Income Tax

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Income Tax
Q. Define and discuss the following under Income Tax Act, 1961.
Person [Sec. 2(31)]
The term “Person” Includes:
• An individual;
• A Hindu Undivided family (HUF);
• A company;
• A firm;
• An association of persons (AOP) or a body of individuals (BOI), whether incorporated or not;
• A local authority; and
• Every artificial juridical person not felling within any of the preceding sub-clauses are - An
individual includes a natural person. I.e. a human being. It includes a male, female, child or lunatic
or idiot person also. However, income of a minor child is taxed in the hands of his parents, while
income of a lunatic or idiot person is taxable in the hands of a representative assessee in
accordance with the law.
HUF: A Hindu undivided family is the normal condition of Hindu Society. The members of Hindu Undivided
Family are living in a state of union unless the contrary is stated. A Hindu Undivided Family (H.U.F.) is a
unit of assessment under the Income-Tax Act. It consists of all the persons lineally descended from a
common ancestor. Hindu Undivided Family consists of males and females.
Company: A company is an artificial person. But it has got legal independent entity. The definition of
Company has been provided in Section 2(17) of the income Tax Act. It includes:
1. any Indian company, or anybody corporate incorporated by or under the laws of a country outside
India, or
2. any institution, association or body which is or was assessable or was assessed as a company for any
assessment year under the Indian Income- tax Act, 1922 (11 of 1922), or which is or was assessable or was
assessed under this Act as a company for any assessment year commencing on or before the 1st day of
April,1970. or
3. any institution, association or body, whether incorporated or not and whether Indian or non-Indian,
which is declared by general or special order of the Board to be a company.
4. A firm refers to a Partnership firm. Partnership means relationship between two persons who have
agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have
Compiled by Rahul Kumar Singh

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entered in to a partnership with one another are referred as partners and the under which the business
is carried on is called the firm’s name.
5. An association of a person means two or more persons join together for common purpose with a view
to earn income. AOP is distinct from partnership and it is not necessary that of any contract between the
persons who have joined together.
6. The body of individual means a conglomeration of individuals who carry on some activity with the
objective of earning of some income. It would consist of only individuals. Entities like company, firm
cannot be a member of body of individuals.
7. A Local Authority means Panchayat as referred to in clause (d) of article 243 of the Constitution; or
Municipality as referred to in clause (e) of article 243 of the Constitution; or Municipal committee and
District Board, legally entitled to, or entrusted by the Government with, the control or management of a
Municipal or local fund; or Cantonment Board as defined in section 3 of the Cantonments Act 1924 (2 of
1924).
8. Artificial juridical persons are not natural persons but are entities in the eyes of law. The artificial
persons include a juridical personality and also deities.
As the given definition is inclusive any person not falling in the above-mentioned categories, may still fall
in the four comers of the term “person” and accordingly may be liable to tax u/s 4.
Indian Company [Sec. 2(26)]: An Indian company means a company formed & registered under the
Companies Act, 1956 & includes:
a. 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 & Kashmir and the Union territories specified in (c) infra;
b. a company formed and registered under any law for the time being in force in the State of Jammu &
Kashmir;
c. a company formed and registered under any law for the time being in force in the Union territories of
Dadar & Nagar Haveli, Goa, Daman & Diu and Pondicherry;
d. a corporation established by or under a Central, State or Provincial Act;
e. any institution, association or body which is declared by the Central Board of Direct Taxes (CBDT) to be
a company u/s 2(17). In the aforesaid cases, a company, corporation, institution, association or body will
be treated as an Indian company only if its registered office or principal office, as the case may be, is in
India.
Domestic Company [Sec. 2(22A)]: Domestic company means:

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i) an Indian company; or
ii) any other company, which in respect of its income liable to tax under the Act, has made
prescribed arrangements for the declaration and payment of dividends (including dividend on
preference share), payable out of such income, within India.
Foreign Company [Sec. 2(23A)]: Foreign company means a company which is not a domestic company.
Company in which public are substantially interested [Sec. 2(18)]: Following companies are said to be a
company in which public are substantially interested:
1. Government Company;
2. A company u/s 8 of the Companies Act, 2013;
3. Mutual benefit finance company;
4. Listed company;
5. Company in which shares are held by co-operative societies;
6. Company which is prescribed by CBDT
Firm: As per sec. 4 of Indian Partnership Act, 1932, partnership means “relationship between persons who
have agreed to share profits of the business carried on by all or any one of them acting for all”.
Persons, who enter into such business, are individually known as partners and such business is known as
a Firm. A firm is, though not having a separate legal entity, but has separate entity in the eyes of Income-
tax Act
IV) Assessee [sec.2(7)]

Any individual who has income earned or losses incurred, and is liable to pay taxes on these to the
government in a particular assessment year, is an assessee.
Categories of the assessee –
1. Normal Assessee: a person against whom proceedings are going on under the Income Tax Act, despite
the fact that any tax or other amount is payable by him or not;
• a person who has undergone loss and filed a return of loss u/s 139(3);
• a person by whom some amount of interest or tax or penalty is payable under the income tax Act;
• any person who is entitled to refund of tax under this Act.
2. Representative Assessee: A person may not be liable for his own income or loss but he might also be
liable for the income or loss of other persons say for example agent of a non-resident, guardian of a minor
or a lunatic person, etc. In such cases, the person responsible for the assessment of the income of such a
person is called representative assessee. Such a person is deemed to be an assessee.

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3. Deemed Assessee: In the case of a deceased person who has died after writing down his will, the
administrators of the property of the deceased are deemed as assessee.
• In case if a person dies intestate (without writing down his will) the eldest son or other legal heirs
of the deceased person are deemed as assessee.
• In case a minor, lunatic or an idiot person has income taxable under the Income Tax Act, their
guardian is deemed to be an assessee.
• In case a non-resident has income in India, any person acting on his behalf is deemed as an
assessee.
4. Assessee-in-default: A person is deemed as an assessee-in-default if he fails to fulfill his statutory
obligations. In case an employer is paying a salary or a person who is paying interest, it is their duty to
deduct TDS and deposit the amount of tax so collected in Government treasury. If he fails to deduct TDS
or deducts tax but does not deposit it in the treasury, he is known as assessee-in-default.
ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]:

