INCOME FROM SALARY:

An income earned is chargeable to tax under the head "salaries" if and only if there exists an
employer- employee relationship between the payer and the payee. The important features to
be considered are –
(1) Contract of service : The employer and employee must enter into a "Contract of
Service" and not the "Contract for Service". "Contract of service" bounds the
employee to work for the employer whereas in "contract for service" the payee is
not bound but he offers the payer to avail his services and pay the fees as a
consideration. (2) Relationship of master & servant: The relationship between
employer and employee must be like master and servant wherein the employer has
the direct supervision and control over the work of the employee. Also, the
employer gives the instructions to employee and the manner to carry out such
instructions
(2) Not a principal-agent relationship : The employer-employee relationship is
not a principal-agent relationship because in case of principal-agent
relationship, the agent is free to carry out the instructions given by the
principal in his own manner.
(3) Illustrations of employer and employee relationship :
(a) Employee v. Independent professional: Miss Y, an actress, is employed in Chopra
Films wherein she gets the monthly salary of Rs. 1 lakh. She acts in various films
and all the producers pay directly to Chopra Films. Here, the remuneration received
by Miss Y from Chopra Films constitutes her "Salary". In case Miss Y does not get
monthly remuneration from Chopra Films but receives from different producers,
then it does not constitute the 'Income from Salaries' and shall be treated as 'Profits
& Gains of Business or Profession'.
(b) Paper-setter / invigilator not an employee : If an individual is working in a school
as a teacher and gets the remuneration for the same, then such remuneration shall
come in the ambit of 'Salaries'. However, if he sets any examination paper or acts as
an invigilator in any examination and gets the fees for the same, then the fees so
received shall not constitute salaries and is taxable under the head 'Income from
other sources'.
(c) Salary received by MLA's/ MP's : MLA's and MP's are elected representatives
and not the government employees, hence the salary received by them will be
taxable under the head 'Income from other sources'. However, if they are assigned
any charge of ministry, then the remuneration received by them shall be taxable
under the head 'Salaries'.
(d) Remuneration received by Judges : Salary received by judges of court is
chargeable to tax as 'Salaries' as their employment is created by the Indian
Constitution. - Justice Deoki Nandan Agarwala v. UOI [1999] 237 ITR 872 (SC)
(e) Pay and allowances to Chief Minister is 'salary' : In view of Article 164(5) of the
Constitution of India, which provides for payment of salary to the Ministers, the pay
and allowances received by the Chief Minister from the State Government is
chargeable to tax as 'Income from Salaries'. - Lalu Prasad v. CIT [2009] 316 ITR
186 (Patna).

The concept of charge of salaries is discussed as under -

(1) Salaries [Section 15]: The following income shall be chargeable to income tax
under the head "Salaries"-
(a) Salary taxable on due basis : Any salary due from an employer or a former
employer to an assessee in the previous year, whether paid or not.
(b) Advance salary taxable on receipt basis : Any salary paid or allowed to him in
the previous year by or on behalf of an employer or a former employer though not
due or before it became due to him.
(c) Arrears of Salary taxable on receipt basis : Any arrears of salary paid or allowed
to him in the previous year by or on behalf of an employer or a former employer, if
not charged to income-tax for any earlier previous year.Thus, salary is taxed on due
basis or receipt basis whichever is earlier.
(2) Advance salary not to be taxed again on due basis [Explanation 1]: Where any
salary paid in advance is included in the total income of any person for any previous
year it shall not be included again in the total income of the person when the salary
becomes due.
(3) Salary received by partner of firm to be taxed under profit and gains of business
or profession [Explanation 2]: Any salary, bonus, commission or remuneration, by
whatever name called, due to, or received by, a partner of a firm from the firm shall
not be regarded as "salary" for the purposes of this section

(1) Fixed pay scale and graded pay scale : In fixed pay scale, the employee receives a
certain fixed amount of salary for a specified period whereas in case of graded
pay scale, the employee gets an annual increment in his salary on the basis of the
grade in which he is placed.
(WRITE ONE EXAMPLE )
(2) Tax-free salary : It means that the employer takes the burden of the tax which is
to be paid on the salary of the employee. Therefore, in such a case the taxable
salary of the employee shall include the tax paid by the employer on his behalf.
(WRITE ONE EXAMPLE )
(3) Advance Salary v/s Loan or advance against salary : Advance salary means that
the employee receives the salary before it becomes due to him and hence it is
taxable on receipt basis in the year in which it is received.
Deductions from salaries [Section 16] :
The income chargeable under head "Salaries" shall be computed after making the
following deductions –
(1) Standard Deduction [Section 16(ia)]: A deduction of Rs. 50,000 or the amount of the
salary, whichever is less.
(2) Entertainment allowance [Section 16(H)] : Only Government employees are entitled
to avail deduction on account of entertainment allowance. Entertainment allowance is
first included in the gross salary and thereafter deduction is given. The deduction is
allowed to the extent of least of the following –
(a) Actual amount received; or
(b) Rs. 5,000; or
(c) 20% of basic salary (salary exclusive of any allowance, benefit or other perquisite)
(3) Employment Tax [Section 16(iii)]: An assessee is allowed deduction of any sum paid
by him on account of a tax on employment within the meaning of Article 276(2). Under
the said article employment tax cannot exceed Rs. 2,500 per month.

