Taxation Law Question Bank BALLB

Q1. Various Heads of Income?
Ans. What are the Heads of Income Under the Income Tax Act?
For tax computation purposes, the income earned by you during a financial year is divided into 5 heads
of income in accordance with Section 14 of the IT Act, 1961. Having a clear understanding of the 5
income tax heads will make it easy for you to accurately declare and calculate your tax obligations for a
particular financial year.
The five heads of income are as follows:
1. Salary
2. House property
3. Capital gains
4. Profits and gains of business or profession
5. Other sources
Let us now look at the individual heads of income under income tax separately in the section below:
5 Heads of Income Tax Act
1. Income from Salary
If you are a professional with a salary as your primary source of income, this head is primarily applicable
to you. Under this heading, any compensation paid to you as employee remuneration, is accounted for.
However, remember that income will only be considered under this head if there is an
employee-employer relationship between the payee and the payer of such salary.
The income under the salary head involves an employee’s basic wages, pension, perquisites, gratuity,
commission, annual bonus and any salary paid in advance, if applicable. Upon adding the various
components under this head, one can get their gross income.
The following are some of the common allowances for which you can claim tax deductions:
1. HRA
House Rent Allowance (HRA) is generally part of a standard salary package. It is an allowance that
employees receive to pay their house rent. Subject to certain conditions, you can claim exemptions for
HRA under Section 10 (13A) of I-T Act, 1961. The tax exemption you can claim for HRA will be the lowest
among the following:
● HRA received from your employer

● 50% of the basic salary if you live in a metro city or 40% if you live in a non-metro city
● Actual rent paid per month minus 10% of your annual salary
2. Conveyance Allowance
This is an allowance that employers generally pay to compensate for the cost of travel between your
home and workplace. Under Section 10 (14(ii)) of I-T Act 1961, you can claim a maximum tax exemption
of ₹1,600 per month or ₹19,200 per year.
3. LTA
Leave Travel Allowance or LTA is a part of your compensation which you can use to pay for your personal
travel expenses. It is a cost-to-the-company (CTC) component and is usually offered as a yearly benefit.
However, note that subject to certain conditions and limits, you can claim tax benefits against LTA for up
to 2 leisure trips in a block of 4 calendar years, under Section 10(5).
4. Medical Allowance
This is an allowance that is paid to employees to help them meet their medical expenses. Under Section
17 (2) of I-T Act, 1961, you can claim tax exemption of up to ₹15,000 by producing your supporting
medical documents.
2. Income from House Property
The second of the 5 heads of income includes income from house property. It accounts for all rental
income earned by a taxpayer. Sections 22 to 27 of I-T Act, 1961 cover this income head in great detail.
However, note that if a taxpayer’s house has not been rented out, then the amount that the person
would have received as rent if he/she had let it out, would be considered as taxable income under this
head.
This is a head under which tax is calculated on the basis of assumption. Moreover, tax is levied both on
income earned from house property and commercial property. The different deductions that come under
this head of income are standard deduction, deductions for home loan interest payment, and deduction
for municipal tax.
Here, an assessee will also have to pay 10% TDS on rent if the rent value is more than the specified limit.
Here are a few conditions that must be fulfilled for the income to be taxable under this head:
● The assessee should be the house property owner

● House property can include a building, a land appurtenant, or a bungalow
● Individuals must not use their property for any other purposes than residency
3. Income from Capital Gains
If any profit/gain arises from the transfer or sale of a capital asset held as an investment, it is taxable
under capital gains. Income or proceeds from a large number of asset classes, such as stocks, bonds,
mutual funds, gold, and real estate among others, can be considered under this head. You should also
remember that capital gains are generally classified as short- and long-term gains. Based on the asset
class, long-term capital gains tax is applied at a maximum rate of 20% on investments held for 3 years or
more, while short-term capital gains tax is applied at a maximum rate of 15% on investments held for
less than 3 years. However, you must check if the income is eligible for an exemption under Sections 54,
54B, 54EC, 54F, 54D, 54ED, 54GA, or 54G.
4. Income from Profits and Gains of Business/Profession
Your income will be considered under this head if your earnings come from a business or if you are
self-employed. To calculate your profit or gross income, you will have to deduct your expenses from the
total revenue. Then, tax will be applicable under this income head.
This head will also include incomes, such as bonuses, salary, and profit earned due to a partnership with
a business organisation. However, the following rules apply:
● A taxpayer must be controlling the operations of this business or profession

● There business or profession declared under this head must be legitimate
● The business or profession in question must be carried out by the taxpayer themselves.
● The taxpayer must be actively engaged in a particular business or profession for the greater part
of the previous year
● If taxpayers operate any other professions or businesses, they must also include it
5. Income from Other Sources
For the earnings that do not belong to any of the heads of income mentioned above, it will fall under the
5th category called income from other sources. Some common examples of earnings that fall under this
head include income from lottery, gambling, gift card games, bank deposits, rewards from other sports,
and more. Section 56(2) of the IT Act covers these incomes.
Final Word
Now that you know what the various heads of income are, it may be easier for you to classify your
income, based on the source, and file your income tax returns without mistakes. It may also be easier for
you to forecast your tax liabilities for the year and plan your investments and savings accordingly.
Equipped with this knowledge, you may also be able to avoid penalties for non-payment of tax under a
particular head of income or incorrect filing of tax.
If you want to maximise your tax savings, you could consider investing in the Navi ELSS Nifty 50 Index
Fund scheme, starting at ₹500 or a Navi health insurance plan, with monthly premiums as low as ₹235.
Q2. Gratuity?
Ans. Gratuity is a voluntary payment made by an employer in appreciation of the services rendered by an
employee. For organisations covered under the Payment of Gratuity Act, 1972 (“Gratuity Act”), it is
mandatory to pay gratuity to employees subject to the fulfilment of conditions. For other organisations,
payment of gratuity is a matter of organisational policy.
Gratuity is generally paid as part of salary at the end of the employment term of an employee, provided
the term is a minimum period of 5 years. The gratuity amount is exempt from tax to the extent of the
limit prescribed in Section 10(10) of the Income-tax Act, 1961. An employer generally pays gratuity from
its own funds or by purchasing a group gratuity plan from an insurance provider.
In this article, we will discuss the eligibility conditions for receiving a gratuity, the concept of gratuity in
income tax, and the extent to which a tax exemption is available.
Understanding Gratuity
Prior to 1972, there was no law mandating employers to pay gratuity to their employees. However, with
the introduction of the Gratuity Act, it became mandatory for a factory, plantation, mine, oilfield, port, or
railway company, and for an owner of a shop, educational institution, or corporation having more than
10 employees, to pay gratuity to its employees.
What is gratuity?
The word gratuity is derived from the Latin word gratus which means pleasing or thankful. As the origin
of the word suggests, gratuity is a lump sum amount given by an employer to its employees, paid not as
part of the regular monthly salary but in recognition of their services to the employer.
The Gratuity Act mandates certain organisations to pay gratuity to their employees subject to the
fulfilment of certain conditions.
When is gratuity given?
The Gratuity Act mandates the following organisations to make gratuity payments:
● Every factory, mine, oilfield, plantation, port, and railway company; and
● Every shop or establishment in which 10 or more persons are employed, or were employed on
any day of the previous 12 months.
A shop or establishment to which the Gratuity Act has become applicable once is required to continue
to make gratuity payments even if the number of persons employed falls below 10 subsequently.
Employers not mandated under the Gratuity Act can voluntarily offer gratuity to their employees.
Gratuity is usually paid at the time of retirement or at the time of changing jobs, provided the employee
has rendered continuous service for at least 5 years.
Eligibility criteria for receiving gratuity
For employees covered under the Gratuity Act, gratuity is payable on superannuation, retirement, or
resignation if the employee has rendered continuous service for at least 5 years. Gratuity is also payable
on death or disablement of the employee due to accident or disease, even if the employee has not
rendered 5 years of continuous service. The Gratuity Act entitles an employee to receive 15 days of
salary as gratuity in for every completed year of service.
For other employees, payment of gratuity is not dependent on the fulfilment of statutory conditions but
rather on the organisational policy.
It should be noted that interns or temporary workers are not eligible for gratuity. Also, in the
determination of 5 years, a continuous and active period of 240 days is considered to be one full year.
For example, if a person has worked for 4 years and 240 days, he/she will be eligible for gratuity
benefits. In the case of establishments which work less than 6 days a week, continuous and active service
of 4 years and 190 days will be considered as 5 years, thus making the person eligible for gratuity
benefits.
Is Gratuity Taxed?
If gratuity is received during employment, it is fully taxable irrespective of whether the recipient is a
government employee or a non-government employee. However, the tax treatment of gratuity received
on account of retirement, resignation, death, illness, or superannuation is different for various classes of
employees. Here, three classifications can be made – (i) Government employees and defence personnel,
(ii) Employees covered under the Gratuity Act; and (iii) Other employees – those who are not covered
under the Gratuity Act.
Government Employees and Defence Personnel
Retirement gratuity received by members of the defence service is fully exempt from tax. Similarly,
retirement and/or death gratuity received by employees of Central or State Government, local
authorities or Members of Civil Services is also fully exempt from tax.
Employees covered under the Gratuity Act
Gratuity received by employees covered under the Gratuity Act is exempt from tax to the extent of least
of the following:
● 15 days salary (Basic + DA) each completed year of service or part of the year in excess of 6
months;
● Rs. 20,00,000 (hiked from Rs.10,00,000); or
● Amount of gratuity actually received.
Employees not covered under the Gratuity Act
Gratuity received by employees not covered under the Gratuity Act is exempt from tax to the extent of
least of the following:
● Half month’s salary (Basic + DA) for each completed year of service, on the basis of the average
salary for the last 10 months;
● Rs. 20,00,000 (hiked from Rs.10,00,000); or
● Amount of gratuity actually received.
Q3. Capital and Revenue Receipts?
Receipts are the earning of the company and through it revenue is generated. Not all the receipts
contribute towards the profit and loss in business. Receipts can be categorized as
Revenue receipts and

Capital receipts.
To some extent, we can say that revenue receipts affect the profit and loss of the business and capital
receipts don’t.
For a better understanding of the revenue receipts and capital receipts let’s discuss these terms in detail.
What do you understand by Revenue Receipts?
Revenue receipts are money earned by a business through its day to day operational activities. These are
recurring in nature and directly affects the profit and loss of the business. Thus, the disclosure of revenue
receipts are required to be made in the income statement of the company or organization.
In general terms, we can say that revenue receipts do not create any liability for the business nor does it
reduces the assets. It simply suggests that goods or services have been delivered to the clients and in
return, income has been received. Ultimately it is a source of cash inflow which leads to an increase in
the total revenue of a company.
Examples of Revenue Receipts
Some examples of receipts which are of routine nature i.e. revenue receipts in an organization are,
Money received for services provided to customers

