Court

d) Revision of an order by the CIT under the IT Act.

Watch YT
Q.Requirements of Good tax system? Discuss the concept of equity in Taxation.

The following are the characteristics of sound tax system of any state:

 Maximum Social Benefit: According to Dr. Dalton, that system of taxation is the best which is based on the principle of
maximum social advantage. To achieve this, the taxes should be on different sections of people in such a way that the
marginal sacrifice of different taxes should be the same. Every tax system should promote the greatest good of the
greatest number.
 Equality in the distribution of tax burden: There are two aspects to the problem of the tax system equality. The first is the
proper treatment of persons in like circumstances. The rate in this case is ‘equal treatment of equals’. All those persons
who are placed in similar circumstances should bear the same burden of taxation. The second aspect of equality in
taxation is the desirable relative treatment of persons in unlike circumstances. That is, those who are better off should pay
more taxes and they should bear a great burden of taxation.
 Multi-taxation system or diversity system- A multiple tax refers to the tax system in which taxes are levied on various
items. The tax system should be diversified instead of being concentrated in one or two taxes. At the same time, care
should be taken to avoid multiplicity of taxes.
 Productivity of the tax system: The term ‘productivity’ is interpreted in two senses. First, the taxation system should be
such as to provide adequate income to the government to meet its expenditure. As the needs of the public authorities
increase continually of the tax system should yield increased revenues.
 Rights of tax-payers: A sound tax system will have to safeguard the interests of the tax payers. In a democratic set-up, the
rights of the tax payers have to be continuously kept in mind. Besides, the present level of taxation as well as the further
prospects of taxation necessitate that the interest and rights of tax-payers should be given adequate recognition.
 Universal application of taxes: Each individual should pay according to his ability to pay, and the individual possessing
the same ability to pay should contribute the same amount by way of taxes without any discrimination. In India, income
tax is lacking these characteristics because income from agriculture is not taxed to the extent the incomes have been
taxed in the non-agriculture sector.
 Elasticity: The taxation system should provide to the government increased income with the increase in the national
income of the country. The taxation system should also yield more income when the government expenditure goes up.
Two things are essential to bring about elasticity in the tax system. First there should be proper blending of direct and
indirect taxes. Secondly, certain sources of income should be exclusively reserved for emergencies.
 Convenience: The government should keep in view the convenience of the tax-payer while devising the taxation system
of the country. Since the tax-payers make sacrifices when they pay the taxes, it is essential for the government to see that
they are not put to any avoidable inconvenience.

The Principle of Equity in Taxation !

An important question widely discussed in public finance is what kind of tax system is fair, just or equitable. As seen above,
equity in taxation was the first canon of taxation on which Adam Smith laid a good deal of stress. A fair tax system is not merely
an issue in pure economic analysis but also in social philosophy. There are two prominent theories put forward to devise a fair or
equitable tax system. They are (1) Benefits Received Theory and (2) Ability to pay Theory.

We discuss below these two theories of equity in taxation:

Benefits Received Theory:

According to this theory of taxation, citizens should be asked to pay taxes in proportion to the benefits they receive from the
services rendered by the Government. This theory is based upon the assumption that there is an exchange relationship or quid pro
quo between the tax payer and Government.

The Government confers some benefits on the tax payers by performing various services or providing them what are called social
goods. In exchange for these benefits individuals pay taxes to the Government. Further, according to this theory, equity or fairness
in taxation demands that an individual should be asked to pay a tax in proportion to the benefits he receives from the services
rendered by the Government.

However, there are some difficulties in application of this theory. The most crucial problem faced by benefits received approach is
that it is difficult to measure the benefits received by an individual from the services rendered by the Government.

For instance, how much benefit an individual tax payer derives from providing for national defence and education, and
maintaining law and order by the Government cannot be measured with any objective criterion. Secondly, most of the
Government expenditure is incurred on common indivisible benefits so that the division of benefits of Government expenditure is
not possible.

Further, benefits received theory militates against the very notion of a tax. A tax is defined as a payment for general purposes of

the State and not in return for a specific service. The benefit theory can have meaning if the benefits of the Government services to

the community as a whole are considered.

But this will only indicate how much total tax revenue the community should pay to the Government. This will not help us in

dividing the tax liability among various individuals comprising the community. It may be noted that most important common

benefits are peaceful enjoyment of life, liberty and property.

So far as life and liberty are concerned, Government’s protection is the same for all. This will indicate levying of a toll tax. But

toll tax has long been discarded as it was found to be highly regressive and also a small yielder of revenue.

The benefit principle is applicable only in cases where the beneficiaries can be clearly identified. Thus benefit principle is applied

to the collection of road tax from vehicle owners. This is also applied when local bodies collect special levies for the services such

as construction of sewers and roads they render to the people of their locality. The benefit principle is also applied to social

security programmes for workers.