TAXABILITY OF ALLOWANCES
The taxability of house rent allowance is discussed as under -
(1) House Rent Allowance [Section 10(13A)]: HRA is an allowance granted to an
employee for the payment of rent of his residence. Section 10(13A) provides an
exemption to the assessee who is in receipt of HRA from his employer. Least of
the following shall be exempt –
S. NO IN OTHER CITIES IN MUMBAI, DELHI,
CHENNAI AND
KOLKATA
1. Actual HRA received Actual HRA received
2. Rent paid less 10% of Rent paid less 10% salary
salary
3. 40% of salary 50% of salary

(2) Exemption not applicable: This exemption shall not apply in a case where - (a)
the residential accommodation occupied by the assessee is owned by him; or
(b) the assessee has not actually incurred expenditure on payment of rent in respect
of the residential accommodation occupied by him.
(3) Notes:
(a) Salary = Basic pay + Dearness Allowance (if it enters into retirement benefits) +
Percentage-wise fixed commission on turnover.
(b) Salary is taken on due basis for the period for which HRA is granted.
(c) Computation of exempted HRA depends on— (i) HRA actually received, (ii)
Amount of rent paid, (iii) 'Salary' of employee and (iv) Place of situation of rented
house.
If there is change in any of the factors during the previous year, the exemption
should be worked out on 'monthly basis'

There are many allowances some of which are fully taxable, some are partially
taxable
and some are wholly exempt from tax.
(1) Fully Taxable Allowances :

➢ Dearness allowance;

➢ City Compensatory allowance;

➢ Medical allowance;

➢ Tiffin allowance;

➢ Servant allowance;

➢ Project allowance;

➢ Interim Allowance;

➢ Non-practicing Allowance;

➢ Family allowance;

➢ Overtime allowance;

➢ Warden allowance;

➢ Transport allowance to employee other than blind/ deaf and dumb/

orthopedically
handicapped employee;

➢ Any other cash allowance etc

Partly Taxable Allowances :
Allowances exempt from tax to the extent of amount expended for the purpose for
which they are given [Section 10(14)(i)]: Allowances granted to meet expenses
wholly, necessarily and exclusively incurred in the performance of the duties of an
office or employment of profit, to the extent such expenses are actually incurred for
that purpose :
(i) Travelling Allowance to meet cost of travel on tour or on transfer (including
any sum paid in connection with transfer, packing and transportation of
personal effects on such transfer).
(ii) Conveyance Allowance to meet expenditure incurred on conveyance in
performance of official duties if free conveyance is not provided by the
employer.
(iii) Uniform Allowance to meet expenditure incurred on purchase or
maintenance of uniform or wears during the performance of the duties of an
office or employment of profit.
(iv) Daily Allowance granted on tour or for the period of journey in connection
with transfer, to meet ordinary daily charges incurred on account of absence
from his normal place of duty.
(v) Research Allowance for encouraging the academic, research and training
pursuits in educational and research institutions.
(vi) Helper Allowance to meet expenditure incurred on a helper where such
helper is engaged for performance of official duties or employment of profit

• Children Education Allowance - Granted to meet the tuition fees of a maximum

of two children. : Up to Rs. 100 per month per child for a maximum of 2
children
• Transport Allowance granted to an employee working in any transport system to
meet his personal expenditure during the performance of his duties for going
from one place to another, provided he does not receive the daily allowance, :
• Tribal Area or Special Compensatory or Scheduled Area or Agency Area
Allowance (Subject to certain locations) : 200 PER MONTH
• Underground Allowance granted to employees working in uncongenial,
unnatural climates in underground mines Up to Rs. 800 per month
• Hostel allowances: 300 PER MONTH / 2 CHILD
Wholly Exempt Allowances :
(a) Allowances to Indian citizen who is a government employee and rendering
services outside India [Sec. 10(7)].
(b) Allowances to High Court judges.
(c) Sumptuary Allowance to judges of High Court and Supreme Court.
(d) Allowances to employees of UNO
PERQUISITES
Meaning of Accommodation [Explanations to Section 17(2) read with Rule 3] : As per
Rule 3, "accommodation" includes a house, flat, farmhouse or part thereof, or
accommodation in a hotel, motel, service apartment, guesthouse, caravan, mobile home,
ship or other floating structure.
Valuation of Rent Free Accommodation : The value of residential accommodation
provided by the employer directly or indirectly to the assessee or to any member of his
household by reason of his employment, shall be determined in the following manner:

Circumstances When accommodation is When accommodation is

unfurnished furnished
When accommodation License fee determined Value calculated under
is provided by the by the Government as column (3) as increased by
Government to its reduced by the rent - 10% p.a. of the cost of
employees holding actually paid by the furniture if owned by
office/ post in employee. employer or actual hire
connection with charges payable in case the
Government affairs furniture is taken on hire.
Any charges recovered
from the employee shall be
deducted
(a) When the Any charges recovered Value calculated under
accommodation is from the employee shall column (3) as increased by
provided by any other be deducted - 10% p.a. of the cost of
employer and such furniture if owned by
accommodation is employer or actual hire
owned by the employer charges payable in case the
furniture is taken on hire.
Any charges recovered
from the employee shall be
deducted.
(b) Such accommodation is Lower of – Value calculated under column
taken on lease or rent (i)actual rent paid by the (3) as increased by - 10% p.a.
by the employer - employer; or (ii)15% of salary; of the cost of furniture if
Any amount recovered from owned by employer or actual
the employee shall be reduced. hire charges payable in case the
furniture is taken on hire. Any
charges recovered from the
employee shall be deducted
When the Not applicable. Lower of -
accommodation is (i) the actual charges paid/
provided by the above payable to such hotel; or
employers in a hotel - (ii) 24% of salary;
Any amount recovered
 from the
employee shall be reduced.

Notes:
(1) Salary = Basic pay + Dearness allowance/pay (if forms part of superannuation or
retirement benefits) + Bonus + Commission + Fees + All taxable allowances + All
monetary payments chargeable to tax; from one or more employers,Salary does
not include –
(2) Exemption: The perquisite shall be exempt in the following cases-
(a) Hotel accommodation not exceeding 15 days: When the employee is provided
accommodation in a hotel for a period not exceeding 15 days on account of his
transfer from one place to another, then the value of such perquisite shall be Nil.