Assessment year means the period of 12 months commencing on the 1st day of April every year. It is the
year (just after the previous year) in which income earned in the previous year is charged to tax. E.g.,
A.Y.2019-20 is a year, which commences on April 1, 2019 and ends on March 31, 2020. Income of an
assessee earned in the previous year 2018-2019 is assessed in the A.Y. 2019-20.
PREVIOUS YEAR [SEC.3]: Previous Year means the financial year immediately preceding the Assessment
Year. Income earned in a year is assessed in the next year. The year in which income is earned is known
as Previous Year and the next year in which income is assessed is known as Assessment Year. It is
mandatory for all assessee to follow financial year (from 1st April to 31st March) as previous year for
Income-Tax purpose.
Financial Year: According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year means the year
commencing on the 1st day of April. Hence, it is a period of 12 months starting from 1st April and ending
on 31st March of the next year. It plays a dual role i.e. Assessment Year as well as Previous Year. Example:
Financial year 2018-19 is –
• Assessment year for the Previous Year 2017-18; and
• Previous Year for the Assessment Year 2019-20.
Generally, income of the Previous Year is assessable as the income of immediately following Assessment
Year. This rule has certain exceptions which are enumerated as follows:
(i) Income of the non-resident from shipping business;

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(ii) Income of persons leaving India either permanently or for a long period of time;
(iii) Income of the bodies formed for short duration;
(iv) Income of a person trying to alienate his assets with a view to avoiding payment of tax; and Income
of a discontinued business.
Thus, under these provisions Income Tax Act, 1961 tries to ensure smooth collection is income tax from
the aforesaid taxpayer who may not be traceable if tax Assessment procedure is postponed till the
commencement of the normal Assessment.
Assessing Officer: Tax returns which are either processed or unprocessed by CPC may require further
detailed enquiry in order to ensure correctness of returned income and also to discover
intentional/unintentional errors if any. This process of detailed examination of return of income is called
‘assessment’. An Individual officer of Income-tax department who is entrusted with this task of
assessment is called as ‘Assessing Officer (AO)’
An AO is an income tax officer who has jurisdiction to make an assessment of a taxpayer (assessee) who
is liable to tax under the Act. Following is the list of ranks in the income tax department in India:
• Principal Chief Commissioner of Income Tax or Principal Director General of Income Tax
• Chief Commissioner of Income Tax or Director General of Income Tax
• Principal Commissioner of Income Tax or ADG/Principal Director of Income Tax
• Commissioner of Income Tax or Additional Director General/Director of Income Tax
• Additional Commissioners of Income Tax or Additional Director of Income Tax
• Joint Commissioner of Income Tax or Joint Director of Income Tax
• Deputy Commissioner of Income Tax or Deputy Director of Income Tax
• Assistant Commissioner of Income Tax or Assistant Director of Income Tax
The AO who would handle the return filed by you may vary according to the volume of income/nature of
trade as assigned by the Central Board of Direct Tax (CBDT or Board).
What is the Importance of Having an Assessing Officer?
As mentioned above an AO is required for detailed examination of return of income to ensure its
correctness keeping in mind income tax law provisions, various circulars, notifications, instructions issued
by Board and application of mind in interpreting the same. In this process, the AO may recompute taxable
income of the taxpayer and for this purpose.
The AO has the authority to ask for books of accounts, various other supporting documents or any other
details from the taxpayer for verification. This is initiated by issuing a notice to the taxpayer. Once the

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assessment is complete, assessment order and tax demand if any is also served on the taxpayer. Further,
taxpayers may also write to income tax department for any of their concerns such as rectification of
return, issue of refund etc.
(g) AOP and BOI: An AOP means a group of persons (whether individuals, HUF, companies, firms, etc.)
who join together for common purpose(s). Every combination of person cannot be termed as AOP. It is
only when they associate themselves in an income-producing activity then they become AOP. Whereas,
BOI means a group of individuals (individual only) who join together for common purpose(s) whether or
not to earn income.
Co-heirs, co-donees, etc. joining together for a common purpose or action would be chargeable as an AOP
or BOI. In case of income of AOP, the AOP alone shall be taxed and the members of the AOP cannot be
taxed individually in respect of the income of the AOP
Difference between AOP and BOI
In case of BOI, only individuals can be the members, whereas in case of AOP, any person can be its member
i.e. entities like Company, Firm etc. can be the member of AOP but not of BOI.
In case of an AOP, members voluntarily get together with a common will for a common intention or
purpose, whereas in case of BOI, such common will may or may not be present.
(h) Zero coupon bond: A coupon is a periodic interest received by a bondholder from the time of issuance
of the bond till maturity. Zero coupon bonds, also known as discount bonds, do not pay any interest to
the bondholders. Instead, you get a large discount on the face value of the bond.
On maturity, the bondholder receives the face value of his investment. In simple words, the investor
purchasing a zero-coupon bond profits from the difference between the buying price and the face value,
contrary to the usual interest income.
Yield to maturity of Zero-Coupon Bonds: Zero coupon bonds can work wonders, if used meticulously and
in sync with your investment goals. In the absence of any intermittent coupon payments, the yield to
maturity of a zero coupon bond is calculated as below: (Face value/ current market price)*(1/years to
maturity) – 1
Advantages of Zero-Coupon Bonds: Bonds are usually compared with other fixed income options by
investors looking for minimal risks. As compared to other fixed-income options, these bonds offer good
returns on maturity while keeping the option of selling them on the secondary market open, if the interest
rates decline sharply. Another important feature of notified zero coupon bonds is that investors do not

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have to pay any tax on interest since the bonds are issued at a discounted price and redeemed at face
value. They are only subject to capital gains tax.
Q. How to determine Residential Status of an individual under Income Tax Act?

Need to determine Residential Status: The total income is different in case of a person resident in India
and a person non-resident in India. Further, in case of an individual and HUF being "not ordinarily resident
in India", the meaning of total income shall be slightly different. Since the total income of an assessee
varies according to his residential status in India, the incidence of tax shall also vary according to such
residential status in India.
Tax is levied on total income of assessee. Under the provisions of Income-tax Act, 1961 the total income
of each person is based upon his residential status. Section 6 of the Act divides the assessable persons
into three categories
1. Ordinary Resident;
2. Resident but Not Ordinarily Resident; and
3. Non-Resident.
Residential status is a term coined under Income Tax Act and has nothing to do with nationality or
domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes,
whereas an American who is a citizen of America can be resident of India for Income-tax purposes.
Residential status of a person depends upon the territorial connections of the person with this country,
i.e., for how many days he has physically stayed in India.
The residential status of different types of persons is determined differently. Similarly, the residential
status of the assessee is to be determined each year with reference to the “previous year”. The residential
status of the assessee may change from year to year. What is essential is the status during the previous
year and not in the assessment year.
Important Points:
1. Residential Status in a previous year. Residential status is to be determined for each previous
year.
It implies that—
a. Residential status of assessment year is not important.