Rent received
Discount received from suppliers, vendors or creditors
Dividend received
Interest earned
Commission received
Bad-debts recovered(if any)
Revenue earned by the sale of scrap material or waste etc
Some Important features of Revenue Receipts
Benefits from revenue receipts can be taken for a short period of time i.e one accounting or
financial year
As benefits from revenue receipts are for a short period of time, thus another feature comes that
it is recurring in nature
Revenue receipts come directly from the operational activities of a business
It directly affects the profit and loss of business. As when revenue is received by a company it will
either increase the profit or will contribute towards loss.
Disclosure is made under Trading and Profit or Loss account and not in the Balance Sheet.
What do you understand by Capital Receipts?
Capital receipts are cash inflow in business arising from financial (capital) activities and not the operating
activities of the business. These are receipts resulting from activities which are occasional or not of
routine nature. Capital Receipts are not the regular or main source of income for an organisation. Thus it
either creates a liability or reduces the assets for the business entity. And, because of its capital nature
such receipts are shown in the balance sheet of a company and not the income statement or Profit and
Loss account.
These receipts are recorded on an accrual basis (means recording an income for which you have got the
rights to receive but the actual receipt has not yet occurred). Also, since capital receipts are
non-recurring in nature, they can not be used for the distribution of profit, unlike revenue receipts.
Types of Capital Receipts
Capital receipts are divided into three groups-
1. Borrowings
2. Recovery of Loans and
3. Other Capital Receipts
1. Borrowings
2. It includes the funds raised from outside to meet the expenditure incurred in the company. It is
considered as the capital receipts because it creates liability for the company.
3. Recovery of Loans
4. Sometimes the company separates a part of the asset to recover the loans in future, as a result, it
decreases the assets of the company.
5. Other Capital receipts
6. Under this category of Capital Receipts, Disinvestment and Small Savings are covered.
Examples of Capital Receipts
Cash received from the sale of fixed assets

Amount received from Shareholders and debenture holders
Borrowings which includes loans, disinvestment, insurance claims etc.
Features of Capital Receipts
Capital receipts are non-recurring in nature

Funds generated from capital receipts are from non-operating activities.
It either creates a liability or reduces the asset.
It has no impact on the income statement instead balance sheet is affected by the capital
receipts.
Difference between the Revenue Receipts & Capital Receipts
S. Revenue Receipts Capital Receipts

No
.
1. Revenue receipts are generated from the Capita receipts are generated from
operational activities of the business. the financial activities.
2. It affects the profit and loss of the business. It has no impact on the profit and loss
of a business.
3. Revenue receipts are recurring in nature. Capital receipts are non-recurring in

nature.
4. It is the amount received from the sale of Capital receipts result from any loan,
normal day to day products or services of the disinvestment, insurance claim etc.
company
5. Affect the Income Statement of the company. Capital receipts affect the Balance
sheet.
6. Through revenue receipts distribution of profit Profit distribution is not available

is done. through capital receipts.
7. It includes Sale of products of business It includes the sale of fixed or financial

assets.
8. Revenue receipts are one of the sources for Capital receipts can not be used for
creating reserves creating reserve funds in the business.
Q4. Constitutional Provisions on Taxation?
Ans. The Constitution of India is the supreme law of the land and all laws in India must be consistent with
its provisions. The constitutional provisions relating to taxation in India are contained in Articles 265 to
289 of the Constitution of India. These articles outline the powers of the Union and the States to levy
taxes, as well as the procedures for assessing and collecting taxes.
Some of the key constitutional provisions relating to taxation include:

● Article 265: This article states that no tax can be levied or collected except by the authority of
law. This means that all taxes must be imposed by a valid law and that no tax can be levied or
collected without the authority of law.
● Articles 268 to 270: These articles deal with the levy of duties of customs, excise and other taxes
on goods imported into or exported out of India. These taxes are levied by the Union
government and the proceeds are shared between the Union and the States.
● Article 286: This article restricts the power of the States to levy taxes on goods and services that
are imported into or exported out of India. This is to prevent States from taxing goods that are in
transit between different States.
● Articles 276 and 277: These articles deal with taxes that can be levied by the States for the
benefit of the State or for the benefit of a municipality, district board or other local authority.
These taxes are known as “cess” taxes and they can be levied on a variety of subjects, such as
professions, trades, callings and employment.
● Articles 271 and 279: These articles deal with taxes that can be levied by the Union and the
States concurrently. This means that both the Union and the States can levy taxes on the same
subject, but the Union government has the power to override any State law that conflicts with a
Union law.
● Articles 273, 275, 274 and 282: These articles deal with grants-in-aid that can be given by the
Union government to the States. These grants are given to help the States meet their financial
needs and they can be used for a variety of purposes, such as education, health and
infrastructure development.
The constitutional provisions relating to taxation are complex and have been interpreted by the courts in
a number of cases. However, these provisions provide the basic framework for the taxation system in
India.
Article 265
Article 265 of the Constitution of India states that no tax can be levied or collected except by the
authority of law. This means that all taxes must be imposed by a valid law and that no tax can be levied
or collected without the authority of law.
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 against arbitrary tax extraction.
In the case of Tangkhul v. Simerei Shailei, the Supreme Court held that the practice of villagers paying
Rs. 50 a day to the headman in place of a custom to render free a day’s labour was a collection of tax
and that no law had authorised it. Therefore, it violated Article 265.
In the case of Lord Krishna Sugar Mills v. UOI, the Supreme Court held that the government had no
authority of law to collect additional excise duty on sugar merchants who fell short of export targets in a
promotion scheme started by the government. This is because the government had not passed a law to
authorise the collection of this tax.
These cases illustrate the importance of Article 265 in protecting citizens from arbitrary taxation. This
article ensures that taxes can only be levied by a valid law and that no tax can be levied without the
authority of law. This helps to prevent the government from imposing excessive or unfair taxes on
citizens.
Article 266
Article 266 of the Constitution of India deals with the Consolidated Funds and Public Accounts of India
and the States. It states that the following shall form one consolidated fund to be entitled the
Consolidated Fund of India:
● 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
● Loans or ways and means of advances
The same holds for the revenues received by the Government of a State which 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 of the Constitution.
Article 268
Article 268 of the Constitution of India deals with duties levied by the Union government but collected
and claimed by the State governments. These duties include stamp duties, excise on medicinal and
toilet preparations, etc. These duties collected by states do not form a part of the Consolidated Fund of
India but are with the state only.
Article 2689
Article 269 of the Constitution of India 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. These taxes include taxes on
income other than agricultural income, taxes on corporation tax and duties of customs.
The taxes mentioned in Article 269 are levied and collected by the Union government, but the proceeds
are assigned to the States. This is done to ensure that the States have a fair share of the tax revenue and
that they are able to raise the resources they need to provide essential services to their citizens.
The case of M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others is an example
of how Article 269 has been interpreted by the courts. In this case, the Supreme Court held that the
State Sales Tax Act was not applicable to sale or purchase in the course of interstate trade or commerce.
This is because Article 269 prohibits the levy and collection of tax on sale or purchase in the course of
interstate trade or commerce.
Article 269(A)
Article 269(A) of the Constitution of India was inserted by the 122nd Amendment of the Constitution in
2017. This article gives the power to collect goods and services tax (GST) on supplies in the course of
inter-state trade or commerce to the Government of India. The proceeds of this tax are then apportioned
between the Union and the States in the following manner:
● 50% of the proceeds are directly apportioned to the States.
● The remaining 50% is credited to the Consolidated Fund of India (CFI). Out of this amount, a
prescribed percentage is then distributed to the States.
The percentage of the proceeds that are distributed to the States through the CFI is determined by the
Goods and Services Tax Council (GST Council). The GST Council is a body that is constituted by the
Union and the States to recommend the principles that should be followed in determining the rates of
GST, the exemptions from GST and the distribution of the proceeds of GST between the Union and the
States.
The direct apportionment of 50% of the proceeds of GST to the States is intended to ensure that the
States have a fair share of the revenue generated by GST. The distribution of the remaining 50% of the
proceeds through the CFI is intended to take into account the relative needs of the States.
The introduction of Article 269(A) has had a significant impact on the taxation system in India. It has
simplified the taxation system by removing the need for multiple taxes on goods and services that are in
transit between different States. It has also helped to ensure that the States have a fair share of the
revenue generated by GST.
Article 270
Article 270 of the Constitution of India deals with the taxes levied and distributed between the Union
and the States. It states that the following taxes are levied and collected by the Union government and
the proceeds are distributed between the Union and the States in the following manner:
● All taxes and duties mentioned in the Union List, except the duties and taxes mentioned in
Articles 268, 269 and 269A.
● Taxes and surcharges on taxes, duties and cess on particular functions are specified in Article 271
under any law created by Parliament.
The proceeds from these taxes are distributed between the Union and the States in the following
manner:
● The proceeds of taxes levied on the sale or purchase of goods and services in the course of
inter-state trade or commerce are distributed to the States in the ratio of their population.
● The proceeds of other taxes are distributed to the States in such manner as may be prescribed
by the Parliament.
The distribution of the proceeds of taxes between the Union and the States is determined by the
Finance Commission, which is a body constituted by the Parliament every five years. The Finance
Commission takes into account a number of factors, including the needs of the States, the resources of
the States and the overall economic situation of the country, in determining the distribution of the
proceeds of taxes between the Union and the States.
The introduction of Article 270 has had a significant impact on the taxation system in India. It has
simplified the taxation system by removing the need for multiple taxes on the same subject. It has also
helped to ensure that the States have a fair share of the revenue generated by taxes.
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. In this case, the Supreme Court held that the income tax
collected forms a part of the Consolidated Fund of India. The income tax thus collected cannot be
distributed between the centre, union territories and states which are under the presidential rule.
Article 271
Article 271 of the Constitution of India allows the Parliament to increase any of the taxes or duties
mentioned in Articles 269 and 270 by levying an additional surcharge for a particular purpose. The
proceeds from the surcharge are credited to the Consolidated Fund of India.
Cess and Surcharge