Gratuity [Section 10(10)]: The exemption to the assessees who are in receipt of
gratuity from their employers at the time of death or retirement from
employment is as under —

Section Particulars of Employee Amount of exemption

Central Government Fully exempt
employees/ Members of
civil services/ Local
authority employees etc.
Other Employees :Least of the following is
Employees covered under exempt - (i) Rs.20 lakh; or
Payment of Gratuity Act, (ii) Actual gratuity received;
1972 or (iii) (15 ÷ 26) x Salary
last drawn x No. of
completed years of service
or part thereof in excess of 6
months.
Note: Salary = Basic pay +
Dearness allowance (always
included). In case of
seasonal establishment, 15
days shall be substituted by
7 days. Part of a year
exceeding 6 months is taken
as a full year.
Employees not covered by Least of the following is
the payment of Grauity Act, exempt — (i) Rs. 20 lakh,
1972 being the specified limit; or
(ii) Actual gratuity received;
or (iii) ½ x Average Salary x
Completed years of service
(fraction of a year not to be
considered) Average salary =
Average of salary in last 10
months preceding the month
 of retirement. For example:
Retirement is on 15th
February 2022, then average
salary will be average of
salary from 1st April 2021 to
31st January 2022. Salary =
Basic pay + Dearness
allowance (to the extent it
forms part of retirement
benefits) + % wise fixed
commission on turnover

Notes:
(1) Gratuity received by an employee while in employment is fully taxable.
(2) If an individual receives gratuity from more than one employer in the same
previous year, then the total amount of exemption claimed in that previous year
shall not exceed Rs. 20 lakhs.
(3) If an assessee has already availed exemption in respect of any gratuity
received from previous employer in earlier years, then while computing the
exemption in the current year, the maximum exemption limit of Rs. 20 lakhs
shall be reduced by the amount of exemption already availed.
(4) In case if the employee has rendered services to any other employer in the
earlier years and did not receive any gratuity from him, then such period of
services rendered to his former employer shall also be included while calculating
'completed years of service'. - CIT v. PNMehra [1993] 201 ITR 930 (Bom.)

LEAVE ENCASHMENT
Exemption of Earned leave salary [Section 10(10AA)]: Exemption for leave
encashment received by an individual from his employer, on retirement,
superannuation or otherwise is as under —
(i) In case of Government employees: Wholly exempt.
(ii) In case of any other Employees (including the employees of a local authority/
a statutory corporation): Least of the following is exempt -
(a) Actual amount received; or
(b) Rs. 3,00,000; or
(c) 10 months' average salary; or
(d) Average salary x leaves at the credit of an employee taking 30 days in a year
for completed years of service (fraction of year is to be ignored while computing
completed years of service)

Where -
➢ Salary = Basic pay + Dearness Allowance (if it forms part of retirement
benefits)
+ Percentage-wise fixed commission on turnover.
➢ Average Salary = Average of salary drawn in the last 10 months immediately
preceding the date of retirement. (E.g. - If a person retires on 16th March, 2021,
then 10 months average salary shall be computed from 16"' May, 2021 to 15th
 March, 2021)
➢ Leaves standing at the credit of employee = [Annual Leave Entitlement
(taking 30 days in a year) x Completed years of actual service rendered] - Leaves
actually
availed in service.

PENSION
Commuted Pension [Section 10(10A)]: The exemption in respect of commuted pension received by
an employee during a previous year is as under—

1. (1) Employees of the Central Wholly Exempt

Government local authorities/
Statutory Corporation/
Members of the Defence
Services
2. 2) Other employees - (a) In Exemption = 1/3rd of
receipt of gratuity (b) Not in Commuted value of pension
receipt of gratuity Exemption = 1/2 of Commuted
value of pension

Notes:
(1) Commuted value of pension = Pension received ÷ % of pension commuted.
(2) Uncommuted pension is fully taxable for all kinds of employees, (i.e. whether
government employee or non-government employee)
(3) Pension received from UNO is exempt.
(4) Commuted Pension received from pension fund established by LIC or any other
approved insurer under section 10(23AAB) is exempt from tax for all employees.
(5) Family pension received by legal heirs is not income from salaries, it shall be taxed
as 'Income from other sources'

RETRENCHMENT COMPENSATION
Exemption in respect of Retrenchment Compensation [Section 10(10B)[ :
Retrenchment Compensation received by an assessee shall be exempt to the extent of
least of the following –
1) Actual amount received; or
2) Rs. 5,00,000; or
3) An amount calculated in accordance with Section 25F(b) of the Industrial Disputes
Act, 1947 i.e. 15 days' average pay x Every completed year of service or part thereof in
excess of 6 months.

voluntary retirement/ separation.

Exemption in respect of compensation received on voluntary retirement or separation [Section
10(10C)]: Section 10(10C) grants exemption to the employees who are in receipt of voluntary
retirement receipts, subject to some conditions –

Eligible Employees: Only the employees of following undertakings are eligible -

(a) A public sector company;
(b) Any other company;
(c) An authority established under a Central/State or Provincial Act;
(d) A local authority;
(e) A co-operative society;
(f) A University established or incorporated under a Central/State or Provincial
Act and an institute declared to be a University by University Grants
Commission;
(g) An Indian Institute of Technology;
(h) Institute of management as the Central Government may specify in this behalf
through a notification in the Official Gazette;
(i) Central or State Government; or
(j) An institution having importance throughout India or in any state as the Central
Government may specify by notification in the Official Gazette

Limit of Exemption : Least of the following is exempt –

(a) Actual amount received;
(b) Rs. 5,00,000. The exemption shall be given even if the compensation is receivable in
instalments.

TAX TREATMENT OF PROVIDENT FUNDS ANDTAX RELIEF

Discuss the tax implications in respect of various Provident Funds.

The tax implications of various provident funds is as under -
 (1) Provident fund scheme : In a Provident Fund Scheme, employer deducts a
certain amount from the salary of employee for the purpose of contribution
towards a fund and the employer also contributes to the same. Both the
contributions are invested in securities and interest earned thereon is credited to
the fund.
Hence, Provident Fund consists of-
(c) employer's contribution and interest thereon; and
(d) employee's contribution and interest thereon.