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b. A person may be resident in one previous year and a non-resident in India in another
previous year, e.g., Mr. A is resident in India in the previous year 2018-19 and in the very
next year he becomes a non-resident in India.
2. Duty of Assessee. It is assessee’ s duty to place relevent facts, evidence and material before the
Income Tax Authorities supporting the determination of Residential status.
3. Dual Residential Status is possible. A person may be resident of one or more countries in a
relevant previous year e.g., Mr. X may be resident of India during previous year 2018-19 and he
may also be resident/non-resident in England in the same previous year. The emergence of such
a situation depends upon the following
a. the existence of the Residential status in countries under considerations
b. the different set of rules having laid down for determination of residential status.
Determination of Residential status of different ‘Persons’:
As we know that Income tax is charged on every person. The term ‘Person’ has been defined under
section 2(31) includes:
i. An individual
ii. Hindu Undivided Family
iii. Firm
iv. Company
v. AOP/BOI
vi. Local authority
vii. Every other artificial juridical person not falling in preceding six sub-classes.
Therefore, it is essential to determine the residential status of above various types of persons and now
we shall learn the calculation of residential status of each type of person.
Basic rules for determining Residential Status of an Assessee

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The following basic rules must be kept in mind while determining the residential status:
• — Residential status is determined for each category of persons separately e.g. there are
separate set of rules for determining the residential status of an individual and separate rules for
companies, etc.
• — Residential status is always determined for the previous year because we have to determine
the total income of the previous year only.
• — Residential status of a person is to be determined for every previous year because it may
change from year to year. For example, A, who is resident of India in the previous year 2017- 18,
may become a non-resident in previous year 2018-19.
• — If a person is resident in India in a previous year relevant to an assessment year in respect of
any source of income, he shall be deemed to be resident in India in the previous year relevant to
the assessment year in respect of each of his other source of income. [Section 6(5)]
• — A person may be a resident of more than one country for any previous year. If Y is a resident
in India for previous year 2017-18, it does not mean that he cannot be a resident of any other
country for that previous year.
• — Citizenship of a country and residential status of that country are separate concepts. A person
may be an Indian national/citizen, but may not be a resident in India. On the other hand, a person
may be a foreign national/citizen, but may be a resident in India.
• — It is the duty of the assessee to place all material facts before the assessing officer to enable
him to determine his correct residential status.
Residence in India is determined by Section 6 of the Income Tax Act 1961. To determine the residential
status of an individual, section 6(1) prescribes two tests.
An individual who fulfils any one of the following two tests (a or b) is called Resident under the provisions
of this Act. These tests are:
Test A – RESIDENT
(a) If he is in India during the relevant previous year for a period amounting in all or in aggregate to 182
days or more.
OR
(b) If he was in India for a period or periods amounting in all to 365 days or more during the four
years preceding the relevant previous year
AND

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he was in India for a period or periods amounting in all to 60* days or more in that relevant previous
year. (*182 days refer note ii)
An individual who is Resident u/s 6(1) can be subdivided into two categories: Ordinary Resident TEST B;
OR Not ordinarily Resident Test C
Test B – RESIDENT (Ordinary Resident) -ROR

After fulfilling one of the above two tests, an individual becomes resident of India. Further to become,
an ordinary resident of India an individual has to in addition to Test A fulfill both the following two
conditions:
1. He has been resident of India in at least 2 previous years out of 10 previous years immediately prior to
the previous year in question.
AND
2. He has stayed in India for at least 730 days in 7 previous years immediately prior to the previous year
in question.
Notes: i. While calculating number of days forestay in India, day of departure was not included. But now
as per decision of Authority for Advance Rulings, both, day of departure from India and day of arrival in
India are to be counted as stay in India.
ii. For persons as mentioned below test (a) remains the same but in test (b) words ‘60 days’ have been
replaced by 182 days.
For Indian citizen going abroad on a job or as a member of crew of an Indian ship
In case of an Indian citizen:
Who is going outside India for a job and his contract for such employment outside India has been approved
by the Central Government; or
He is a member of crew of an Indian ship;
For Indian citizens and persons of Indian origin*
In case of an individual being a citizen of India, or a person of Indian origin, who being outside India, comes
on a visit to India in any previous year’
*A person shall be deemed to be of Indian origin if he or either of his parents or any of his grandparents
was born in India or undivided India
Test C – RESIDENT (NOT Ordinary Resident) – “RNOR”

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After fulfilling one of the above two tests i.e TEST A, an individual becomes resident of India. Further to
become, Resident but NOT ordinary resident (‘RNOR’) an individual has to in addition to Test A fulfill ANY
the following two conditions:
An individual who is resident u/s 6(1) Test A can claim the beneficial status of RNOR, if he can prove that:
1. He was a non-resident in India for 9 previous years out of 10 previous years preceding the relevant
previous year.
OR
2. He was in India for a period or periods aggregating in all to 729 days or less during seven previous
years preceding the relevant previous year.
In Nutshell
Resident (Ordinary Resident) = Satisfying any one of two conditions given u/s 6(1) Test A
+ Satisfying both the additional conditions of Test B
Resident but Not Ordinarily Resident = Satisfying any one of the two conditions u/s 6(1)
Test A + Satisfying any one of the additional conditions of Test C
NON-RESIDENT
Under section 2(30) of the Income-tax Act, 1961 an assessee who does not fulfill any of the two conditions
given in section 6(1) (a) or (b) i.e. TEST A would be regarded as ‘Non-resident’ assessee during the
relevant previous year for all purposes of this Act.

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Tax Residency of Companies: The residential status of a company is to be determined on the basis of
its incorporation or registration. Section 6(3) provides the following tests in this connection.
RESIDENT: A company is resident in India if:
a) it is an India company, or
b) Place of effective management ‘POEM’, during that year is in India.
In other words, the residential status of companies which are not incorporated under the corporate laws
of India, would be determined by the concept of “POEM”.
Further, POEM has been defined in explanation to section 6(3) of the Act to mean the following:
• Place where key management and commercial decisions are, in substance, made.
• Such decisions are necessary for the overall conduct of business.
• Where such decisions which are necessary for the overall conduct of business is made in India,
tax residency maybe triggered
NON-RESIDENT: A company shall be ‘non-resident’ if it is not resident in India during the relevant
accounting year. It means that, a company whose POEM during that year is outside India, it will be non-
resident company.
Tax Residency of FIRM and AOP or BOI

ORDINARY RESIDENT: A Firm, an Association of persons (AOP) or body of individuals (BOI) is said to be
resident in every case except where during that year the control and management of its affairs is situated
wholly outside India.
It means that if A firm, an association of persons (AOP) or body of individuals (BOI) is controlled from
India even partially it will be resident assessee.
*The control and management of affairs refers to the controlling and directing power, the head and the
brain. It means that decision-making power for vital affairs is situated in India. The control and
management mean de-facto control and management and not merely the right to control or manage.
In case of a firm, it is said that the control and management of firm is situated at a place where partners
meet to decide the affairs of the firm. If such place is outside India, it will be said that the control and
management is outside India.