The surcharge is collected by the Union government and the States have no role to play in its collection.
The surcharge is an exception to Articles 269 and 270, which specify the taxes and duties that are levied
and collected by the Union and the States.
The surcharge is similar to a cess, which is a tax levied for a specific purpose. However, the surcharge is
an additional tax on an existing tax, while a cess is a separate tax.
The Supreme Court in the case of M/s SRD Nutrients Private Limited v. Commissioner of Central Excise,
Guwahati has ruled that the education cess and the higher education cess are surcharges, not cess. This
is because they are additional taxes on existing taxes and they are not levied for a specific purpose.
Grants-In-Aid
The Constitution also provides for grants-in-aid to the States. Grants-in-aid are financial assistance
provided by the Union government to the States to help them meet their financial needs. Grants-in-aid
are charged to the Consolidated Fund of India and the Parliament has the authority to grant them.
The grants-in-aid are intended to help the States to provide essential services to their citizens, such as
education, health and infrastructure. They also help to reduce disparities between the rich and poor
States.
The grants-in-aid are an important part of the fiscal federalism system in India. They help to ensure that
all States have the resources they need to provide essential services to their citizens.
Article 273
This article provides for grants to the States of Assam, Bihar Orissa and West Bengal in lieu of any share
of the net proceeds of the export duty on jute and jute products. The grants are charged to the
Consolidated Fund of India and are to be made for a period of ten years from the commencement of the
Constitution.
Article 275
This article provides for grants-in-aid to the States by the Union government. The grants are to be made
on the recommendation of the Finance Commission. The grants are to be used for the development of
the States and for the welfare of the people.
Article 276
This article provides for taxes that are levied by the States. The taxes are to be levied and collected by
the States. The taxes that can be levied by the States include sales tax, value-added tax (VAT),
professional tax and stamp duty.
Article 277
Article 277 of the Constitution of India provides that cesses, fees, duties or taxes which were levied
immediately before the commencement of the Constitution by any municipality or other local authority
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.
This article was enacted to protect the interests of the States and the local authorities. It ensures that the
States and the local authorities can continue to raise revenue from taxes that were already being levied
before the commencement of the Constitution. This revenue can then be used for the benefit of the
people of the State or the local area.
The case of Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh is an
example of how Article 277 has been interpreted by the courts. In this case, the Supreme Court held that
the State government could continue to levy a fee on the appellant for the supervision of the use of
alcohol in the manufacture of medicines, even though the Parliament had passed a law that prohibited
the levy of fees on the manufacture of medicines.
The Court held that the fee levied by the State government was a “cess” and not a “tax”. A “cess” is a
tax that is levied for a specific purpose, while a “tax” is a tax that is levied for general revenue. The Court
held that the fee levied by the State government was for the specific purpose of supervising the use of
alcohol in the manufacture of medicines and therefore it was a “cess” and not a “tax”.
Article 277 is an important article that protects the interests of the States and the local authorities. It
ensures that they can continue to raise revenue from taxes that were already being levied before the
commencement of the Constitution. This revenue can then be used for the benefit of the people of the
State or the local area.
Article 279
Article 279 of the Constitution of India deals with the calculation of “net proceeds”. Net proceeds are
the proceeds of a tax or duty after deducting the cost of collection, as ascertained and certified by the
Comptroller and Auditor-General of India.
Article 282
Article 282 of the Constitution of India provides for grants by the Union government to the States for any
public purpose. The grants can be made for special, temporary or ad hoc schemes. The power to grant
sanctions under Article 282 is not restricted.
In the case of Bhim Singh v. Union of India & Ors, the Supreme Court held that the Member of
Parliament Local Area Development Scheme (MPLAD) falls within the meaning of “public purpose”. The
MPLAD scheme is a scheme by which Members of Parliament can use funds to undertake development
projects in their constituencies. The Supreme Court held that the MPLAD scheme is a public purpose
because it helps to improve the lives of people in the constituencies of Members of Parliament.
In the case of Cf. Narayanan Nambudripad, Kidangazhi Manakkal v. State of Madras, the Supreme Court
held that the practice of religion is a private purpose. Donations and endowments made for religious
purposes are therefore not a state affair unless the state takes over the management of the religious
endowment for a public purpose and uses the funds for public welfare measures.
Article 282 can be used for a public purpose, but it can also be misused. It is important that the grants
made under Article 282 are used for genuine public purposes and not for political or personal gain.
Article 286
Article 286 of the Constitution of India restricts the power of the States to tax. It states that the States
cannot:
● Impose taxes on imports or exports.
● Impose taxes on sales or purchases that take place outside the territory of the State.
● Impose taxes on goods that are of special importance, unless the Parliament has authorised
them to do so.
The Parliament has the power to lay down principles to determine when a sale or purchase takes place
during import or export or outside the territory of the State. The Parliament can also restrict the power of
the States to tax goods of special importance.
The case of K. Gopinath v. the State of Kerala is an example of how Article 286 has been interpreted by
the courts. In this case, the Supreme Court held that the sale of cashew nuts by the Cashew Corporation
of India to local users 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 286 is an important article that protects the interests of the Union government. It ensures that the
States cannot impose taxes on goods that are of national importance and that they cannot tax imports or
exports. This helps to create a level playing field for businesses across the country and it helps to
promote economic growth.
Article 289
Sure, here is a rewritten version of the text that removes plagiarism:
Article 289 of the Constitution of India states that the property and income of the States are not liable to
taxation by the Union government, except in the following cases:
● If the Parliament makes a law to that effect.
● If the State government consents to such taxation.
The Parliament can make a law to tax the property and income of the States if it is necessary for the
purpose of implementing a constitutional provision. For example, the Parliament can make a law to tax
the property and income of the States in order to raise revenue for the Union government.
The State government can also consent to the taxation of its property and income by the Union
government. For example, a State government may consent to the taxation of its property and income in
order to receive financial assistance from the Union government.
Article 289 is an important article that protects the interests of the States. It ensures that the Union
government cannot tax the property and income of the States without their consent, except in cases
where it is necessary for the purpose of implementing a constitutional provision. This helps to maintain
the financial autonomy of the States.
Some Other Tax-Related Provisions in the Constitution of India
Article 301 of the Constitution of India guarantees freedom of trade, commerce and intercourse
throughout the territory of India. This means that goods and services can be freely transported and sold
across the country, without any restrictions.
Article 302 empowers the Parliament to impose restrictions on trade, commerce and intercourse in the
interest of the general public. For example, the Parliament can impose restrictions on the import of
goods that are harmful to public health or safety.
Article 303 allows the Parliament to give preference to one State over another in the matter of trade,
commerce and intercourse if there is a scarcity of goods in that State. For example, the Parliament can
give preference to a State that is facing a drought, so that the people of that State can get foodgrains at
a cheaper price.
Article 304 allows a State government to impose taxes on goods imported from other States and Union
Territories. However, the State government cannot discriminate between goods from within the State
and goods from outside the State. The State government can also impose some restrictions on freedom
of trade and commerce within its territory, but these restrictions must be reasonable and in the interest
of the general public.
Article 366 defines the following terms:
● Goods: This includes all movable property, including animals and birds.
● Services: This includes any activity that is not the sale of goods.
● Taxation: This includes the imposition of taxes, duties, cess and tolls.
● State: This includes a Union territory, but does not include a Union territory that is a part of a
State.
Taxes that are levied on the sale/purchase of goods: This includes all taxes that are levied on the sale or
purchase of goods, including value-added tax (VAT).
Goods and service tax (GST): This is a single tax that is levied on the sale or purchase of goods and
services.
Q5. Agricultural Income?
Ans. Agricultural Income
Agriculture, alongside its allied sectors, exists as one of the largest sources of livelihood in India. Figures
ascertained by the Food and Agriculture Organisation (FAO) indicate that agriculture still serves as a
primary source of income for about 70% of the Indian rural households. The government, therefore,
endeavours to boost this sector by means of schemes, policies, and tax exemptions for agricultural
income.
What is Agricultural Income?
Agricultural income refers to the income earned or revenue generated from sources essentially premised
on agricultural activities. These sources of income include farming land, buildings on or identified with
agricultural land as well as commercial produce from a horticultural land.
Section 2(1A) of the Income Tax Act, 1961, lays down the definition of ‘agricultural income’ under the
following three activities:
● Rent or revenue derived from agricultural land situated in India and used for agricultural
purposes.
● Income earned from agricultural land through the commercial sale of produce gained from this
land.
● Revenue derived from renting or leasing of buildings in or around agricultural land. However, this
criterion is subject to the following conditions:
● This building should be occupied by a farmer or cultivator through revenue or rent.
● It is used as a residential space, warehouse/storeroom, or outhouse.
● The land on which this building is located is assessed for land revenue or a local rate evaluated
and collected by government officers.
Categorising a particular amount earned as agricultural income takes into account several other factors,
such as:
● Existence of land: The income earned should be from an existing piece of land.
● Utilisation of land for agricultural purposes: Rent or revenue from the agricultural land and
income earned by a cultivator through the sale of produce should be based on agricultural
operations on a piece of land. Alongside income from agricultural operations, the ambit of
agricultural income also includes operations undertaken to make produce marketable.
● Cultivation of land is mandatory: The income should be generated by way of cultivation of land.
Agricultural income covers all land produce such as grain, fruits, commercial crops, etc. However,
it does not include using a piece of land for poultry farming, breeding of livestock, dairy farming,
and the like.
● Ownership of land is optional: In the case of agricultural operations, the law does not necessitate
the cultivator to be the owner of the land in question. However, in the case of rent or revenue, it
is essential that an individual possesses an interest in the land, either as an owner or a
mortgagee.
Types of Agricultural Income
The table below summarises the different types of agricultural income:
Basis of Types of Agricultural Income

Differentiation
Source of income Rent or revenue Income derived from Income from a building
generated from a piece agricultural operations. attached to agricultural
of land. land.
Example of Rent received by an Income earned by a Rent received on a

agricultural owner of the land from cultivator by way of building used as a
income the cultivator in cash or sale of his/her warehouse by a
in-kind. produce. cultivator.
Agricultural Income in Income Tax
Under Section 10(1) of the ITA, 1961, agricultural income is exempt from taxation. This exemption
implies that the Central Government does not impose or levy any tax on agricultural income.
However, agricultural income tax persists at the state level. The legislature uses a method called partial
integration of agricultural income with non-agricultural income to tax such earnings. This method is
applicable when the conditions mentioned below are met by an individual:
● Net agricultural income was more than Rs. 5,000 in the previous financial year.
● Total income, minus this net agricultural income, is higher than the exemption limit of Rs.
2,50,000 for individuals below 60 years of age, Rs. 3,00,000 for senior citizens and Rs. 5,00,000
for super senior citizens.
Raja Benoy Kumar Sahas Roy v/s C.I.T
Decision of the Hon'ble Supreme Court:
Supreme Court stated that Agriculture means when both primary and subsequent operations should be
performed on the land
Supreme Courted further stated that only subsequent operations are performed on the land which isn't
enough to think about it as Agricultural Income as Primary Operations are missing.
Supreme Court agreed with the decision of the Appellate Assistant Commissioner, Appellate Tribunal
and Hon'ble High Court.
Supreme Court after applying the cost dismissed the Appeal and the decision gone in the favour of CIT.
Q6. Tax and Kinds of Tax?
Ans. The government of every nation needs to collect taxes from its citizens to run the country. You pay
taxes to your local authorities and state and central government in almost every part of the world. Tax
collection is essential to run a nation judiciously.
Countries collect taxes in many forms. The most common types of tax collections are direct tax, indirect
tax, and customs.
Meaning of Tax
Taxes are a way to finance projects for the benefit of the larger population, public interest and social
welfare. These projects can be related to fundamental infrastructure, defence and social welfare, like
schools, bridges, satellites, etc. Taxes help fund many projects without huge commercial benefits, such
as providing a regular supply of clean drinking water.
Tax in India is levied on all legal entities and individuals. Legal tax entities like corporations,
development bodies, an association of individuals, and non-profit organisations are required to pay their
share of direct and indirect taxes. Any taxpayer importing goods to India may also have to pay customs.
Listed below are a few things about taxation:
Tax can be levied annually or on each transaction.