(2) The various provident funds are -

(a) Statutory Provident Fund (SPF) : Statutory provident fund is set up under the
provisions of the Provident Funds Act, 1925. This fund is maintained by Government
and semi-Government organizations, local authorities, railways, universities and
recognised educational institutions.
(b) Recognised Provident Fund (RPF): A provident fund scheme to which the
Employee's Provident Fund and Miscellaneous Provisions Act, 1952 applies is
Recognised Provident Fund. Besides, these funds are recognized by the Principal CIT or
CIT or Principal CCIT or CCIT under the provisions of the Income Tax Act, 1961. The
Principal CIT or CIT recognizes only those funds which follow the rules given in the
Fourth Schedule of Income-tax Act.
(c) Unrecognised Provident Fund (URPF): If a provident fund is not recognized by the
Principal CIT or CIT of Income tax, it is known as unrecognized provident fund.
Tax treatment of various Provident Funds
Tax incidence of - SPF RPF URPF
(1) Employer's EXEMPT Exempt upto 12% of Not taxable when the
contribution salary [Note-1 & 2]] contribution is made
(2) Employee's TAXABLE TAXABLE Taxable
contribution
(3) Deduction u/s 80C AVAILABLE Available Not available
on employee's
contribution
(4) Interest credited to EXEMPT Exempt upto interest Not taxable when
PF calculated @ 9.5% p.a. interest is credited
[Note-3]
(5) Lump sum EXEMPT U/S Exempt from tax in ➢ Employer's
payment at the time 10(11) some cases. When not contribution &
of retirement or exempt provident interest thereon:
termination of service fund will be treated as Taxable as salary.
an unrecognised fund Relief can be claimed
from the beginning. u/s 89
[Note-2] ➢ Employee's own
contribution: Exempt,
as taxed earlier.
➢ Interest on
employee's
 contribution : Taxable
as 'Income from Other
Sources'.

Assessment Procedure: Filing Returns, PAN, Signatures, E-

Filing, etc.
Assessment Procedure:
Every assessee, who earns income beyond the basic exemption limit in a Financial Year (FY),
must file a statement containing details of his income, deductions, and other related
information. This is called the Income Tax Return (ITR). Once you as a taxpayer file the
income returns, the Income Tax Department will process it. There are occasions where, based
on set parameters by the Central Board of Direct Taxes (CBDT), the return of an assessee
gets picked for an assessment.
1. Self Assessment

Every assessee before filing income tax return under various sections viz. 139,
142(1), 148 or 153A is supposed to find whether he is liable for any tax, interest or
penalty. For this purpose section 140A has been introduced in Income tax act.

Procedure of self-assessment is as follows: Self-assessment calculation Summary:

Particulars Amount
Compute total income XX
Calculate tax payable on XX
total income
Add Edu. Cess +Surcharge if XX
any
Less Relief under section 89, 90, XX
91 & 90A
less MAT credit under 115JAA XX
or 115JD
Less TDS/TCS XX
Less Advance tax Paid XX
Add Interest u/s 234A, 234B, XX
234C
 Amount Payable as Self- XX
Assessment u/s 140A

If any amount is payable under section 140A then amount so paid shall be adjusted
against interest payable first and then balance amount to be adjusted toward tax
payable.
Inquiry before Assessment --142(1)
Section 142(1): for making assessment the AO may take any of the following steps :
i) Notice u/s 142 (1)(i): this notice can be issued to assessee (only those who have
not filed return) requiring him to furnish return when no any return has
been u/s 139(1) has been filed, within the time allowed u/s 139(1) or before the
end of the relevant assessment year.
ii) Notice u/s 142 (1)(ii): this notice can be issued to all assessees who filed return
or not to produce or cause to be produced such accounts or documents as the
assessing officer may require but shall not require the assesse to produce any
accounts relating to period of more than three years prior to the previous
year along with accounts of previous year under assessment

Example: suppose assessment for AY 2018-19 is to be made then accounts for

last 3 years FY 2014-15, FY 2015-16, FY 2016-17 and previous year 2017-18
may be required by officer.

iii) Notice u/s 142 (1)(iii): this notice can be issued to ay assessee who has filed a
return of income of whose time to file return u/s 139(1) has been expired, to
furnish, in writing and verified in prescribed manner information in such
form as he may require and he may also ask for a statement of all assets and
liabilities of the assessee for any number of previous year.

iv) Audit of accounts u/s 142(2A) to (2D):

The assessing officer may, at any time at any stage of the assessment, direct the assesse to get
the accounts audited by a Chartered Accountant nominated by Chief Commissioner /
Commissioner of Income Tax, such a decision may be taken by assessing officer, if having
regard to the nature, volume, multiplicity of transactions, doubts about the correctness of
accounts, specialized nature of business activity and in the interest of revenue is of opinion
that it is necessary to do so.
Above direction of Audit can be given even if accounts are already audited under the income
tax Act or any other law.
Audit report instructed under this notice shall be submitted in Form 6B not later than 180
days from the date of such direction. Expenses of such Audit determined by Chief
Commissioner / Commissioner shall be paid by Central Govt.
Section 142(3): The assessing officer before using such information gathered u/s 142(2) and
142(2A) for any assessment shall give an opportunity of being heard to the assessee.
However no such opportunity is necessary when the assessment is made u/s 144.