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There may be a situation where all the partners of a firm are resident in India but even then, that firm
may be non-resident if its full control and management lies outside India.
A firm, or association of persons shall be non-resident if the control and management of affairs is situated
NON-RESIDENT: A firm, or association of persons shall be non-resident if the control and management of
affairs is situated wholly outside India.
Tax Residency of HUF

ORDINARY RESIDENT: HUF, is said to be resident in every case except where during that year the control
and management of its affairs is situated wholly outside India. It means that if a HUF is controlled from
India even partially it will be resident assessee.
It is only HUF besides individual, which can claim the advantageous status of Not Ordinarily. A
RESIDENT BUT NOT ORDINARY RESIDENT: HUF will be ‘Not Ordinarily Resident’ if :
1. its manager (Karta) has not been resident in India in nine out of ten previous years preceding the
relevant accounting year;
OR
2. the Karta had not, during the seven previous years preceding the relevant previous year been present in
India for a period or periods amounting in all to 730 days.
These two tests have to be applied in case of manager (Karta) of such HUF.
In case the Karta has been succeeded by some other man, for computing the presence in India, the length
of presence in India of each succeeding Karta will be added. What is important to note is that from where
the business of HUF is being controlled.
RNOR or Not ordinarily resident status of HUF is linked with the status of its Karta. So, if Karta taken as an
individual is not ordinarily resident then the status of his HUF shall also be not ordinarily resident.
NON-RESIDENT: HUF, shall be non-resident in India if the control and management of affairs is situated
Q. Define Income. What are the various heads of Income under the Income tax Act? What do you mean
by 'Income from other sources'? Give eight examples of Income from other sources?
Income is defined in Section 2(24) of the Income Tax Act, 1961. Income includes:
1. Profits and gains
2. Dividend

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3. Voluntary Contributions received by a trust. Voluntary contributions received by a trust are

included in the definition of income. As such contributions received by following types of trusts,
funds, associations, bodies etc. are included in the income of such bodies.
i. Contributions received by a trust created wholly or partly for charitable or religious
purposes.
ii. Contributions received by a scientific research association.
iii. Contributions received by a fund or institution set up for charitable purposes and notified
u/s 10(23c)(iv)(v).
iv. Contribution received by any university or other educational institution; hospital referred
in section 10(23c).
4. The value of any perquisite or profit in lieu of salary taxable under section 17(2)(3).
5. Any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically
granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance
of the duties of an office or employment of profit.
6. Any allowance granted to the assessee either to meet his personal expenses at the place where
the duties of his office or employment of profit are ordinarily performed by him or at a place
where he ordinarily resides or to compensate him for the increased cost of living.
7. Value of any benefit or amenity, whether convertible into money or not, obtained by a
representative assessee or by any person on whose behalf such benefit is received by
representative assessee and sum paid by representative assessee in respect of any obligation
which hut for such payment would have been payable by the person on whose behalf
representative assessee has made such payments.
The profits and gains of any business of banking (including providing credit facilities) carried on by a co-
operative society with its members;
8. The value of any benefits or perquisites, 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 a director of such person, and any sum paid by such company in respect of any
obligation but for which, such payment would have been payable by the director or other person
aforesaid.
9. Any sum chargeable to income-tax under section 28(u) and (iii) or section 41 or section 59;
10. Any sum chargeable to tax u/s 28 (iiia)
11. Any sum chargeable to tax u/s 28(iiib)

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12. Any sum chargeable to tax u/s 28 (iiic) , -

13. The value of any benefit or perquisite taxable under section 28 (iv).
14. Any capital gain taxable under section 45.
15. Any sum whether received or receivable in cash or in kind under an agreement for—not carrying
out any activity in relation to any business ; or not sharing any know-how, patent, copyright, trade-
mark, license, franchise or any other business or commercial right of similar nature or information
or technique likely to assist in the manufacture or processing of goods or provision of services.
16. The profit 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.
17. Any winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature whatsoever.
18. Any sum received by the assessee as his employers’ contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the Employee’s State Insurance
Act, 1948 or any other fund for the welfare of’ such employees.
19. Any sum received under a key man insurance policy including the sum allocated by way of bonus
on such policy.
Any sum received by an individual or HUF from any person during last assessment year in cash or
by issue of cheque or draft or by any other mode or by way of credit otherwise than by way of
consideration for goods or services but does not include
20. An aggregate amount of gift or gifts received (whether in cash or in the form of property)
exceeding Rs. 50,000 in a previous year by an individual or Hindu undivided family from non-
relatives shall be treated as income which will be taxable in the hands of the recipient. (For details,
please refer to chapter on Other Sources)
21. Gifts received by a firm or closely held company as provided in Section 56(2)(viia).
22. Any consideration for issue of shares by a closely held company as exceeds the fair market value
of shares as provided in Section 56(2)(viib) [w.e.f. last assessment year].
• The definition of term ‘Income’ as given above does not explain what income is? It only tells
that the above-mentioned receipts are also included in the meaning of term income. The
definition given u/s 2(24) is inclusive and not exhaustive. According to English dictionary, the
term income means “periodical receipts from one ‘s business, land, work, investments etc.”

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• The term income simply means something which comes in. It is a periodical return with
regularity or expected regularity. It’s nowhere mentioned that income refers to only
monetary return. It includes value of benefits and perquisites. Anything which can reasonably
and properly be described as income is taxable under this Act unless specifically exempted
under the various provisions of this Act.
• The term income includes not only what is received by using the property but also the amount
saved by using it himself. Anything which is convertible into income can be regarded as source
of accrual of income.
Income is classified under five categories in the Indian Income Tax Act –
• Income from Salary
• Income from House Property
• Income from Business or Profession
• Income from Capital Gains
• Income from Other Sources
PART I: INCOME FROM SALARY: As per Section 15, the income chargeable to income tax under the head
salaries would include:
Any salary due to an employee from an employer or a former employer to an assessee during the previous
year irrespective of the fact whether it is paid or not.
Any salary paid or allowed to the employee during the previous year by or on behalf of an employer, or
former employer, would be taxable under this head even though such amounts are not due to him during
the accounting year.
Arrears of salary paid or allowed to the employee during the previous year by or on behalf of an employer
or a former employer would be chargeable to tax during the previous year in cases where such arrears
were not charged to tax in any earlier year.
Illustration: Meera is an employee of Tara Pvt Ltd. getting a salary of Rs 40,000 per month which becomes
due on the last day of the month but is paid on the 7th of next month. Salary for which months will be
taxable for AY 2015-16?
Solution: the salary for the months of April 2014 to March 2015 will be taxable for the Assessment Year
2015-16 because salary for April 2014 will be due on 30th April ,2014 (i.e. within the same month)
Salary (SECTION 17(1))