Social security contributions, or what are called payroll taxes, which are collected from workers are kept in reserves out of which
benefit payments are made to them. To conclude, therefore, “at best the benefit principle can provide a partial solution to the
problem of fairness in taxation.”

Ability to Pay Theory:

The ability to pay is another criterion of equity or fairness in taxation. This theory requires that individuals should be asked to pay
taxes according to their ability to pay. The rich have greater ability to pay, therefore they should pay more tax to the Government
than the poor.

Essentially, the ability to pay approach to fairness in taxation requires that burden of tax falling on the various persons should be
the same. In the discussion of various characteristics of a good tax system, we mentioned about the two concepts of equity,
namely horizontal equity and vertical equity based on the principle of ability to pay.

According to the concept of horizontal equity, equals should be treated equally, that is, persons with the same ability to pay should
be made to bear the same amount of tax burden. According to the vertical equity, unequal’s should be treated unequally, that is,
how the tax burden among people with different abilities to pay is divided.

In both these concepts of equity, what exactly do we mean by ability to pay and what are the objective measures of ability to pay
are crucial. Some have explained the ability to pay treating it as a subjective concept. Others have treated the ability to pay in
terms of some objective bases such as income, wealth, consumption expenditure etc. We shall explain below both these
approaches to the measurement of ability to pay.

Ability to Pay: Subjective Approach:

In the subjective approach to tax paying ability, the concept of sacrifice undergone by a person in paying a tax occupies a crucial
place. In paying a tax, a person feels a pinch or suffers from some disutility. This pinch or disutility felt by a tax payer is the
sacrifice made by him. In this subjective approach to ability to pay, tax burden is measured in terms of sacrifice of utility made by
the tax payers.

The following three principles of sacrifice have been put forward by various authors:

1. The Principle of Equal Absolute Sacrifice;

2. The Principle of Equal Proportional Sacrifice; and

3. The Principle of Equal Marginal Sacrifice (or Minimum Aggregate Sacrifice).

The principle of equal absolute sacrifice implies that the tax burden in terms of utility sacrificed should be the same for all tax
payers. If U stands for total utility, Y stands for income and T for the amount of tax paid, then the principle of equal absolute
sacrifice requires that U(Y) – U (Y – T) should be the same for all individuals.

The term U(Y) implies that total utility of a given income Y and U(Y – T) implies the total utility of the post-tax income (Y – T).
If the equal absolute sacrifice principle is applied, none will be exempted from taxation and everybody will pay same amount of
the tax.

Now, the pertinent question is what type of tax, proportional or progressive, follows from this principle. If marginal utility of
money income falls, as is generally believed, and if this fall in marginal utility of money income equals the rate of increase in
income, then this principle will suggests proportional income tax. However, if the fall in marginal utility of income is greater than
the rate of increase in income, then equal absolute sacrifice principle will suggest progressive income tax.

Equal Proportional Sacrifice:

This principle requires that every person should be made to pay so much tax that the sacrifice of utility as a proportion of his
income is the same for all tax payers. In terms of the notation used above, this implies that U(Y) -U(Y-T)/U(Y) of all tax payers
should be equal. If a person enjoying higher income is to bear same proportion of sacrifice, then given the falling marginal utility
of income, he will have to pay income tax at a higher rate. This means progressive income tax.

Equal Marginal Sacrifice:

According to this principle, tax burden should be so apportioned among various individuals that marginal sacrifice of utility of
each person paying the tax should be the same. This approach seeks to minimize the aggregate sacrifice of the society as a whole.

When all persons pay so much tax that their marginal sacrifice of utility is the same, the loss of total utility by the society will be
minimum. Thus, the principle of equal marginal sacrifice looks at the problem of dividing the tax burden from the point of view of
welfare of the whole society. The social philosophy underlying this principle is that the total sacrifice imposed by taxation on the
community ought to be minimum.

Assuming that marginal utility of income falls, the principle of equality of marginal sacrifice implies very high marginal rates of
taxation. Indeed, in the extreme this principle can be used to recommend 100 per cent rate of tax on the people in highest income
bracket in the society. Thus this principle recommends a highly progressive tax structure.

This principle of taxation has been recommended among others by Edgeworth, Pigou and Musgrave who consider this as the
ultimate principle of taxation. It is worthwhile to quote Edgeworth, a chief exponent of this principle. “The minimum sacrifice is
the sovereign principle of taxation.

If one is utilitarian and believes not only in the measurability of utility but also in the view that the law of diminishing utility is
applicable to money also, then this principle would involve a high level of minimum exemption and a very steep progression as
income increases . The less the aggregate sacrifice, the better the distribution of tax burden in the community. The State exists to
maximize human welfare. This it will be able to do by minimizing the sacrifices involved.”