Consequences of non-compliance of section 142(1) and section 142(2A):

a) best judgement assessment u/s 144
b)penalty u/s 271(1)(b) which has been fixed at Rs. 10000/-
c) prosecution u/s 276D – rigorous imprisonment up to 1 year or fine from Rs. 4 to Rs. 10 per
day or both
d) issue of warrant u/s 132 for search

2. Summary Assessment
When a return is filled by an assessee and the AO make assessment on the basis of such
return, then it is called regular assessment on the basis of return.
Such kind of assessment also called summary assessment.
Where a return under section 139 or in response to notice under section 142 (1)
If any tax or interest is found due on the basis of such return, an intimation shall be sent
to the assessee specifying the sum so payable and such intimation shall be deemed to be
a notice of demand issued u/s 156 (response to notice)
If any refund is due on the basis of such return it shall be granted to the asessee and an
intimation to this effect shall be sent to the assessee;
is filed then u/s 143(1) this return is checked form the point of arithmetical accuracy
and will not be scrutinized in detail,
intimation u/s 143(1) shall not be sent after the expiry of one year from the end of the
financial year in which return is filed.
In this type of assessment, the information submitted by the assessee in the return of income
is cross-checked against the information that the income tax department has access to, it is a
type of assessment carried out without any human intervention, if any tax liability/refund
arises on summary assessment, intimation u/s 143(1) will be sent to assessee through e-mail.
This intimation should be treated u/s 156(1) or a refund order. No separate demand notice
will be issued. In this process, the reasonableness and correctness of the return are verified by
the department. The return gets processed online, and adjustments for arithmetical errors,
incorrect claims, and disallowances are automatically done.
3. Regular Assessment section 143(3)
When AO consider it necessary to verify the correctness or completeness of the return to
ensure himself of the following facts:
 that the assessee has neither understated his income
 nor overstated any expense or loss or
 underpaid any tax.
The income tax department authorizes the assessing officer or income tax authority, not
below the rank of an income tax officer, to conduct this assessment. The purpose is to
ensure that the assessee has neither understated his income nor overstated any expense
or loss or underpaid any tax.
a. If an assessee is subject to a scrutiny assessment, the Department will send a notice well in
advance. However, such notice cannot be served after the expiry of 6 months from the end of
the Financial year, in which return is filed.
b. The assessee will be asked to produce the books of accounts, and other evidence to validate
the income he has stated in his return. After verifying all the details available, the assessing
officer passes an order either confirming the return of income filed or makes additions. This
raises an income tax demand, which the assessee must respond to accordingly.
4. Best Judgement Assessment
This assessment gets invoked in the following scenarios:
a. If the assessee fails to respond to a notice issued by the department instructs him to
produce certain information or books of accounts
b. If he/she fails to comply with a Special Audit ordered by the Income tax authorities
c. The assessee fails to file the return within due date or such extended time limit as allowed
by the CBDT
d. The assessee fails to comply with the terms as contained in the notice issued under
Summary Assessment After providing an opportunity to hear the assessee’s argument, the
assessing officer passes an order based on all the relevant materials and evidence available to
him. This is known as Best Judgement Assessment.
This type of assessment is made when the assessee is not complying with the tax provisions.
The A.O., in the absence of sufficient information of the assessee, according to the best of his
ability, knowledge, and experience makes such judgment. In short, Best judgment assessment
refers to a situation where the officer computes the tax payable as the assessee does not
comply to provide or maintain necessary source documents or book of accounts to support
the claim when requested to submit.
FILING RETURNS
RETURN BY INDIVIDUAL/HUF/AOI/BOI/AJB:

Voluntary Return of Income [Section 139(1)]: Return of income filed under section 139(1) is
furnished by the assessee voluntarily and not in response to notice issued by the department, hence
it is known as voluntary return of income. As per Section 139(1),-

(i) A company or a firm; or

(ii) A person other than a company or a firm, if his total income or total income of any
other person in respect of whom he is assessable during the previous year exceeds the
maximum amount not chargeable to income tax, shall be required to furnish return of
income on or before the specified due dates. It has been provided that a person other
than company or firm has to furnish return of income on or before the due date in such
form and verified in such manner and setting forth such other particulars, as may be
prescribed —
(a) if his total income or total income of any other person in respect of which he is
assessable during the previous year, without giving effect to the provisions of Chapter
VI-A or Section 54 or section 54B or section 54D or section 54EC or section 54F or
section 54G or section 54GA or section 54GB exceeded the maximum amount not
chargeable to tax.
(b) if such person is not required to furnish return under Section 139(1) and has during
the previous year —
(i) has deposited an amount or aggregate of the amounts exceeding Rs. 1 crore in one or
more current accounts maintained with a banking company or a co-operative bank; or
(ii) has incurred expenditure of an amount or aggregate of the amounts exceeding Rs. 2
lakh for himself or any other person for travel to a foreign country; or
(iii) has incurred expenditure of an amount or aggregate of the amounts exceeding Rs. 1
lakh towards consumption of electricity; or
(iv) fulfils such other conditions as may be prescribed.
Note: Company or Firm is mandatorily required to furnish return whether having
income or loss : Every company or a firm shall furnish, on or before the due date, the
return in respect of its income or loss in every previous year.
The three situations where the Return of Income has to be compulsorily filed u/s 139(1)
of the Incometax Act, 1961 are as under:
(1)Companies and firms (whether having profit or loss or nil income);
(ii) a person, being a resident other than not ordinarily resident, having any asset
(including any financial interest in any entity) located outside India or signing authority
in any account located outside India, whether or not having income chargeable to tax;
(iii) Individuals, HUFs, AOPs or BOIs and artificial judicial persons whose total income
before giving effect to the provisions of Chapter VI-A or Section 54 or section 54B or
section 54D or section 54EC or section 54F or section 54G or section 54GA or section
54GB exceeds the basic exemption limit. (deduction se pehle)
(iv) Any person other than a company or a firm, who is not required to furnish a return
under section 139(1), is required to file income-tax return in the prescribed form and
manner on or before the due date if, during the previous year, such person –
(a) has deposited an amount or aggregate of the amounts exceeding Rs. 1 crore in one or
more current accounts maintained with a banking company or a co-operative bank; or
(b) has incurred expenditure of an amount or aggregate of the amounts exceeding Rs. 2
lakh for himself or any other person for travel to a foreign country; or
(c) has incurred expenditure of an amount or aggregate of the amounts exceeding Rs. 1
lakh towards consumption of electricity; or
(d) fulfils such other prescribed conditions.