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“Salary” includes:
• Wages or Salary: salary is generally used in respect of payment for services of a higher class,
whereas ‘wages’ is confined to the earnings of labourers.
• Annuity is annual grant made by the employer to the employee.
• Pension – periodical payment for past services
• Gratuity- lump sum payment for past services
• Fees and Commission- remuneration to encourage employees
• Perquisites- include all benefits by the employer to the employee
• Profit in lieu
• Advance of salary
PART II: INCOME FROM HOUSE PROPERTY: SECTION 22 of the Act provides as follows:
“The annual value of property consisting of any buildings or lands appurtenant thereto of which the
assessee is the owner other than such portions of such property as he may occupy for the purposes of any
business or Profession carried on by him, the profits of which are chargeable to income tax , shall be
chargeable to income tax under the head from House Property.”
• Tax is charged on income from the buildings or lands appurtenant thereto: the buildings include
residential buildings, buildings let out for business or profession or auditoriums for entertainment
purposes.
• Tax is charged on income from lands appurtenant to buildings: the lands appurtenant to buildings
include approach roads to and from public streets, courtyards, compound, playground, motor
garage. In case of non-residential buildings, car parking spaces, drying grounds shall be the lands
appurtenant to buildings.
• Tax is charged from the owner of the buildings and lands appurtenant thereto: where the
recipient of the Income from House Property is not the owner of the building, the income is not
chargeable under this head but under the head ‘Income from Business or Other Sources.’
PART III: INCOME FROM BUSINESS OR PROFESSION: The provisions of Sections 28 to 44D deal with the
method of computing income under head “Profits and Gains of Business or Profession.”
The meaning of the expression ‘Business’ has been defined in Section 2(13) of the Income Tax Act.
According to this definition, business includes any trade, commerce or manufacture or any adventure or
concern in the nature of trade commerce or manufacture.

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The concept of business presupposes the carrying on of any activity for profit, the definition of business
given in the Act does not make it essential for any taxpayer to carry on his activities constituting business
for a considerable length of time.
The expression ‘profession’ has been defined in Section 2 (36) of the Act to include any vocation. The term
profession includes the concept of an occupation requiring either intellectual skill or manual skill
controlled and directed by the intellectual skill of the creator. For instance, an auditor, a lawyer or a doctor
carrying on their profession and not business.
The common feature in the case of both profession as well as business is that the object of carrying them
out is to derive income or to make profit.
PART IV: INCOME FROM CAPITAL GAINS: Sections 45 of the Act provides that any profits or gains arising
from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in
Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H be chargeable to income tax under the head
“Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took
place.
The requisites of a charge to income tax, of capital gains under Section 45 (1) are:
• There must be a capital asset
• The capital asset must have been transferred
• The transfer must have been affected in the previous year
• There must be a gain arising on such transfer of a capital asset
• Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G or
54GA.
PART V: INCOME FROM OTHER SOURCES: Income chargeable under Income Tax Act which does not
specifically fall for assessment under any of the heads discussed earlier, must be charged to tax as “Income
from Other Sources.”
Income chargeable under Income Tax Act which does not specifically fall for assessment under any of the
heads discussed earlier, must be charged to tax as “Income from Other Sources.”
Sections 56 (2) specifically provides for the certain items of incomes as being chargeable to Tax under the
head as Dividend , Keyman Insurance Policy , winnings from lotteries, contribution to provident fund ,
money gifts, share premiums in excess of the fair market value to be treated as income, income by way
of interest received on compensation.

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The entire income of winnings, without any expenditure or allowance or deductions under Sections 80C
will be taxable. However, expenses relating to the activity of owning and maintaining race horses are
allowable. Further, such income is taxable at a special rate of income tax i.e. 30% + surcharge + cess @
3%.
The income chargeable under the head “Income from Other Sources” is the income after making the
deductions such as sum paid by way of commission or remuneration to a banker or any other person for
the purpose of realising such interest or a deduction of a sum equal to 50% of from interest on
compensation or enhanced compensation and any other expenditure laid out or expended wholly.
The following incomes are covered under the head Income from other sources
Dividend: Dividends usually refer to distribution of profits by a company to its shareholders. However,
under the Income-tax Act, dividend also includes distribution on liquidation of company, reduction of
share capital and any loan or advance given by a closely held company to its shareholder.
Income from Lottery, Crossword Puzzle and Horse Race Winning: This includes any winnings from
lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from
gambling or betting of any form or nature whatsoever.
Employee’s Contribution to Welfare Fund: The contribution received by the employer from employee
regarding EPF, ESI or superannuation fund, if not deposited to the employees account under relevant fund
on or before the due date under the relevant law then the same income is taxable under other sources if
it is not taxable as business income.
Interest on Securities: The income earned in the nature of interest on securities such as debentures,
bonds, Government securities are taxable in the hands of the assessee under the head ‘income from other
sources. However, if the assessee is engaged in the business of trading of securities then the same shall
be taxable as business income.
Income from Letting out of Machinery, Plant or Furniture: Income earned from letting out of machinery,
plant or furniture belonging to assessee shall be taxable under the head “Income from other sources”.
Further, if an assessee lets out building along with these assets and letting out of building is inseparable,
then the income earned from letting out of building shall also be taxable as income from other sources.
However, if the assessee is engaged in the business of letting out of such assets then the same shall be
taxable as business income.
Sum Received under Keyman Insurance Policy: Any sum received under ‘keyman insurance policy’
including the sum allocated by way of bonus on such policy is treated as income from ‘other sources’,

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provided the same is not taxable under the head “profits and gains of business or profession” or under
the head “salaries”.
Share Premium (Angel tax): If a company, not being a company in which the public are substantially
interested, receives, in any previous year, from any person being a resident, any consideration for issue
of shares that exceeds the face value of such shares, the aggregate consideration received for such shares
as exceeds the fair market value of the shares is taxable as income from the other sources.
Income on compensation or Enhanced Compensation: Income by way of interest received on
compensation or on enhanced compensation is taxable under the head other sources in the year of
receipt.
Advance Money forfeited: Advance money received by the assessee during the course of negotiations
done for the purpose of transfer of a capital asset is taxable under the head ‘income from other sources’
if such advance is forfeited because the negotiations did not result in transfer of the asset.
Taxability of Gifts: Any sum of money or property, whether movable or immovable, received without
consideration or for inadequate consideration is taxable under the head ‘income from other sources.
However, gifts received from certain persons shall not be chargeable to tax such as gifts received from
relatives.
Compensation on Termination of Employment: Any compensation or other payment, due to or received
by any person, by whatever name called, in connection with the termination of his employment or the
modification of the terms and conditions relating thereto is taxable as income from other sources.
Q. What is a “Return of Income”? Who are the persons required to daily file a return of income?
In Indian law the tax liability is twofold, one, the payment of the income tax on the total income and
second, disclosing the details of income through various sources, the taxable and non-taxable income and
giving details about the total tax. The second liability is called the return of income. Thus, the taxpayer’s
responsibility is not only limited to the payment of tax but also disclosing to the Government the details
of the income.
The return of income can simply be seen as a balance sheet of the income and the tax that is due on such
income. The details of one’s income from various sources, tax liability thereon, the details of tax paid and
any refunds that have to be given by the government is simply the return of income. Section 139 of the
Income Tax Act, 1961 deals with the return of income. According to this section every person whose
income has exceeded the non-taxable income limit is liable to file a return of income before a specified
date in a specified manner, the details of which are given in the Act. The filing of return is proof that one

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has an income for which the tax had been paid. The income tax return is a standard proof of income, and
it establishes a record with the tax department.
Who should file an Income Tax Return?