Local, state, and central authorities can levy taxes.
All taxes must be deposited with the central or state tax authorities.
Only state and central governments can reallocate the tax collection pool for investment and
other purposes.
How does Taxation Work?
The taxability of a person in India depends on the income slab of that person for the financial year.
Individual and corporate tax rates are different.
However, different types of incomes can be taxed at different rates or under distinct conditions. Indian
tax system recognizes the following types of income, otherwise known as heads of income under the
Indian tax laws:
Income from Salary

Income from House Property
Income from Business & Profession
Income from Capital Gains
Income from Other Sources
Salary income covers any form of regular income. House property refers to the rental income received
from a residential house. Interest income, dividend receipts, lottery winnings and gifts are considered
under income from other sources.
You also have the option of claiming deductions and exemptions from your income. Certain incomes and
perquisites are exempt from tax. If you have these incomes, you can claim an exemption from tax on
these.
Additionally, you can avail of deductions on certain investments and expenses. These deductions are
applicable when you invest in tax-saving instruments or spend on eligible expenses. For example, tuition
fees for school education is eligible for deduction from the gross total income.
Types of Tax
Whether you are an individual or a business owner, you need to pay taxes. Taxes in India are broadly
categorized into two categories:
Direct Taxes
These are taxes that you directly pay to the government. A direct tax cannot be transferred to
any legal entity or other individuals. It comes under the Central Board of Direct Taxes (CBDT).
Examples of direct tax are Income Tax and Wealth Tax.
Dire Description
ct
Tax
Typ
e
Inco It is levied on the annual income or the profit made. It is paid directly to the
me government. If your income is above the exemption limit, you have to pay
Tax income tax. If your age is below 60 years, the tax exemption limit is Rs 2.5 lakh,
and for senior citizens, it is Rs 3 lakh.
Capi You will pay capital gain tax if you have sold a property or stocks (mutual funds)
tal and made a profit. These taxes can vary based on the years you held the
Gain investment. It could be short-term or long-term capital gain taxes. The
Tax definition of the short and long-term depends on the investment type.
Prer You may receive various perks from your company over and above the salary. It
equi could be in the form of food coupons, fuel reimbursement, etc. These are
site taxed separately and come under Prerequisite Tax.
Tax
Cor The taxes paid by the company come under the corporate tax. The tax rate
pora depends on the company's revenue in a financial year. It applies to the net
te income that an investor receives from the investment.
Tax
Indirect Taxes
These are consumption-based and apply to goods and services sold or bought. The government
collects indirect tax from the seller of goods or services. The seller collects the tax from the
end-user - goods or service buyer. Hence, these are taxes that you pay but not directly to the
government. Examples of indirect tax include GST, VAT, etc.
Indire Description
ct Tax
Type
Good GST is a consumption tax added to the final price of a product or service.
and Manufacturers pay GST on the raw material they purchase. Service providers
Servic pay GST on the amount paid for the product. Retailers pay GST on the
e Tax product purchased from the distributor.
(GST)
Other Taxes
Apart from direct and indirect taxes, a few other taxes are levied in different forms and they are
listed below:
✓Several other taxes are levied on specified goods, assets and activities in the country.
✓Examples of other taxes include property taxes, municipal taxes, professional taxes, entertainment
taxes, etc.
✓Registration of property or transfer of asset ownership requires you to pay state and central taxes.
These are Stamp Duty, Transfer Tax, and Registration Fees.
✓Cess is applied to your final tax liability towards the government. The government often uses this to
collect taxes for a specific purpose.
✓Road and Toll Tax applies to vehicles plying on the road. Both taxes have become a critical part of
maintaining and growing road infrastructure.
Benefits of Taxes
Paying taxes helps the government to run the nation smoothly. Listed below are a few benefits of paying
taxes:
Taxes help the state, and central government provide public services and develop amenities
such as parks and schools. Also, a part goes to enhance the defence sector of the nation.
It improves the living standards of citizens as taxation improves healthcare, education, and other
sectors.
It allows the government to offer various public schemes like unemployment benefits, pension
schemes, etc.
Taxation documents help you get loans and credit cards as ITR serves as income proof.
It also help citizens in their Visa application form as it is one of the proofs considered in the visa
process.
Why should you Pay Taxes on Time?
Every individual and business owner must pay taxes on time. If you fail the government can impose
penalties on you or your business. The tax penalty will depend on the category under which you have
not paid the tax.
Below are some situations in which you have to pay a penalty and a corresponding penalty.
Income not Disclosed Completely

If you have not disclosed 100% of your income, you can be charged a penalty of 50% of tax
payable on under-reported income. If under-reporting was because of misreporting, you have to
pay 200% of the tax payable.
Penalty on Fake Documents
If you have shown falsified documents such as a fake invoice or documentary evidence in your
returns, you need to pay a penalty of the amount equal to the sum of such false or omitted
entries.
TDS
If a business fails to deduct Tax at Source, it will be liable to pay a penalty equal to the tax
amount. You cannot avoid tax. However, you can plan your taxes and reduce your tax burden.
Section 80C, 80D, and other provisions under section 80 of the Income Tax Act, 1961 give you
options to save tax. You can build your wealth, look after the financial safety of your family and
incur other necessary expenses and save tax.
Calculate your income from different income sources, calculate your tax liability and file your
taxes on time.
Recent Reforms in Taxes
GST stands for Goods and Services Tax and is the primary indirect tax applicable in India from FY
2018-19. It has simplified the complicated web of indirect taxes applicable to goods and services earlier.
These included VAT, Service Tax, State Taxes, and more depending on the goods or service.
Simplification has brought taxpayers into the ambit and has increased indirect tax collection dramatically
in the last five years.
With an online filing and credit system, GST is one of the most successful indirect taxes in the world. It
has also simplified goods transfer from one state to other, improving trade within the country.
Q7. Income?
Ans. Definition of Income
Section 2(24) of the Income Tax Act defines income as including the following:
1. Salaries: Any salary, wages, annuity, pension, gratuity, or other payment received by an
individual from his employer is considered as income for taxation purposes.
2. Income from House Property: Any rental income earned from a house property, or the
deemed rental income from a self-occupied property, is considered as income.
3. Profits and Gains of Business or Profession: Any profits or gains earned by an individual from
a business or profession is considered as income for taxation purposes.
4. Capital Gains: Any profits or gains earned from the sale of a capital asset, such as property or
shares, is considered as income.
5. Income from Other Sources: Any income earned from sources other than those mentioned
above, such as interest on bank deposits, lottery winnings, or gifts, is considered as income.
6. Winnings from Lotteries, Crosswords, and Other Games: Any winnings from lotteries,
crossword puzzles, races, card games, or any other games or gambling activities are
considered as income.
7. Contribution to Employees’ Provident Fund (EPF) Account: Any contribution made by an
employer to an employee’s EPF account is considered as income.
8. Voluntary Retirement Scheme (VRS) Compensation: Any compensation received by an
employee under a VRS is considered as income.
9. Foreign Income: Any income earned by an individual outside India is also considered as
income for taxation purposes.
Exclusions from the definition of Income

While the above-mentioned sources of income are considered as income for taxation purposes, there are
some exclusions from the definition of income, such as:
1. Agricultural Income: Any income earned from agricultural land is exempted from taxation
under Section 10(1) of the Income Tax Act.
2. Income of a Charitable Trust or Institution: Any income earned by a charitable trust or
institution is exempted from taxation under Section 11 of the Income Tax Act.
3. Income from a Hindu Undivided Family (HUF): Any income earned by an HUF is taxed
separately from the income of its individual members.
Additional Information about Section 2(24) of the Income Tax Act
1. Exempt Income: Apart from the exclusions mentioned above, there are several types of
income that are exempt from tax under the Income Tax Act, such as the interest earned on
PPF, Sukanya Samriddhi Yojana, and so on.
2. Deductions from Income: The Income Tax Act also allows for various deductions from the
total income of taxpayers, which can reduce their tax liability. For example, deductions are
allowed for contributions made to charities, investments made in certain savings schemes,
and so on.
3. Taxability of Gifts: Gifts received from specified relatives are exempt from tax under the
Income Tax Act. However, gifts received from non-relatives above a certain limit are taxable
as income.
4. Taxation of Clubbing of Income: The Income Tax Act also contains provisions for clubbing
the income of certain individuals, such as minor children, with that of their parents. This is
done to prevent tax evasion by transferring income to family members in lower tax brackets.
5. Importance of Proper Record Keeping: Section 2(24) of the Income Tax Act covers a wide
range of income sources, and it is crucial for taxpayers to maintain proper records of their
income and expenses to ensure compliance with the relevant tax laws.
Additional Considerations for Section 2(24) of the Income Tax Act
1. Multiple Sources of Income: Many taxpayers earn income from multiple sources, such as
salary and rental income, or business profits and capital gains. It is important to calculate the
total income from all sources and determine the applicable tax rate based on the tax slab
applicable to the total income.
2. Taxability of Bonus and Perquisites: Apart from salary, employees may also receive bonuses
and perquisites such as free accommodation, car, or other benefits. These are also taxable as
income under the Income Tax Act.
3. Taxability of Interest Income: Interest income earned from various sources, such as bank
deposits, bonds, or debentures, is taxable as income. Taxpayers should ensure that they
include all interest income earned during the financial year while calculating their taxable
income.
4. Taxability of Rental Income: Rental income earned from property is also taxable under the
Income Tax Act. However, taxpayers can claim deductions for expenses such as repairs,
maintenance, and property taxes paid during the financial year.
5. Taxability of Capital Gains: Capital gains earned from the sale of assets such as property,
shares, or mutual funds are taxable under the Income Tax Act. However, taxpayers can claim
deductions for expenses such as brokerage fees, transfer charges, and so on.
Conclusion
Section 2(24) of the Income Tax Act is a critical provision that defines the term “income” for the
purposes of taxation. It covers various sources of income and helps determine the tax liability of
individuals and entities. It is essential for taxpayers to understand the scope of Section 2(24) and ensure
that they comply with the relevant provisions of the Income Tax Act.
Q8. Residential Status?
Ans. Residential Status Under Income Tax Act
It is critical for the Income Tax Department to establish a taxable individual’s or company’s residence
status. It is especially important during the tax filing season. In reality, this is one of the variables used to
determine a person’s taxability.
Residential Status for Income Tax
An individual’s taxability in India is determined by his residential status under the income tax act in India
for any given fiscal year. The phrase “residential status” was coined by India’s income tax rules and
should not be confused with an individual’s citizenship in India.
An individual may be an Indian citizen but become a non-resident for a certain year. Similarly, a foreign
citizen may become a resident of India for income tax purposes in a given year.
It is also worth noting that the residential status as per income tax differs to sorts of people, such as an
individual, a corporation, a company, and so on, decided differently.
Resident Status Classifications
Income Tax Law has divided the residence status of an individual in India into three categories based on
the length of time he or she has lived in India. An individual’s residential status will include his or her
current fiscal year as well as previous years of stay.
The following categories are used to classify an individual’s residence status.
○ Resident (ROR)
○ Resident but Not Ordinarily Resident (RNOR)
○ Non-Resident (NR)
● Resident and Ordinarily Resident
Individuals are deemed to be residents of India under Section 6(1) of the Income Tax Act if they meet the
following conditions: If he/she stays in India for 182 days or more in a fiscal year, or if he/she stays in
India for 60 days or more in a fiscal year, and if he/she stays in India for 365 days or more in the four
years immediately before the previous year and comes under ordinary resident in income tax.
According to section 6(6) of the Income Tax Act of 1961, there are two criteria under which an individual
will be considered a “Resident and Ordinarily Resident” (ROR) in India.
○ If he or she spends 730 days or more in India in the seven years preceding the current year.
○ If he/she has resided in India for at least two of the ten prior fiscal years before the current year.
● Resident but Not Ordinarily Resident
When an assessee meets the following fundamental requirements, he or she will be regarded as RNOR:
If an individual stays in India for a time of 182 days or more in a fiscal year; or if he/she stays in India for a
period of 60 days in a fiscal year and 365 days or more in the four preceding fiscal years.
An Assessee, on the other hand, will be classified as a Resident but Not Ordinarily Resident (RNOR) if
they meet one of the following fundamental conditions:
○ If he/she stays in India for 730 days or more in the previous fiscal year.
○ If he/she was a resident of India for at least 2 out of 10 days in the previous fiscal year.
● Non Resident
An individual will be eligible for Non-Resident (NR) status if he or she meets the following criteria:
○ If an individual spends less than 181 days in India within a fiscal year.
○ If an individual stays in India for no more than 60 days in a fiscal year.
○ If an individual stays in India for more than 60 days in a fiscal year but does not remain for 365
days or more in the preceding four fiscal years.
Tax for Residents, NR, NROR
For a A resident will be taxed in India on his total income, which includes money generated in
Resident India as well as income obtained outside of India.
For NR Their tax burden in India is limited to the income they make in the country. They are not
and required to pay any tax in India on their international earnings. Also, in the event of
RNOR double taxation of income, when the same income is taxed in India and overseas, one
may rely on the Double Taxation Avoidance Agreement (DTAA) that India would have
signed with the other nation to avoid paying taxes twice.
How to Calculate the Residential Status of an Individual?
● First, it is noted if the individual falls under the category of exceptions for primary conditions.
● After which, it is noted if they satisfy the basic condition of 182 days or more. If they do come
under the classification, they would be treated as a resident or a non-resident.
Q9. Set Off and Carry Forward?
Ans. Set off of losses
Set off of losses means adjusting the losses against the profit/income of that particular year. Losses that
are not set off against income in the same year, can be carried forward to the subsequent years for set off
against income of those years. A set-off could be:
a. An intra-head set-off
b. An inter-head set-off
a. Intra-head Set Off
The losses from one source of income can be set off against income from another source under the same
head of income.
For eg: Loss from Business A can be set off against profit from Business B where Business A is one source
and Business B is another source and the common head of income is “Business”.
Exceptions to an intra-head set off:
Losses from a Speculative business will only be set off against the profit of the speculative business. One
cannot adjust the losses of speculative business with the income from any other business or profession.
Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an
activity of owning and maintaining race-horses.
Long-term capital loss will only be adjusted towards long-term capital gains. Interestingly, a short-term
capital loss can be set off against long-term capital gain or short-term capital gain.
Losses from a specified business will be set off only against profit of specified businesses. But the losses
from any other businesses or profession can be set off against profits from the specified businesses.
b. Inter-head Set Off
After the intra-head adjustments, the taxpayers can set off remaining losses against income from other
heads.
Eg. Loss from house property can be set off against salary income
Given below are few more such instances of an inter-head set off of losses:
Loss from House property can be set off against income under any head
Business loss other than speculative business can be set off against any head of income except income
from salary.
One needs to also note that the following losses can’t be set off against any other head of income:
a. Speculative Business loss
b. Specified business loss
c. Capital Losses
d. Losses from an activity of owning and maintaining race-horses
● Carry forward of losses
After making the appropriate and permissible intra-head and inter-head adjustments, there could still be
unadjusted losses. These unadjusted losses can be carried forward to future years for adjustments
against income of these years. The rules as regards carry forward differ slightly for different heads of
income. These have been discussed here:
● Losses from House Property:

Can be carry forward up to next 8 assessment years from the assessment year in which the loss
was incurred
Can be adjusted only against Income from house property
Can be carried forward even if the return of income for the loss year is belatedly filed.
● Losses from Non-speculative Business (regular business) loss:
was incurred
Can be adjusted only against Income from business or profession
Not necessary to continue the business at the time of set off in future years
Cannot be carried forward if the return is not filed within the original due date.
● Speculative Business Loss:
was incurred
Can be adjusted only against Income from speculative business
Cannot be carried forward if the return is not filed within the original due date.
● Specified Business Loss under 35AD:
No time limit to carry forward the losses from the specified business under 35AD
Cannot be carried forward if the return is not filed within the original due date
Can be adjusted only against Income from specified business under 35AD
● Capital Losses:
was incurred
Long-term capital losses can be adjusted only against long-term capital gains.
Short-term capital losses can be set off against long-term capital gains as well as short-term
capital gains
● Losses from owning and maintaining race-horses:
was incurred
Can only be set off against income from owning and maintaining race-horses only
Q10. Application and Diversion of Income?
Ans. Introduction
Diversion of income and application of income are two concepts that are recognized under the Income
Tax Act, 1961 in India. These concepts are used to determine the taxability of income in certain
situations where income is diverted or applied by a taxpayer in a manner that may affect its tax liability.
Let's delve into a detailed analysis of these concepts as per the Income Tax Act, 1961:
● Diversion of Income:
Diversion of income refers to a situation where income is legally diverted by a taxpayer to a third party
before it reaches the taxpayer, and the diverted income is not considered as the taxpayer's income for
tax purposes. In other words, the income is diverted to another person before it becomes taxable in the
hands of the taxpayer.
Under the Income Tax Act, for a diversion of income to be recognized, the following conditions must be
met:
a) Existence of a legal obligation: There must be a legal obligation on the taxpayer to apply the income
in a particular manner before it accrues or arises to the taxpayer. This legal obligation can arise from a
contract, an agreement, a statute, or any other legal arrangement.
b) Diversion before accrual or arising of income: The income must be legally diverted to a third party
before it accrues or arises to the taxpayer. Once the income accrues or arises to the taxpayer, it becomes
taxable in the hands of the taxpayer unless it satisfies the conditions for diversion of income.
c) Diversion without the taxpayer's control: The income must be diverted to a third party without the
taxpayer having control over it. The taxpayer must not have any power or control over the diverted
income after it is diverted.
d) Genuine and bona fide transaction: The diversion of income must be a genuine and bona fide
transaction, and it must not be a sham or colorable transaction intended to evade taxes.
If all these conditions are met, the diverted income will not be treated as the taxpayer's income for tax
purposes, and it will be taxable in the hands of the third party to whom it is diverted.
● Application of Income:
Application of income refers to a situation where income is applied by a taxpayer for a specific purpose
or utilized in a particular manner, and such application or utilization is considered as a taxable event. In
other words, the income is applied or utilized by the taxpayer for a particular purpose, and it is treated
as the taxpayer's income for tax purposes.
Under the Income Tax Act, the concept of application of income is primarily used in cases where income
is accumulated or set apart for the benefit of a specific person, such as a trust or a fund. In such cases,
the income is considered as the taxpayer's income and is taxable in the hands of the person for whose
benefit it is accumulated or set apart.
Diversion Of Income v/s Application Of Income
The Supreme Court decision in case of CIT v. Sitaldas Tirthdas (1961) is the authority for the proposition
that where by an obligation, income is diverted before it reaches the assessee, it is deductible from his
income as for all practical purposes it is not his income at all (as it is diversion of income by overriding
title). But where the income is required to be applied to discharge an obligation after it reaches the
assessee, it is not deductible (as it is called as application of income). Thus, there is the difference
between the diversion of income by an overriding title and application of income as the former is
deductible while the latter is not.
Thus, when management of a company is taken over by another person from the existing team in
consideration of percentage of future profit to the latter, in computing the business income of the
former, such percentage of profits is diversion of income and hence, deductible [CIT v. Travancore
Sugars and Chemicals Ltd. (1973)].
Example of Application of Income Example of Diversion of Income
Mr. A is liable to pay Rs. 2,000/- per month to Ms. M/s ABC is a partnership firm in which A
B (his ex-wife) as an alimony sum. Mr. A being an and his two sons B & C are partners. The
employee of Mr. C, instructs him to pay Rs. 2,000/- partnership deed provides that after the
per month out of his salary and disburse the death of Mr. A, B & C shall continue the
remaining salary to him. Whether this amount of business of the firm subject to a condition
Rs. 2,000/- per month be included in the Total that 20% of profit of the firm shall be given
Income of Mr. A or is it a case of diversion of to Mrs. D (Wife of Mr. A/ Mother of B & C).
income of Mr. A and not taxable in his hands? After the death of Mr. A, whether this 20%
amount of profit be included in the Total
Income of Firm M/s ABC or is a case of
diversion of income of M/s ABC and not
taxable in its hands?
This is a case of Application of Income by Mr. A

and not diversion of Income and hence it will be
included in the Total Income of Mr. A. This is
because this amount of Rs. 2,000/- per month is an
obligation of Mr. A to pay to Ms. B out of his This is a case if Diversion of Income and
income and not an income in which Ms. B had over the said 20% amount shall not be included
riding entitlement from Mr. C before being earned in the Total Income of M/s ABC, i.e., it is
by Mr. A. In other words, this is an Income of Mr. A, deductible from its Total Income. This is
which is applied by him to fulfill an obligation and because the clause mentioned in
hence included in his Total Income and a mere partnership deed has given an overriding
arrangement to make Mr. C make such payments title of 20% profit to Mrs. D and such
directly to Ms. B won’t make it a case of Diversion income is a precondition for the firm to
of Income. continue its business. In other words, this
20% profit reaches Mrs. D before it
becomes income of the firm and hence it
is a case of diversion of Income.
CONCLUSION
In conclusion, diversion of income and application of income are important concepts under the Income
Tax Act, 1961 in India, which are used to determine the taxability of income in certain situations where
income is diverted or applied by a taxpayer. It's crucial for taxpayers to understand these concepts and
ensure that their transactions are in compliance with the legal provisions to avoid any potential tax
implications. Consulting with a tax professional or seeking legal advice may be helpful in navigating the
complexities of these concepts and ensuring compliance with the tax laws.
Q11. Clubbing of Income?
Ans. Introduction
Diversion of income and application of income are two concepts that are recognized under the Income
Tax Act, 1961 in India. These concepts are used to determine the taxability of income in certain
situations where income is diverted or applied by a taxpayer in a manner that may affect its tax liability.
Let's delve into a detailed analysis of these concepts as per the Income Tax Act, 1961:
● Diversion of Income:
Diversion of income refers to a situation where income is legally diverted by a taxpayer to a third party
before it reaches the taxpayer, and the diverted income is not considered as the taxpayer's income for
tax purposes. In other words, the income is diverted to another person before it becomes taxable in the
hands of the taxpayer.
Under the Income Tax Act, for a diversion of income to be recognized, the following conditions must be
met:
a) Existence of a legal obligation: There must be a legal obligation on the taxpayer to apply the income
in a particular manner before it accrues or arises to the taxpayer. This legal obligation can arise from a
contract, an agreement, a statute, or any other legal arrangement.
b) Diversion before accrual or arising of income: The income must be legally diverted to a third party
before it accrues or arises to the taxpayer. Once the income accrues or arises to the taxpayer, it becomes
taxable in the hands of the taxpayer unless it satisfies the conditions for diversion of income.
c) Diversion without the taxpayer's control: The income must be diverted to a third party without the
taxpayer having control over it. The taxpayer must not have any power or control over the diverted
income after it is diverted.
d) Genuine and bona fide transaction: The diversion of income must be a genuine and bona fide
transaction, and it must not be a sham or colorable transaction intended to evade taxes.
If all these conditions are met, the diverted income will not be treated as the taxpayer's income for tax
purposes, and it will be taxable in the hands of the third party to whom it is diverted.
● Application of Income:
Application of income refers to a situation where income is applied by a taxpayer for a specific purpose
or utilized in a particular manner, and such application or utilization is considered as a taxable event. In
other words, the income is applied or utilized by the taxpayer for a particular purpose, and it is treated
as the taxpayer's income for tax purposes.
Under the Income Tax Act, the concept of application of income is primarily used in cases where income
is accumulated or set apart for the benefit of a specific person, such as a trust or a fund. In such cases,
the income is considered as the taxpayer's income and is taxable in the hands of the person for whose
benefit it is accumulated or set apart.
Diversion Of Income v/s Application Of Income