Interest for defaults in furnishing return of income [Section 234A]:

(1) When interest under section 234A payable : Interest under section 234A is payable in
case of failure to file a return of income on or before the due date mentioned in Section
139(1) i.e. where an assessee furnishes the return of income after the due date or does not
furnish the return of income.
(2) Rate of Interest: Simple interest @ 1 % per month or part of a month. (3) Period for which
interest is payable: The period commencing on the date immediately following the due date
and ending on the following dates:
Fee for default in furnishing return of income [Section 234F]: The relevant provisions
are discussed as under— Fee of Rs. 5,000 / Rs. 10,000 payable for delay in furnishing
return of Income :
Without prejudice to the provisions of this Act, where a person required to furnish a return of
income under section 139, fails to do so within the time prescribed in Section 139(1), he shall
pay, by way of fee, a sum of, —
(a) Rs. 5,000, if the return is furnished on or before the 31st day of December of the
assessment year;
(b) Rs. 10,000 in any other case.
Rs. 1,000 payable if total income does not exceed Rs. 5,00,000 : If the total income of the
person does not exceed Rs. 5,00,000, the fee payable under this section shall not exceed Rs.
1,000.
Option to furnish return of income to employer [Section 139(1A)]:
(1) This section gives an option to a person, being an individual who is in receipt of income
chargeable under the head "Salaries", to furnish a return of his income for any previous year
to his employer, in accordance with such scheme as may be notified by the CBDT and subject
to such conditions as may be specified therein.
(2) Such employer shall furnish all returns of income received by him on or before the due
date, in such form (including on a floppy, diskette, magnetic cartridge tape, CD-ROM or any
other computer readable media) and manner as may be specified in that scheme.
(3) In such a case, any employee who has filed a return of his income to his employer shall be
deemed to have furnished a return of income under section 139(1).
Filing of returns in electronic format [Section 139(1B)] : Any person, being a company or
being a person other than a company, may, at his option, on or before the due date, furnish a
return of his income for any previous year in accordance with electronic furnishing of return
scheme, in prescribed form on or before due date of furnishing return. Return so filed shall be
deemed to be a return furnished under section 139(1).

PERMANENT ACCOUNT NO. (PAN)

Persons liable to apply for allotment of PAN [Section 139A(1)] : The following persons
are liable to apply for allotment of PAN within prescribed time-limit specified against
each case (Time limit as per Rule 114)-
(a) whose total income or total income of any On or before 31st May of Assessment Year for
other person in respect of which he is which such income is assessable (if he has not
assessable exceeded the maximum amount not been alloted any PAN earlier)
chargeable to tax
(b) who is carrying on a business or profession Before the end of that financial year (if he has
whose total sales/turnover/gross receipts are not been alloted any PAN earlier)
likely to exceed Rs. 5,00,000
c) who is liable to file a return under section Before the end of that financial year (if he has
139(4A) not been alloted any PAN earlier)
(d) being a resident, other than an individual, On or before 31st May of the immediately
which enters into a financial transaction of an following such financial year (if he has not been
amount aggregating to Rs. 2,50,000 or more in alloted any PAN earlier)
a financial year
e) who is the managing director, director, On or before 31st May of the immediately
partner, trustee, author, founder, karta, chief following financial year in which the person
executive officer, principal officer or office referred to in (d) above enters into financial
bearer of the person mentioned in (d) above or transaction specified therein (if he has not been
any person competent to act on behalf of such alloted any PAN earlier)
person.
(f) who intends to enter into such transaction as may be prescribed by the Board in the interest of
revenue.

(3) Specified class of persons to apply for allotment of PAN [Section 139A(1B)]: The Central
Government may, for the purpose of collecting any information which may be useful for or
relevant to the purposes of this Act, notify any class or classes of persons who shall apply to
the Assessing Officer for the allotment of the permanent account number and such persons
shall, within notified time, apply to the Assessing Officer for the allotment of a permanent
account number.
(4) Assessing Officer has power of suo motu allotment of PAN [Section 139A(2)] : The
Assessing Officer may, having regard to the nature of transactions as may be prescribed, also
allot a PAN to any other person (whether any tax is payable by him or not) in the manner and
in accordance with the procedure as may be prescribed.
(5) Any other person may apply for allotment of PAN [Section 139A(3)J: Any person, not
falling in any of the above categories, may apply to the Assessing Officer for the allotment of
a permanent account number and, thereupon, the Assessing Officer shall allot a permanent
account number to such person.
(6) Documents in which PAN to be quoted [Section 139A(5)J: Such person shall quote
Permanent Account Number-
(i) in all returns to or correspondences with any Income Tax authority;
(ii) in all challans for the payment of any sum due under this Act; and
(iii) in all documents pertaining to transactions prescribed by CBDT in the interests of the
revenue.
Further, every person shall intimate any change in his address/name/nature of business, on the
basis of which PAN was allotted to him.
(7) Obligation of person to intimate PAN to the payer deducting tax at source [Section
139A(5A)] : Every person receiving any sum or income or amount from which tax has been
deducted, shall intimate his permanent account number to the person responsible for
deducting such tax.
In case of minor : Where a person, entering into any transaction referred to in this rule, is a
minor and who does not have any income chargeable to income-tax, he shall quote the
permanent account number of his father or mother or guardian, as the case may be, in the
document pertaining to the said transaction.
Person not having PAN: Any person who does not have a permanent account number and
who enters into any transaction specified in this rule, he shall make a declaration in Form No.
60 giving therein the particulars of such transaction.