Any individual who has a taxable income is bound by law to file a tax return. Tax return has to be filed
irrespective of the fact that one has paid the tax. If the employer deducts tax and submits it even, in that
case, one has to file the tax return. As mentioned earlier that the tax liability is twofold. Currently, income
above Rs.2 Lacks is taxable.
It is not that people with lower incomes cannot file a tax return. Anyone who has any income, even within
the exemption limit, can file an income tax return. Although such a person is not legally bound to do it
and no penalty would be faced by such person who otherwise would be faced by persons with income
above exemption limit.
Why should one file a return of income?

The return of income is to be filed as a legal liability. The income tax mandates persons who have income
above the exemption limit to file a return of income u/s 139 of the Act. The persons who do not file a
return of income can face prosecution, scrutiny, penalties and interests.
However, there are other benefits also. Firstly, the filing of returns helps in adjusting the accounts with
the Government. If there is any extra tax paid then, it can be refunded by the Government only after the
filing of the return. If any loss is accrued in a year, then the filing of return helps in reducing the tax which
the IT department otherwise would charge based on the information submitted in previous. Thus, it
becomes necessary for a business person to file returns regularly in case the revenues are not steady.
Another important benefit of filing return is that it serves as a proof of income. The return of income is a
recognized proof of income and is used by almost every authority that needs to verify the income of a
person. This proof, in turn, helps in various ways, which are:
1. Loans- Bank grants loans only after a proper scrutiny of the income of the person. The bank wants
to be sure of the sources of income as they want to be assured that the loan will be repaid. Thus,
without a return of income file, it is difficult to get loans.
2. Insurance/Accidental claims- The courts take into consideration the income of the person while
awarding claims. In such cases, the courts consider the return of income as the proof of income
and award the claims accordingly.

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3. Obtaining Visa, Government tenders, jobs, startup funding, etc., require the proof of income
which the return of income is.
What are the different modes of filing return of income?

There are many modes to file a return of income. The mode depends on upon the need of the person
filing. If the return of income is relatively simple, i.e., the person has only one or two sources of income
then the person can file the return himself without any aid of professionals like Chartered Accountant or
Tax Advocate. Depending upon the feasibility, the person can file the return on the online platform or can
use the traditional paper method. In the following paragraphs, the different modes are discussed
separately.
There are three options that a person has while filing for returns, these are:
1. Self-Filing: One can file the returns directly. There are two ways of doing it, online or
physically/paper based. However, the offline submission can only be made if the income is less
than Rs. 5 lacs and there is no refund claimed. Also, there should not be any income located
abroad to file returns offline. The relevant forms can be filled up and can be submitted to the
Income Tax office of relevant jurisdiction. Upon submission, a duly stamped and numbered
acknowledgment slip should be collected by the person filing the return. In the case of online
submissions, one can do it in two ways, partially online and completely online. This will be
discussed in detail later. This method of filing return is apt for people who have simple, one or
two, sources of income and who do not require any professional consultation.
2. Tax Return Preparers: The tax return preparers are appointed under a scheme by the
Government. People who find it difficult to understand the nuances of the
documents/papers/forms the tax return preparers are appointed to help such people. A tax return
preparer can be located in any area using the website www.trpscheme.com. After submitting the
relevant information on this website, a tax return preparer can be found. The tax return preparers
charge fees for filing the returns. While filing the return through a tax return preparer, one should
check the details of the return preparers as the identification number, name and counter
signature on the form.
3. Chartered Accountant: In simple cases where the income sources are simple and limited to one
or two the need for a CA does not arise. However, in complicated cases where there are tax audits,
multiple sources, deductions, etc. are involved consulting a Chartered Accountant becomes a
necessary. The CA charges fees for this work. Checking the credentials of the CA is suggested.

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Returns can also be filed through two platforms. There are two platforms that can be used the online and
offline platforms. Although some smart phone apps have also come up for filing the returns, there have
very limited usage and are thus not of major importance. The filing of the return on the official website is
the widely used and most apt way to file the return.
Filing return online can be done in two ways; one is completely online and the other partially. In the
completely online method, the person has to log into the website with a user ID and password after
creating an ID. After logging in the user has to select the required form and fill up the details on the site
and submit. This will complete the filing of return.
In the partially online method, the person has to download the relevant ITR form. Then the form has to
be filled up, and a file has to be generated. Then the person has to log into the website and upload the
filled-up form and submit it.
The offline method is the traditional method of filing a return. The relevant form has to be filled up by
hand; all the documents are to be attached, and the form is then to be submitted to the office of the IT
department physically. This method is time and effort demanding. It is totally upon the preferences of the
person to decide the mode of filing the return.
Thus, the filing of return of income is a legal duty, and the person needs to file it before the expiry of the
period. The filing of return also has other benefits as has been mentioned above. The filing process has
been simplified over the years. The online submission of the ITR also helps in reducing the usage of paper
and promotes e-governance.
Q. Discuss the assessment of Income from House Property.

Income from House Property is one of the most important heads of income under the Income Tax Act. It
is one such subject on which the tax payers in particular have a lot of queries relating to exemptions,
deductions and overall computation of Income from House Property.
Section 4 of the Income tax Act 1961 (Act hereinafter) provides for charge of income tax. However, this
section by itself does not create any liability. It has been observed by the Supreme Court in CIT Vs. K.
Srinivasan (1972) 83 ITR 346-351 that although section 4 is the charging section, yet income tax can be
charged only when the central Act, which normally is the Finance Act, enacts that income tax shall be
charged for any assessment year at the rate or rates specified therein.
Every money receipt by a person is not chargeable to tax. Section 14 of the Act specifies five heads of
income on which tax can be imposed under the Income tax Act. In order to be chargeable, an income has
to be brought under one of these five heads. The heads are (i) salaries (ii) Income from House property