The Supreme Court decision in case of CIT v. Sitaldas Tirthdas (1961) is the authority for the proposition
that where by an obligation, income is diverted before it reaches the assessee, it is deductible from his
income as for all practical purposes it is not his income at all (as it is diversion of income by overriding
title). But where the income is required to be applied to discharge an obligation after it reaches the
assessee, it is not deductible (as it is called as application of income). Thus, there is the difference
between the diversion of income by an overriding title and application of income as the former is
deductible while the latter is not.
Thus, when management of a company is taken over by another person from the existing team in
consideration of percentage of future profit to the latter, in computing the business income of the
former, such percentage of profits is diversion of income and hence, deductible [CIT v. Travancore
Sugars and Chemicals Ltd. (1973)].
Example of Application of Income Example of Diversion of Income
Mr. A is liable to pay Rs. 2,000/- per month to Ms. M/s ABC is a partnership firm in which A
B (his ex-wife) as an alimony sum. Mr. A being an and his two sons B & C are partners. The
employee of Mr. C, instructs him to pay Rs. 2,000/- partnership deed provides that after the
per month out of his salary and disburse the death of Mr. A, B & C shall continue the
remaining salary to him. Whether this amount of business of the firm subject to a condition
Rs. 2,000/- per month be included in the Total that 20% of profit of the firm shall be given
Income of Mr. A or is it a case of diversion of to Mrs. D (Wife of Mr. A/ Mother of B & C).
income of Mr. A and not taxable in his hands? After the death of Mr. A, whether this 20%
amount of profit be included in the Total
Income of Firm M/s ABC or is a case of
diversion of income of M/s ABC and not
taxable in its hands?
This is a case of Application of Income by Mr. A

and not diversion of Income and hence it will be
included in the Total Income of Mr. A. This is
because this amount of Rs. 2,000/- per month is an
obligation of Mr. A to pay to Ms. B out of his This is a case if Diversion of Income and
income and not an income in which Ms. B had over the said 20% amount shall not be included
riding entitlement from Mr. C before being earned in the Total Income of M/s ABC, i.e., it is
by Mr. A. In other words, this is an Income of Mr. A, deductible from its Total Income. This is
which is applied by him to fulfill an obligation and because the clause mentioned in
hence included in his Total Income and a mere partnership deed has given an overriding
arrangement to make Mr. C make such payments title of 20% profit to Mrs. D and such
directly to Ms. B won’t make it a case of Diversion income is a precondition for the firm to
of Income. continue its business. In other words, this
20% profit reaches Mrs. D before it
becomes income of the firm and hence it
is a case of diversion of Income.
CONCLUSION
In conclusion, diversion of income and application of income are important concepts under the Income
Tax Act, 1961 in India, which are used to determine the taxability of income in certain situations where
income is diverted or applied by a taxpayer. It's crucial for taxpayers to understand these concepts and
ensure that their transactions are in compliance with the legal provisions to avoid any potential tax
implications. Consulting with a tax professional or seeking legal advice may be helpful in navigating the
complexities of these concepts and ensuring compliance with the tax laws.
Q12. GST Full?
Ans. 1. What is GST in India?
GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect taxes
in India such as the excise duty, VAT, services tax, etc. The Goods and Service Tax Act was passed in the
Parliament on 29th March 2017 and came into effect on 1st July 2017.
In other words,Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and
Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every
value addition. GST is a single domestic indirect tax law for the entire country.
Before the Goods and Services Tax could be introduced, the structure of indirect tax levy in India was as
follows:
Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central
GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.
Now, let us understand the definition of Goods and Service Tax, as mentioned above, in detail.
Multi-stage
An item goes through multiple change-of-hands along its supply chain: Starting from manufacture until
the final sale to the consumer.
Let us consider the following stages:
● Purchase of raw materials

● Production or manufacture
● Warehousing of finished goods
● Selling to wholesalers
● Sale of the product to the retailers
● Selling to the end consumers
The Goods and Services Tax is levied on each of these stages making it a multi-stage tax.
Value Addition
A manufacturer who makes biscuits buys flour, sugar and other material. The value of the inputs
increases when the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells these biscuits to the warehousing agent who packs large quantities of
biscuits in cartons and labels it. This is another addition of value to the biscuits. After this, the
warehousing agent sells it to the retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits, thus
increasing its value. GST is levied on these value additions, i.e. the monetary value added at each stage
to achieve the final sale to the end customer.
Destination-Based
Consider goods manufactured in Maharashtra and sold to the final consumer in Karnataka. Since the
Goods and Service Tax is levied at the point of consumption, the entire tax revenue will go to Karnataka
and not Maharashtra.
2. The Journey of GST in India
The GST journey began in the year 2000 when a committee was set up to draft law. It took 17 years from
then for the Law to evolve. In 2017, the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st
July 2017, the GST Law came into force.
3. Objectives Of GST
● To achieve the ideology of ‘One Nation, One Tax’
GST has replaced multiple indirect taxes, which were existing under the previous tax regime. The
advantage of having one single tax means every state follows the same rate for a particular product or
service. Tax administration is easier with the Central Government deciding the rates and policies.
Common laws can be introduced, such as e-way bills for goods transport and e-invoicing for transaction
reporting. Tax compliance is also better as taxpayers are not bogged down with multiple return forms
and deadlines. Overall, it’s a unified system of indirect tax compliance.
● To subsume a majority of the indirect taxes in India
India had several erstwhile indirect taxes such as service tax, Value Added Tax (VAT), Central Excise, etc.,
which used to be levied at multiple supply chain stages. Some taxes were governed by the states and
some by the Centre. There was no unified and centralised tax on both goods and services. Hence, GST
was introduced. Under GST, all the major indirect taxes were subsumed into one. It has greatly reduced
the compliance burden on taxpayers and eased tax administration for the government.
● To eliminate the cascading effect of taxes
One of the primary objectives of GST was to remove the cascading effect of taxes. Previously, due to
different indirect tax laws, taxpayers could not set off the tax credits of one tax against the other. For
example, the excise duties paid during manufacture could not be set off against the VAT payable during
the sale. This led to a cascading effect of taxes. Under GST, the tax levy is only on the net value added at
each stage of the supply chain. This has helped eliminate the cascading effect of taxes and contributed
to the seamless flow of input tax credits across both goods and services.
● To curb tax evasion
GST laws in India are far more stringent compared to any of the erstwhile indirect tax laws. Under GST,
taxpayers can claim an input tax credit only on invoices uploaded by their respective suppliers. This way,
the chances of claiming input tax credits on fake invoices are minimal. The introduction of e-invoicing has
further reinforced this objective. Also, due to GST being a nationwide tax and having a centralised
surveillance system, the clampdown on defaulters is quicker and far more efficient. Hence, GST has
curbed tax evasion and minimised tax fraud from taking place to a large extent.
● To increase the taxpayer base
GST has helped in widening the tax base in India. Previously, each of the tax laws had a different
threshold limit for registration based on turnover. As GST is a consolidated tax levied on both goods and
services both, it has increased tax-registered businesses. Besides, the stricter laws surrounding input tax
credits have helped bring certain unorganised sectors under the tax net. For example, the construction
industry in India.
● Online procedures for ease of doing business
Previously, taxpayers faced a lot of hardships dealing with different tax authorities under each tax law.
Besides, while return filing was online, most of the assessment and refund procedures took place offline.
Now, GST procedures are carried out almost entirely online. Everything is done with a click of a button,
from registration to return filing to refunds to e-way bill generation. It has contributed to the overall ease
of doing business in India and simplified taxpayer compliance to a massive extent. The government also
plans to introduce a centralised portal soon for all indirect tax compliance such as e-invoicing, e-way bills
and GST return filing.
● An improved logistics and distribution system
A single indirect tax system reduces the need for multiple documentation for the supply of goods. GST
minimises transportation cycle times, improves supply chain and turnaround time, and leads to
warehouse consolidation, among other benefits. With the e-way bill system under GST, the removal of
interstate checkpoints is most beneficial to the sector in improving transit and destination efficiency.
Ultimately, it helps in cutting down the high logistics and warehousing costs.
● To promote competitive pricing and increase consumption
Introducing GST has also led to an increase in consumption and indirect tax revenues. Due to the
cascading effect of taxes under the previous regime, the prices of goods in India were higher than in
global markets. Even between states, the lower VAT rates in certain states led to an imbalance of
purchases in these states. Having uniform GST rates have contributed to overall competitive pricing
across India and on the global front. This has hence increased consumption and led to higher revenues,
which has been another important objective achieved.
4. Advantages Of GST
GST has mainly removed the cascading effect on the sale of goods and services. Removal of the
cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax on tax, the
cost of goods decreases.
Also, GST is mainly technologically driven. All the activities like registration, return filing, application for
refund and response to notice needs to be done online on the GST portal, which accelerates the
processes.
5. What are the components of GST?
There are three taxes applicable under this system: CGST, SGST & IGST.
● CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a
transaction happening within Maharashtra)
● SGST: It is the tax collected by the state government on an intra-state sale (e.g., a
transaction happening within Maharashtra)
● IGST: It is a tax collected by the Central Government for an inter-state sale (e.g.,
Maharashtra to Tamil Nadu)
In most cases, the tax structure under the new regime will be as follows:
Transaction New Old Regime Revenue Distribution

Regime
Sale within the CGST + VAT + Central Revenue will be shared equally between the
State SGST Excise/Service tax Centre and the State
Sale to another IGST Central Sales Tax + There will only be one type of tax (central) in
State Excise/Service Tax case of inter-state sales. The Centre will then
share the IGST revenue based on the
destination of goods.
Illustration:
● Let us assume that a dealer in Gujarat had sold the goods to a dealer in Punjab worth Rs.
50,000. The tax rate is 18% comprising of only IGST.
In such a case, the dealer has to charge IGST of Rs.9,000. This revenue will go to Central Government.
● The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate on
goods is 12%. This rate comprises CGST at 6% and SGST at 6%.
The dealer has to collect Rs.6,000 as Goods and Service Tax, Rs.3,000 will go to the Central Government
and Rs.3,000 will go to the Gujarat government since the sale is within the state.
6. Tax Laws before GST

In the earlier indirect tax regime, there were many indirect taxes levied by both the state and the centre.
States mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of
rules and regulations.
Inter-state sale of goods was taxed by the centre. CST (Central State Tax) was applicable in case of
inter-state sale of goods. The indirect taxes such as the entertainment tax, octroi and local tax were
levied together by state and centre. These led to a lot of overlapping of taxes levied by both the state
and the centre.
For example, when goods were manufactured and sold, excise duty was charged by the centre. Over
and above the excise duty, VAT was also charged by the state. It led to a tax on tax effect, also known as
the cascading effect of taxes.
The following is the list of indirect taxes in the pre-GST regime:
● Central Excise Duty