RECOVERY OF INCOME TAX

Need for Recovery & What Schedule Two says About it?
The word has its many meaning but the one we’re looking for is .i.e. recovery of income tax.
In history, these conditions did not exist as money was taxed on other factors. More property
a person owns, more tax they paid. The tax rates tend to incline during wars.
Schedule two is all about the modes through which recovery of tax can be done from
defaulters. It tells about the procedure to be followed when recovering tax from the defaulter
and it is to be read with section 222 and 276, which is further divided into four parts: –
1. Part I – General Provisions
2. Part II -Attachment and Sale of Movable Property
3. Part III -Attachment and Sale of Immovable Property
4. Part IV – Appointment of Receiver
5. Part V – Arrest and Detention of the Defaulter
6. Part VI – Miscellaneous
Under section 222 of the Income Tax Act states that in the situation of a defaulter, TRO (tax
Recovery Officer) will make a statement with his signature stating all amount of arrears in
due. Such a statement is to be called ‘Certificate’ in schedule two. This certificate will be
used to recover tax from the defaulter.
Rule 4 says about ‘Modes of Recovery’ of Income-tax, it specifies if the amount mentioned in
the notice is not paid within the specified time or whatever time TRO may grant under his
discretion. Then the Tax Recovery Officer shall proceed to recover the amount by any of the
methods mentioned below: –
 By attachment & sale of the defaulter’s movable/ immovable property;
 By arrest or detention of defaulter;
 By appointing a receiver for the management.
Attachment & sale of the defaulter’s movable/immovable property
Once the certificate is passed under section 222 of Income Tax Act anyone who tries to
conceal, remove, deliver or transfer to prevent recovery of tax will be punishable with a term
which might extend to 2-year punishment and fine provided under section 276. Any movable
or immovable property transferred to his minor child or to his son’s minor child even after
attainment will be adequate for consideration as assessee’s property. Within 15 days (under pa
period defaulter has to pay the amount in the certificate and if the Tax Recovery Officer
believes that defaulter is likely to conceal, dispose or remove his property. Action can be
taken even before the expiry of 15 days.
Appointing a receiver for the management
Where property of defaulter consists of business TRO appoints a receiver to manage the
business under Rule 69. A copy of the order of attachment is to be given to defaulter and
another copy to be fixed at premises and on the notice board of TRO. In case of immovable
property, TRO shall appoint a receiver to manage the property instead of directing a sale. The
management and attachment will be withdrawn at the direction of TRO at any time or when
the arrears have been paid out.
Arrest or detention of defaulter
Rule 73 Specifies Tax Recovery officer can issue an arrest warrant for defaulter other than in
case of minor, unsound mind or women (under Rule 81), where appearance is not made in
obedience to the notice. Such warrant of arrest issued by a TRO may also be executed by any
other TRO in whose jurisdiction defaulter is found in. In furtherance of warrant, defaulter
should be bought before TRO within 24 hours of his arrest. If defaulter pays the amount
described in warrant and cost of arrest, the Tax Recovery Officer should release him at once.

Other modes :
1. Recovery from salary 226(2)
2. Recovery from debtors 226(3)
3. Recovery from court 226
4. Recovery from movable property
5. Recovery through state government
Conclusion
Schedule two of the Income Tax Act is elaborative provision for the Modes of Recovery of tax.
Whenever there is a defaulter found he is sent notice u/s 222 known as a certificate for
recovery of tax. In it specifies if the amount mentioned in the notice is not paid within the
specified time or whatever time TRO may grant under his discretion. Then Tax Recovery
Officer shall proceed to recover the amount by any of the method, by attachment & sale of
the defaulter’s movable/ immovable property; By arrest or detention of defaulter; By
appointing a receiver for the management.

REFUND UNDER INCOME TAX ACT 1961

Section 237 of the Income Tax Act, 1961 deals with Income Tax refund of excess tax paid
by the assessee. If any person or assessee satisfies the assessing officer that the amount of the
tax paid by him or paid by any person on his behalf during any previous assessment year
exceeds the amount with which he is properly chargeable under the act for that year, he is
entitled to refund of excess amount paid.
The authority will also after considering the facts and circumstances of the case issue order
for the refund of excess tax paid by the assessee. It is right of the assessee to demand excess
tax paid over as tax assessed.
Is any assessee have paid the escess payment of tax from the tax due than he can get to refund
of such excess amount.
In other words if any person satisfies the AO that the tax paid by him for any assessment year
exceeds the amount with which he is properly chargeable under the act for that year he shall
be entitled to a refund of the excess.
CIRCUMSTANCES OF REASON FOR ARISING OF REFUND:
1. Where the refund arises by the order of judgement in a appeal.
2. The total tax deducted at sources is higher than the amount of tax
liability as determined on regular assessment.
3. Where the double tax is paid
4. Where the refund arises by rectification of a mistake
5. The mount of advance tax paid exceeds the tax liability as
determined on regular assessment
PROCEDURE FOR CLAIMING RETURN (SECTION 239)
1. EVERY CLAIM for refund shall be made in prescribed form and verified in the
prescribed manner.
2. Where any part of the total income of a person making a claim for refund of tax
consist of dividends or other source of income from which the tax has been deducted
at source, the application for refund shall be accompanied by the certificate received
in this connection.
3. Claim should be made within one year.
There is no requirement to made application in the following cases.
1. The refund arise as a result of the advance tax
2. Where the refund becomes due to the assessee as a result of rectification of the
mistake.
3. Where the refund arises on appeal.
PERSON ENTITLED TO CLAIM REFUND :
1. Assessee who has paid the tax
2. If a person is unable to claim any refund due to him because of his death, incapacity ,
insolvency, liquidation or any other case.
his legal representative can claim

APPEAL UNDER INCOME TAX ACT 1961

If any demand is raised by the Assessing Officer in the assessment, what’s the next step for
Assessee. Aggrieved tax payer can file appeal before the Commissioner (Appeals) having,
jurisdiction over the tax payer. Designation of the Commissioner (Appeals), with whom
appeal is to be filed is also mentioned in the notice of demand issued by the Assessing Officer
under section 156 of Income Tax Act.

WHEN APPEAL CAN BE FILED BEFORE COMMISSIONER (APPEALS), i.e.