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(iii) profits and gains of business or profession (iv) capital gains and (v) income from other sources. In the
discussion to follow, the relevant provisions of the Act relating to Income from House Property would be
considered and how the computation of income from this source is to be made, namely, how the income
is to be worked out and what are the deductions to be given for computing the taxable income shall be
explained. Sections 22 to 27 of the Act deal with the subject of taxation of income from house property.
Property-the common view: In common parlance, property is understood in wide sense. It is not only the
thing which is the subject matter of ownership but is taken to mean ‘dominon’ or right of ownership or
even partial ownership. Lord Long dale in John v. Skinner (1836) 5Lg 67-90 (Ch) has described it as the
most comprehensive of all the terms which can be used in as much as it is indicative and descriptive of
every possible interest which a person can have. However, for purposes of taxation under sections 22 to
27 of the Act, such wider definition of property is not relevant. The income to be taxable should be
“Income from House Property”.
Section 22 of the IT Act 1961: Section 22 provides for taxation of ‘annual value’ of a property consisting
of any buildings or lands appurtenant thereto, of which the assessee is owner, under the head “income
from House Property”. Tax imposed under section 22 is a tax on ‘annual value’ of house property and is
not a tax on “House Property”. However, if a house property is occupied by a taxpayer for the purpose of
business or profession carried on by him (the profits of which are chargeable to income tax), annual value
of such property is not chargeable to tax under the head ‘Income from House Property’.
In the earlier discussion, the phrase ‘lands appurtenant thereto’ has also been used. It needs to be clarified
in this context that income from letting of vacant plots of land when there is no adjoining building will not
be taxed under this head (but will be taxed as income from other sources). The existence of a building is,
therefore, an essential perquisite Building will, of course, include residential house (whether let out or
self-occupied), office building, factory building, godowns, flats, etc. as long as they are not used for
business or profession by owner. And the purpose for which the building is used by the tenant is also
immaterial. Thus, income from letting out godowns will be taken as income from house property. It does
not make any difference at all if the property is owned by a limited company or a firm.
CONDITIONS NECESSARY FOR TAXING INCOME FROM HOUSE PROPERTY: These are:
• The property should consist of any building or land appurtenant thereto
• The assessee should be the owner of the property
• The property should not be used by the owner for the purpose of any business or profession
carried on by him, the profits of which are chargeable to tax.

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Unless all the aforesaid conditions are satisfied, the property income cannot be charged to tax under the
head ‘Income from House property’.
‘Owner’-concept explained: For the purpose of section 22, the concept hitherto understood even in court
decisions has been that the owner has to be a legal owner. Annual value of property is assessed to tax
under section 22 in the hands of owner even if he is not in receipt of income or even if income is received
by some other person. For instance, if a person makes gift of rental income to a friend or a relative,
without transferring ownership of the property, annual value of property is taxable in the hands of the
donor, even if rental income is received by the donee- S. Kartar Singh v. CIT (1969) 73 ITR 438 (Delhi). In
other words, for the purpose of section 22, the owner must be that person who can exercise the rights of
the owner, not on behalf of the owner but in his own right-RB. Jodha Mal Kuthiala v. CIT [1971] 82 ITR
570 (SC). However, there has been some refinement in the concept of ownership after the decision of the
Supreme Court in the case of CIT v. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC). In this case, the
Supreme Court has expressed the view that under common law ‘owner’ means a person who has got valid
title generally conveyed to him after complying with the requirements of law such as the Transfer of
Property Act, Registration Act etc. But in the context of Section 22 of the Income tax Act, having regard to
the ground realities and further having regard to the object of the Income tax Act, namely, “to tax the
income’’, ‘owner’ is a person who is entitled to receive income from the property in his own right. The
requirement of registration of the sale deed in the context of section 22 is not warranted. In view of this,
where a property is handed over to a purchaser to enjoy fruits of that
property by the builder, the purchaser is to be treated as ‘owner’ of that property even though no
registered document has been executed in his favour.
Ownership is relevant for the previous year: As tax is levied only on the income of previous year, annual
value of property, owned by a person during the previous year, is taxable in the following assessment
year, even if the assessee is not owner of the property during the assessment year.
Deemed ownership: In the following situations the ownership shall be deemed for taxing income from
house property in view of section 27 of the Act:
i. When house property is transferred to spouse (otherwise than in connection with an
agreement to live apart) or minor child (not being a married daughter) without adequate
consideration (Section 27(i))
ii. In the case of holder of an impartible estate (Section 27(ii))
iii. A member of a cooperative society, company etc. to whom a building or part thereof has been
allotted or leased under a house building scheme (Section 27(iii)). Thus, when a flat is allotted

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by a cooperative society or a company to its members/shareholders who enjoy the flat,

technically the co-operative society/company may be the owner. However, in such situations
the allottees are deemed to be owners and it is the allottees who will be taxed under this
head.
iv. A person who is allowed to take or retain possession of any building (or part thereof) in part
performance of a contract of the nature referred to in section 53A of the Transfer of Property
Act, 1882, is deemed as the owner of that building (or part thereof) [Sec. 27 (iiia)].
v. A person who acquires any rights (excluding any rights by way of a lease from month to month
or for a period not exceeding one year) in or with respect to any building (or part thereof) by
virtue of any such transaction as is referred to in section 269UA(f) [i.e. if a person takes a
house on lease for a period of 12 months or more, is deemed as the owner of that building or
part thereof] [Sec. 27 (iiib)].
Persons who purchase properties on the basis of Power of Attorney and under long term leases (12
months & more) are also deemed to be owners. The concept of deemed owner is introduced to prevent
misuse like transferring properties in the name of spouse or minor child etc. and for assessment of income
in the hands of beneficial owner.
Co-ownership: Section 26 concerns properties which are owned by co-owners. This section provides that
where property consisting of building or buildings and land appurtenant thereto is owned by two or more
persons and their respective shares are definite and ascertainable such persons shall not, in respect of
such property, be assessed as an association of persons, but the share of each such person in the income
from the property as computed in accordance with sections 22 to 25 shall be included in his total income.
In such an eventuality, the relief admissible under section 23(2) shall also be separately allowable to each
such person [Explanation to Section 26].
DETERMINATION OF INCOME FROM HOUSE PROPERTY

The determination of ‘Annual Value’ is important in the context of taxation of income from House
Property because though the tax under the head ‘Income from house property’ is tax on income, yet it is
not in that sense a tax on income but upon inherent capacity of such property to yield income and for this
‘annual value’ is the yardstick. The inherent capacity has been defined as the sum for which the property
might reasonably be expected to be let from year to-year. It is not necessary, that the property should be
actually let. It is also not necessary that the reasonable return from property should be equal to the actual
rent realized when the property is, in fact, let out. Where the actual rent received is more than the