● Duties of Excise
● Additional Duties of Excise
● Additional Duties of Customs
● Special Additional Duty of Customs
● Cess
● State VAT
● Central Sales Tax
● Purchase Tax
● Luxury Tax
● Entertainment Tax
● Entry Tax
● Taxes on advertisements
● Taxes on lotteries, betting, and gambling
CGST, SGST, and IGST have replaced all the above taxes.
However, certain taxes such as the GST levied for the inter-state purchase at a concessional rate of 2% by
the issue and utilisation of ‘Form C’ is still prevalent.
It applies to certain non-GST goods such as:
● Petroleum crude;
● High-speed diesel
● Motor spirit (commonly known as petrol);
● Natural gas;
● Aviation turbine fuel; and
● Alcoholic liquor for human consumption.
It applies to the following transactions only:
● Resale
● Use in manufacturing or processing
● Use in certain sectors such as the telecommunication network, mining, the generation or
distribution of electricity or any other power sector
7. How Has GST Helped in Price Reduction?
During the pre-GST regime, every purchaser, including the final consumer paid tax on tax. This condition
of tax on tax is known as the cascading effect of taxes.
GST has removed the cascading effect. Tax is calculated only on the value-addition at each stage of the
transfer of ownership. Understand what the cascading effect is and how GST helps by watching this
simple video:
The indirect tax system under GST will integrate the country with a uniform tax rate. It will improve the
collection of taxes as well as boost the development of the Indian economy by removing the indirect tax
barriers between states.
Illustration:
Based on the above example of the biscuit manufacturer, let’s take some actual figures to see what
happens to the cost of goods and the taxes, by comparing the earlier GST regimes.
Tax calculations in earlier regime:
Action Cost (Rs) Tax rate at 10% (Rs) Invoice Total (Rs)
Manufacturer 1,000 100 1,100

Warehouse adds a label and repacks at 1,400 140 1,540
Rs.300
Retailer advertises at Rs. 500 2,040 204 2,244
Total 1,800 444 2,244
The tax liability was passed on at every stage of the transaction, and the final liability comes to a rest
with the customer. This condition is known as the cascading effect of taxes, and the value of the item
keeps increasing every time this happens.
Tax calculations in current regime:
Action Cost Tax rate Tax liability to be Invoice Total

(Rs) at 10% deposited (Rs) (Rs)
(Rs)
Manufacturer 1,000 100 100 1,100

Warehouse adds label and repacks at Rs. 1,300 130 30 1,430
300
Retailer advertises at Rs. 500 1,800 180 50 1,980
Total 1,800 180 1,980
In the case of Goods and Services Tax, there is a way to claim the credit for tax paid in acquiring input.
The individual who has already paid a tax can claim credit for this tax when he submits his GST returns.
In the end, every time an individual is able to claims the input tax credit, the sale price is reduced and
the cost price for the buyer is reduced because of lower tax liability. The final value of the biscuits is
therefore reduced from Rs.2,244 to Rs.1,980, thus reducing the tax burden on the final customer.
8. What are the New Compliances Under GST?
Apart from online filing of the GST returns, the GST regime has introduced several new systems along
with it.
e-Way Bills
GST introduced a centralised system of waybills by the introduction of “E-way bills”. This system was
launched on 1st April 2018 for inter-state movement of goods and on 15th April 2018 for intra-state
movement of goods in a staggered manner.
Under the e-way bill system, manufacturers, traders and transporters can generate e-way bills for the
goods transported from the place of its origin to its destination on a common portal with ease. Tax
authorities are also benefited as this system has reduced time at check -posts and helps reduce tax
evasion.
E-invoicing
The e-invoicing system was made applicable from 1st October 2020 for businesses with an annual
aggregate turnover of more than Rs.500 crore in any preceding financial years (from 2017-18). Further,
from 1st January 2021, this system was extended to those with an annual aggregate turnover of more
than Rs.100 crore.
These businesses must obtain a unique invoice reference number for every business-to-business invoice
by uploading on the GSTN’s invoice registration portal. The portal verifies the correctness and
genuineness of the invoice. Thereafter, it authorises using the digital signature along with a QR code.
e-Invoicing allows interoperability of invoices and helps reduce data entry errors. It is designed to pass
the invoice information directly from the IRP to the GST portal and the e-way bill portal. It will, therefore,
eliminate the requirement for manual data entry while filing GSTR-1 and helps in the generation of e-way
bills too.
Q13. Components on Income Tax Law?
Ans. The Body of Income Tax Law in India
The Central Government has the power through entry 82 of the Union List of Schedule VII of the
Constitution of India to impose the tax on all incomes, except the agricultural income. State Government
has been given the power to impose Tax on agricultural income as per entry 46 of the State List of said
schedule VII.
In order to understand the law regarding Income Tax, the study of the following enactments and rules is
necessary.
1. Income Tax Act 1961

2. Income Tax rules 1962
3. The Finance Act passed every year
4. Circulars
5. Government notification
6. Court Decision i.e. Judicial Pronouncements
1. Income Tax Act 1961
This act was applicable from 1st April 1962. This act contains 298 sections and 14 schedules. It contains
provisions for the determination of taxable income, determination of tax liability, appeals, penalties and
prosecution. This act is being amended time to time. The law is applicable to the whole of India
including the state of Jammu and Kashmir.
2. Income Tax Rules 1962
These rules are the supplement to the Income Tax Act. Every act normally gives power to an authority,
responsible for implementation of the act, to make rules for carrying out the purpose of the act. in case
of Income Tax Act, CBDT (Central Board of Direct Taxes) has been empowered to make rules.
Example: Section 10 (13A)(1) provide that house rent allowance exempts up to a certain limit, how to
calculate such limit is given in rule 2A of the Income Tax Rules 1962.
3. The Finance Act
Every year the Finance Minister of India presents a Finance Bill in the Parliament, which contains various
amendment proposed to be made in the Direct and Indirect Taxes levied by the Central Government. As
soon as the Bill is passed by both the houses of the Parliament and thereafter receives the assent of the
President of India, it becomes the Finance Act. The amendment proposed therein is then incorporated in
the Income Tax Act, which are applicable from the very first day of the next financial year.
For Example generally, amendments by Finance Act 2018 are effective for FY starting from 1.04.2018
First Schedule to Annual Finance Act: It contains four parts which as applicable for the Finance Act 2018
are as follows-
Part I It specifies the rate at which income tax is to be levied on income chargeable to tax
for the financial year 2018-19 ie. assessment year 2019-20.
Part II It lays down the rate at which tax is to be deducted at source during the financial
year 2018-19 i.e. assessment year 2019-20.
Part It lays down the rates for charging income tax in certain cases, rates for directing
III income tax from income chargeable under the head salaries and the rates for
computing advance tax for the financial year 2017-18 i.e. the assessment year
2018-19.
Part It lays down the rules for computation of net agricultural income.
IV
4. Circulars
The provision of the Income Tax Act are not very clear and complete therefore various types of circulars
are being issued by the CBDT from time to time to avoid any sort of controversy and ambiguity.
5. Government Notification
According to the Income Tax Act, 1961 and the Income Tax rules, Central Government has the power to
issue the notification in several cases. Such notifications are issued by the Ministry of Finance regarding
exemption of various payments to employees such as Allowance, Pension, Leave Encashment, Cost
Inflation, Index for long-term capital gain, Exemption of interest on certain security.
6. Court Decisions
(a)Supreme Court: The decisions given by the Supreme Court becomes law. All decisions given by
Supreme court are binding on all the courts, Appellate Authorities, Income Tax authorities, and the
assessees. Where any two judgments are contradictory then the decision of the larger bench( whether
earlier or later in time) shall prevail. In the case where benches have an equal number of judges then
later decision shall prevail.
(b) High Court: High court decisions are binding on the tribunal, Income Tax Authorities and on all
assesses falling under its jurisdiction.
Q14. Extra
Ans. Article 366(12A) of the Constitution as amended by 101st Constitutional Amendment Act, 2016
defines the Goods and Services Tax (GST) as a 'tax on supply of goods or services or both, except taxes
on the supply of alcoholic liquor for human consumption'.
Section 5 Income Tax Act, 1972
the scope of total income under the Income Tax Act is defined based on the residency status of an
individual or entity. The provisions differentiate between residents and non-residents and outline the
sources of income that should be considered for taxation. Let's break down the key points:
For Residents:
Scope of Total Income for Residents:
For a person who is a resident, the total income includes all income, regardless of its source.
Sources of Income for Residents:
The income can be from any source and is considered for taxation if it falls into one of the following
categories:
Income received or deemed to be received in India during the year.
Income that accrues or arises (or is deemed to accrue or arise) to the person in India during the year.
Income that accrues or arises to the person outside India during the year.
Exception for Non-Ordinarily Residents:

If a person is not ordinarily resident in India, income accrued or arising outside India is not included
unless it is derived from a business controlled in or a profession set up in India.
For Non-Residents:
Scope of Total Income for Non-Residents:
For a person who is a non-resident, the total income includes income received or deemed to be received
in India during the year, or income that accrues or arises (or is deemed to accrue or arise) to the person
in India during the year.
Explanations:
Explanation 1:
Income accruing or arising outside India is not considered received in India solely because it is included
in a balance sheet prepared in India.
Explanation 2:
It clarifies that income, once included in the total income based on accrual or arising, should not be
included again based on the fact that it is received or deemed to be received in India.
In summary, the provisions outline the conditions under which income is considered for taxation based
on its source and the residency status of the individual or entity. The rules aim to ensure a
comprehensive assessment of income for tax purposes, taking into account various scenarios and
locations of income generation.
Definition
2. In this Act, unless the context otherwise requires,—
(1) "agricultural income" means—
(a) any rent or revenue derived from land which is used for agricultural purposes and is
either assessed to land revenue in India or is subject to a local rate assessed and
collected by officers of the Government as such;
(b) any income derived from such land by—
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process
ordinarily employed by a cultivator or receiver of rent-in-kind to render the
produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or
received by him, in respect of which no process has been performed other than a
process of the nature described in paragraph (ii) of this sub-clause;
(c) any income derived from any building owned and occupied by the receiver of the rent
or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind,
of any land with respect to which, or the produce of which, any process mentioned in
paragraphs (ii) and (iii) of sub-clause (b) is carried on:
Provided that the building is on or in the immediate vicinity of the land, and is a building which the
receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his
connection with the land, requires as a dwelling house, or as a store-house, or other out-building;
(2) "annual value", in relation to any property, means its annual value as determined under
section 23;
(3) "Appellate Assistant Commissioner" means a person appointed to be an Appellate Assistant
Commissioner of Income-tax under sub-section (1) of section 117;
(4) "Appellate Tribunal" means the Appellate Tribunal constituted under section 252;
(5) "approved gratuity fund" means a gratuity fund which has been and continues to be
approved by the Commissioner in accordance with the rules contained in Part C of the Fourth
Schedule;
(6) "approved superannuation fund" means a superannuation fund or any part of a
superannuation fund which has been and continues to be approved by the Commissioner in
accordance with the rules contained in Part B of the Fourth Schedule;
(7) "assessee" means a person by whom income-tax or super-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 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;
(8) "assessment" includes re-assessment;
(9) "assessment year" means the period of twelve months commencing on the 1st day of April
every year;
(10) "average rate of income-tax" means the rate arrived at by dividing the amount of
income-tax calculated on the total income, by such total income;
(11) "average rate of super-tax" means the rate arrived at by dividing the amount of super-tax
calculated on the total income, by such total income;
(12) "Board" means the Central Board of Revenue constituted under the Central Board of
Revenue Act, 1924 (4 of 1924);
(13) "business" includes any trade, commerce or manufacture or any adventure or concern in
the nature of trade, commerce or manufacture;
(14) "capital asset" means property of any kind held by an assessee, whether or not connected
with his business or profession, but does not include—
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his
business or profession;
(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery
and furniture) held for personal use by the assessee or any member of his family
dependent on him;
(iii) agricultural land in India;
(15) "charitable purpose" includes relief of the poor, education, medical relief, and the
advancement of any other object of general public utility not involving the carrying on of any
activity for profit;
(16) "Commissioner" means a person appointed to be a Commissioner of Income-tax under
sub-section (1) of section 117;
(17) "company" means—
(i) any Indian company, or
(ii) any association, whether incorporated or not and whether Indian or non-Indian, which
is or was assessable or was assessed under the Indian Income-tax Act, 1922 (11 of
1922), as a company for the assessment year commencing on the 1st day of April, 1947,
or which is declared by general or special order of the Board to be a company for the
purposes of this Act;
(18) "company in which the public are substantially interested"—A company is said to be a
company in which the public are substantially interested—
(a) if it is a company owned by the Government or in which not less than forty per cent of
the shares are held by the Government; or
(b) if it is not a private company as defined in the Companies Act, 1956 (1 of 1956), and
(i) its shares (not being shares entitled to a fixed rate of dividend whether with or
without a further right to participate in profits) carrying not less than fifty per cent
of the voting power have been allotted unconditionally to, or acquired
unconditionally by, and were throughout the relevant previous year beneficially
held by, the Government or a corporation established by a Central, State or
Provincial Act or the public (not being a director, or a company to which this
clause does not apply);
(ii) the said shares were at any time during the relevant previous year the subject of
dealing in any recognised stock exchange in India or were freely transferable by
the holder to other members of the public, and
(iii) the affairs of the company, or the shares carrying more than fifty per cent of its
total voting power were at no time during the relevant previous year controlled
or held by five or less persons.
Explanation 1.—In computing the number of five or less persons aforesaid,—
(i) the Government or any corporation established by a Central, State or Provincial
Act or company to which this clause applies shall not be taken into account, and
(ii) persons who are relatives of one another, and persons who are nominees of any
other person together with that other person, shall be treated as a single person.
Explanation 2.—In its application to any such company as is referred to in sub-clause (2) of clause (iii) of
section 109, sub-clause (b) shall have effect as if for the words "not less than fifty per cent" and "more
than fifty per cent" the words "not less than forty per cent" and "more than sixty per cent" had been
substituted;
(19) "co-operative society" means a co-operative society registered under the Co-operative
Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State
for the registration of co-operative societies;
(20) "director", "manager" and "managing agent", in relation to a company, have the
meanings respectively assigned to them in the Companies Act, 1956 (1 of 1956);
(21) "Director of Inspection" means a person appointed to be a Director of Inspection under
sub-section (1) of section 117, and includes a person appointed to be an Additional Director
of Inspection, a Deputy Director of Inspection or an Assistant Director of Inspection;
(22) "dividend" includes—
(a) any distribution by a company of accumulated profits, whether capitalised or not, if
such distribution entails the release by the company to its shareholders of all or any part
of the assets of the company;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or
deposit certificates in any form, whether with or without interest, and any distribution to
its preference shareholders of shares by way of bonus, to the extent to which the
company possesses accumulated profits, whether capitalised or not;
(c) any distribution made to the shareholders of a company on its liquidation, to the
extent to which the distribution is attributable to the accumulated profits of the
company immediately before its liquidation, whether capitalised or not;
(d) any distribution to its shareholders by a company on the reduction of its capital, to the
extent to which the company possesses accumulated profits which arose after the end
of the previous year ending next before the 1st day of April, 1933, whether such
accumulated profits have been capitalised or not;
(e) any payment by a company, not being a company in which the public are substantially
interested, of any sum (whether as representing a part of the assets of the company or
otherwise) by way of advance or loan to a shareholder, being a person who has a
substantial interest in the company, or any payment by any such company on behalf, or
for the individual benefit, of any such shareholder, to the extent to which the company
in either case possesses accumulated profits;
but "dividend" does not include—
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any
share issued for full cash consideration, where the holder of the share is not entitled in
the event of liquidation to participate in the surplus assets;
(ii) any advance or loan made to a shareholder by a company in the ordinary course of its
business, where the lending of money is a substantial part of the business of the
company;
(iii) any dividend paid by a company which is set off by the company against the whole or
any part of any sum previously paid by it and treated as a dividend within the meaning
of sub-clause (e), to the extent to which it is so set off.
Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not include
capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before
the 1st day of April, 1956.
Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all
profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in
sub-clause (c) shall include all profits of the company up to the date of liquidation;
(23) "firm", "partner" and "partnership" have the meanings respectively assigned to them in
the Indian Partnership Act, 1932 (9 of 1932); but the expression "partner" shall also include
any person who, being a minor, has been admitted to the benefits of partnership;
(24) "income" includes—
(i) profits and gains;
(ii) dividend;
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of
section 17;
(iv) the value of any benefit or perquisite, whether convertible into money or not,
obtained from a company either by a director or by a person who has a substantial
interest in the company, or by a relative of the director or such person, and any sum
paid by any such company in respect of any obligation which, but for such payment,
would have been payable by the director or other person aforesaid;
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41
or section 59;
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance
company or by a co-operative society, computed in accordance with section 44 or any
surplus taken to be such profits and gains by virtue of provisions contained in the First
Schedule;
(25) "Income-tax Officer" means a person appointed to be an Income-tax Officer under section
117;
(26) "Indian company" means a company formed and registered under the Companies Act,
1956 (1 of 1956), and includes—
(i) a company formed and registered under any law relating to companies formerly in
force in any part of India (other than the State of Jammu and Kashmir);
(ii) in the case of the State of Jammu and Kashmir, a company formed and registered
under any Law for the time being in force in that State:
Provided that the registered office of the company in all cases is in India;
(27) "Inspecting Assistant Commissioner" means a person appointed to be an Inspecting
Assistant Commissioner of Income-tax under sub-section (1) of section 117;
(28) "Inspector of Income-tax" means a person appointed to be an Inspector of Income-tax
under sub-section (2) of section 117;
(29) "legal representative" has the meaning assigned to it in clause (11) of section 2 of the Code
of Civil Procedure, 1908 (5 of 1908);
(30) "non-resident" means a person who is not a "resident", and for the purposes of sections
92, 93, 113 and 168, includes a person who is not ordinarily resident within the meaning of
sub-section (6) of section 6;
(31) "person" includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-clauses;
(32) "person who has a substantial interest in the company", in relation to a company, means a
person who is the beneficial owner of shares, not being shares entitled to a fixed rate of
dividend whether with or without a right to participate in profits, carrying not less than twenty
per cent of the voting power;
(33) "prescribed" means prescribed by rules made under this Act;
(34) "previous year" means the previous year as defined in section 3;
(35) "principal officer", used with reference to a local authority or a company or any other public
body or any association of persons or any body of individuals, means—
(a) the secretary, treasurer, manager or agent of the authority, company, association or
body, or
(b) any person connected with the management or administration of the local authority,
company, association or body upon whom the Income-tax Officer has served a notice of
his intention of treating him as the principal officer thereof;
(36) "profession" includes vocation;
(37) "public servant" has the same meaning as in section 21 of the Indian Penal Code (45 of
1860);
(38) "recognised provident fund" means a provident fund which has been and continues to be
recognised by the Commissioner in accordance with the rules contained in Part A of the
Fourth Schedule, and includes a provident fund established under a scheme framed under the
Employees' Provident Funds Act, 1952 (9 of 1952);
(39) "registered firm" means a firm registered under the provisions of clause (a) of sub-section
(1) of section 185 or under that provision read with sub-section (7) of section 184;
(40) "regular assessment" means the assessment made under section 143 or section 144;
(41) "relative", in relation to an individual, means the husband, wife, brother or sister or any
lineal ascendant or descendant of that individual;
(42) "resident" means a person who is resident in India with in the meaning of section 6;
(43) "tax" means income-tax and super-tax chargeable under the provisions of this Act;
(44) "Tax Recovery Officer" means—
(i) a Collector;
(ii) an additional Collector or any other officer authorised to exercise the powers of a
Collector under any law relating to land revenue for the time being in force in a State; or
(iii) any Gazetted Officer of the Central or a State Government who may be authorised by
the Central Government, by notification in the Official Gazette, to exercise the powers
of a Tax Recovery Officer;
(45) "total income" means the total amount of income referred to in section 5, computed in the
manner laid down in this Act;
(46) "total world income" includes all income wherever accruing or arising, except incomes
which are not included in the total income under any of the provisions of Chapter III and
except any capital gains which are not includible in the total income of an assessee;
(47) "transfer", in relation to a capital asset, includes the sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein or the compulsory acquisition thereof under
any law;
(48) "unregistered firm" means a firm which is not a registered firm.

Taxation Law Question Bank BALLB

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Taxation Law Question Bank BALLB

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Q1. Various Heads of Income?

The five heads of income are as follows:

5 Heads of Income Tax Act

1. Income from Salary

● HRA received from your employer

2. Income from House Property

● The assessee should be the house property owner

3. Income from Capital Gains

4. Income from Profits and Gains of Business/Profession

● A taxpayer must be controlling the operations of this business or profession

5. Income from Other Sources

When is gratuity given?

Eligibility criteria for receiving gratuity

Government Employees and Defence Personnel

Employees covered under the Gratuity Act

Employees not covered under the Gratuity Act

Q3. Capital and Revenue Receipts?

​ Revenue receipts and

What do you understand by Revenue Receipts?

Examples of Revenue Receipts

​ Money received for services provided to customers

Some Important features of Revenue Receipts

What do you understand by Capital Receipts?

Types of Capital Receipts

Capital receipts are divided into three groups-

Examples of Capital Receipts

​ Cash received from the sale of fixed assets

Features of Capital Receipts

​ Capital receipts are non-recurring in nature

S. Revenue Receipts Capital Receipts

3. Revenue receipts are recurring in nature. Capital receipts are non-recurring in

6. Through revenue receipts distribution of profit Profit distribution is not available

7. It includes Sale of products of business It includes the sale of fixed or financial

Q4. Constitutional Provisions on Taxation?

Some of the key constitutional provisions relating to taxation include:

Cess and Surcharge

Q5. Agricultural Income?

Ans. Agricultural Income

What is Agricultural Income?

Types of Agricultural Income

The table below summarises the different types of agricultural income:

Basis of Types of Agricultural Income

Example of Rent received by an Income earned by a Rent received on a

Agricultural Income in Income Tax

Decision of the Hon'ble Supreme Court:

Q6. Tax and Kinds of Tax?

Listed below are a few things about taxation:

​ Tax can be levied annually or on each transaction.

​ Income from Salary

​ Income from Other Sources

Why should you Pay Taxes on Time?

​ Income not Disclosed Completely

Recent Reforms in Taxes

Ans. Definition of Income

Exclusions from the definition of Income

Additional Information about Section 2(24) of the Income Tax Act

Additional Considerations for Section 2(24) of the Income Tax Act

Q8. Residential Status?

Ans. Residential Status Under Income Tax Act

Residential Status for Income Tax

Resident Status Classifications

The following categories are used to classify an individual’s residence status.

● Resident and Ordinarily Resident

Tax for Residents, NR, NROR

Revenue receipts and

Money received for services provided to customers

Cash received from the sale of fixed assets

Capital receipts are non-recurring in nature

Tax can be levied annually or on each transaction.

Income from Salary

Income from Other Sources

Income not Disclosed Completely

1. Income Tax Act 1961