APPEALABLE ORDERS:

Appeal can be filed before Commissioner (Appeals), when a tax payer is adversely affected
by Orders as under passed by various Income tax authorities:
 Order against tax payer where the tax payer denies liability to be assessed under
Income Tax Act;
 Intimation issued under Section 143(1) making adjustments to the returned income ;
 Scrutiny assessment order u/s 143(3) or an ex-parte assessment .order u/s 144, to
object to income determined or loss assessed or tax determined or status under which
assessed,
 Order u/s 115WE/115WF/115WG assessing fringe benefits;
 Re-assessment order passed after reopening the assessment u/s 147/150;
 Search assessment order u/s 153A or 158BC;
 Rectification Order u/s 154/155;
 Order u/ s 163 treating the taxpayer as agent of a nonresident;
 Order passed u/s 170(2)/(3) assessing the successor to the business in respect of
income earned by the predecessor;
 Order u/s 171 recording finding about partition of Hindu undivided family(HUF);
 Order u/s 115VP(3) refusing approval to opt for tonnage-tax scheme by qualifying
shipping companies;
 Order u/s 201(1)/206C(6A) deeming person responsible for deduction of tax at source
as assessee in default on failure to deduct/ collect tax at source or to pay the same to
the Government;
 Order determining refund u/s 237;
 Order imposing penalty u/s 221/271 /271A/271AAA/
271F/271FB/272A/272AA/272BB/275(1A)/158BFA(2)/271B/
271BB/271C/271CA/271D/271E

FORM OF APPEAL AND HOW TO FILL THE SAME:

Every appeal to the Commissioner (Appeals) is to be filed in Form No. 35. In this form,
details such as name and address of the tax payer, Permanent Account Number (PAN),
assessment year, details of the order against which appeal is filed etc. are to be filled in.
E- Form is used in these day for filing appeal , no Physical documents are accepted in the
department.
Against the column “Relief claimed in appeal”, amount of reductions sought in income
or any other relief sought in appeal is to be mentioned.
In the column “Statement of Facts”, relevant facts in respect of each subject matter of
appeal are to be mentioned in brief. Nature of business or profession, account books
maintained etc. may also be mentioned in this column.
Against column “Grounds of appeal”, points on which relief is sought in appeal are to be
mentioned in narrative form. For example, in an appeal against addition to the returned
income by applying a gross profit rate on estimated turnover, the ground of appeal may
be, “the Ld. Assessing Officer was not justified in rejecting the results as per regular
books of account and in estimating the income by applying an adhoc rate of gross profit.”
APPEAL FEES: Fees to be paid before filing appeal to the Commissioner (Appeals)
depends upon total income determined by the Assessing Officer. Fees as under are to be
paid and proof of payment of fee is to be attached with Form No. 35:

S.NO Total Income determined Appeal fees

by the Assessing Officer
1 Less than 1,00,000/ Rs. 250
2 More than 1,00,000 but less Rs. 500
than rs. 2,00,000
3 More than 2,00,000 Rs. 1000

TIME LIMIT FOR FILING AN APPEAL

Appeal is to be filed within 30 days of the date of service of notice of demand relating to
assessment or penalty order or the date of service of order sought to be appealed against,
as the case may be. The Commissioner (Appeals) may admit an appeal after the
expiration of period of 30 days, if he is satisfied that there was sufficient cause for not
presenting the appeal within the period of 30 days. Application for condoning the delay
citing out reasons for the delay along with necessary evidences should be filed with Form
No. 35 at the time of filing of appeal. Commissioner (Appeals) can condone the delay in
filing the appeal in genuine cases with a view to dispense substantive justice.

APPEAL PROCEDURE:

On receipt of Form no. 35, Commissioner of Income-tax (Appeals) fixes date and place
for hearing the appeal by issuing notice to the tax payer and the Assessing Officer, against
whose order appeal is preferred. The tax payer has a right to be heard either personally or
through an Authorized Representative.

APPEAL DECISION:
After the hearing is concluded, Commissioner (Appeals) passes order in writing,
disposing of the appeal and stating the decision on each ground of appeal with reasons. In
case of assessment and penalty, Commissioner (Appeals) may confirm, reduce or enhance
it. Before enhancing any assessment or penalty, Commissioner of Income-tax (Appeals)
has to provide reasonable opportunity to the tax payer for showing cause against such
enhancement. While disposing of an appeal, the Commissioner (Appeals) may consider
and decide any matter arising out of the proceedings in which order appealed against was
passed, even if such matter was not raised by the tax payer.
APPEAL BEFORE INCOME TAX APPELLATE TRIBUNAL
Appeal against an order of Commissioner (Appeals) lies with the Income Tax Appellate
Tribunal (ITAT). Both tax payer and the Assessing Officer can file appeal before the
Appellate Tribunal. Several Benches of the Appellate Tribunal comprising judicial and
accountant members have been constituted all over India.

TIME LIMIT FOR FILING APPEAL BEFORE ITAT: Appeal is to be filed before
the Appellate Tribunal within 60 days of the date on which order appealed against is
communicated to the taxpayer or the Commissioner, as the case may be.

WITH WHOM THE APPEAL IS TO BE FILED: Normally appeal is to be filed with

the Assistant Registrar or the Superintendent/ Assistant Superintendent/Clerk in the ITAT.

APPEAL BEFORE HIGH COURT

Appeal against Appellate Tribunal’s order lies with the High Court, Where the High Court
is satisfied that the case involves a substantial question of law. Appeal to the High Court
against Appellate Tribunal’s order can be filed by the tax payer or the Chief
Commissioner/Commissioner within 120 days of receipt of the order and in the form of
memorandum of appeal, precisely stating the substantial question of law involved. If the
High Court is satisfied that a substantial question is involved, it would formulate that
question. High Court hears the appeal only on the question of law so formulated;
however, the respondents can argue at the time of hearing that case does not involve such
question of law. Appeal filed before High Court is heard by bench of not less than two
Judges and decision is by majority.
APPEAL BEFORE SUPREME COURT
Appeal against High Court’s order in respect of Appellate Tribunal’s order lies with the
Supreme Court in those cases, which are certified to be fit one for appeal to the Supreme
Court. Special leave can also be granted by the Supreme Court under Art. 136 of the
constitution of India against the order of the High Court.