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reasonable return, it has been specifically provided that the actual rent will be the annual value. Where,
however, the actual rent is less than the reasonable rent (e.g. in case where the tenancy is affected by
manipulation, emergency, close relationship or such other consideration), the latter will be annual value.
The municipal value of the property, the cost of construction, the standard rent if any under the Rent
Control Act, the rent of similar properties in the same locality are relevant factors for the determination
of the annual value. However, if a property is let and was vacant during any part or whole of the year and
due to such vacancy, the rent received is less than the notional rent, such lesser amount shall be the
Annual Value. For example, in case of a house, whose municipal valuation is Rs. 24,000/- and actual rent
received is Rs. 36,000/- the annual lettable value will be taken at Rs.36,000/-. If the actual rent received
is Rs. 18,000/- and municipal valuation is Rs. 24,000/-, the annual value would be Rs. 24,000/- for the
purpose of the Income-tax Act. Here, if the property was vacant for six months and the rent received is
Rs. 18,000/- for six months the Annual Value shall be Rs. 18,000/-.
Where the property is subject to Rent Control Act, its annual value under section 23(1) cannot exceed the
standard rent (fixed or determined) under the Rent Control Act unless it is actually let out for a higher
amount. Such a view has been expressed by the Supreme Court in the case of Dewan Daulat Rai Kapoor
v. NDMC (1980) 122 ITR 700 (SC).
Determination of Annual Value of Self-occupied property: In case of one self-occupied house property
which has not been actually let out at any time, the annual value is taken as ‘nil’. If, one is having more
than one house property using all of them for self-occupation, he is entitled to exercise an option in terms
of which, the value of one house property as specified by him will be taken at nil. The annual value of the
other self-occupied house properties will be determined on notional basis as if these had been let out.
Annual Value of one house away from work place: A person may own a house property, say in Bangalore,
which he normally uses for his residence. He is transferred to Chennai where he does not own any house
property and stays in a rental accommodation. In such case, the house property in Bangalore cannot be
used for self-occupation and notional income therefor would normally have been chargeable although he
derives no benefit from the property. To save the taxpayer from hardship in such situations, it has been
specifically provided that the annual value of such a property would be taken to be nil subject to the
following conditions:
• The assessee must be owner of only one house property.
• He is not able to occupy the house property because of his employment, business etc. being away
from place where the property is situated.
• The property should not have been actually let.

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• He has to reside at the place of employment in a building not belonging to him [Section 23(2)(b)].
• He does not derive any other benefit from the property not occupied.
Determination of Annual Value of Let out house properties: In respect of a let-out house property, the
rent received is usually taken as the annual lettable value. When, however, the rent is not indicative of
the actual earning capacity of the house, the notional annual value will have to be found and adopted.
The standard rent would be the Annual Value in the case of properties, subject to Rent Control Legislation,
as mentioned earlier. However, when the actual rent received or receivable is higher than the notional
value as calculated above, the higher figure will be taken for the purpose of Income-tax. From the annual
value as determined above, municipal taxes are to be deducted if the following conditions are fulfilled:
• The property is let out during the whole or any part of the previous year (There is no such
deduction in respect of a self-occupied house property). The Municipal taxes must be borne by
the landlord. (If the municipal taxes or any part thereof are borne by the tenant, the same will not
be deductible). The municipal taxes must be paid during the year. (Where the municipal taxes
have become due but have not been actually paid, these will not be allowed. The municipal taxes
may be claimed on payment basis i.e., only in the year they were paid even if the taxes belonged
to a different year).
Amount left after deduction of municipal taxes is net annual value.
Other Permissible Deductions from Annual Value in cases of let out properties (Section 24): The
following deductions are permissible:
(i) deduction equal to 30% of the annual value, irrespective of any expenditure incurred by the taxpayer
(S.24(a)). No other allowance for repairs, maintenance etc. would be allowable.
(ii) interest on borrowed capital (S. 24(b))
Interest on borrowed capital is allowable as deduction on accrual basis (even if account books are kept on
cash basis) if capital is borrowed for the purpose of purchase, construction, repair, renewal or
reconstruction of the house property.
The following aspects concerning claim for deduction of interest are to be kept in view:
(i) The interest is deductible on ‘payable’ basis i.e. on accrual basis. Hence it should be claimed on yearly
basis even if no payment has been made during the year.
(ii) For claiming interest, it is not necessary that the lender should have a charge on the property for the
principal amount or the interest amount.
(iii) In Shew Kissan Bhatter v. CIT (1973) 89 ITR 61 (SC) the Supreme Court has decided that interest
payable for outstanding interest is not deductible.

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(iv) Taxpayer cannot claim deduction for any brokerage or commission paid for arranging loan either as a
one-time arrangement or on periodical basis till the loan continues.
(v) In terms of circular No. 28 dated 20th August 1969, if an assessee takes a fresh loan to pay back the
earlier loan, the interest on the fresh loan would be deductible.
(vi) Interest on borrowing can be claimed as deduction only by the person who has acquired or
constructed the property with borrowed fund. It is not available to the successor to the property (if the
successor has not utilized borrowed funds for acquisition, etc.). In other words, the relationship of
borrower and lender must come into existence before it can be said that any amount or any other money
is borrowed for the purpose of construction, acquisition, etc., of house property by one person from
another and there must be real transaction of borrowing and lending in order to amount to any borrowing.
(vii) In case of Central Government employees, interest on house building advance taken under the House
Building Advance Rules (Ministry of Works and Housing) would be deductible on the basis of accrual of
interest which would start running from the date of withdrawal of advance. The interest that accrues in
terms of rule 6 of the House Building Advance Rules is on the balances outstanding on the last day of each
month.
(viii) Any interest chargeable under the Act, payable out of India on which tax has not been paid or
deducted at source, and in respect of which there is no person in India who may be treated as an agent,
is not deductible, by virtue of Section 25, in computing income chargeable under the head “Income from
house property”.
Interest for pre-construction period: Money may be borrowed prior to the acquisition or construction of
the property. In such a case, interest paid/payable before the final completion of construction or
acquisition of the property will be aggregated and allowed for five successive financial years starting with
the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is
utilized for repairs, renewal or reconstruction.
Example: The assessee took a loan of Rs. 3,00,000/- in April, 2010 from a Bank for construction of a house
on a piece of land which he owns at Meerut. The loan carried interest @15% p.a. The construction is
completed in April 2012 and the house is given on rent from May 2012. Meanwhile he has already incurred
liability of interest of Rs. 90,000/- for F.Y. 2010-11 and 2011-12. Because of the above provision, the
assessee can claim a deduction in respect of this interest of Rs. 90,000/- (Over and above the yearly
interest) in five equal instalments of Rs. 18,000/- each starting from the assessment year 2012-13.
Benefit for vacancy for the period when the property remains vacant (in cases of let out properties): If
due to vacancy, the annual rent received is lower than the expected rent, then the annual rent realized is

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taken as the gross annual value. However, this rule will be applicable only, if the decline is only because
of the vacancy.
Exclusion of unrealised rent from annual value (Explanation to Section 23(1)): Unrealised rent (which
the owner could not realize) shall be excluded from rent received/receivable only if the following
conditions are satisfied:
a. the tenancy is bona fide;
b. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
c. the defaulting tenant is not in occupation of any other property of the assessee;
d. the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
Unrealised rent subsequently recovered would be taxable in the year of receipt. It has been
mentioned earlier that basic requirement for assessment of property income is the ownership of the
property. However, in the cases where unrealised rent is subsequently realised, it is not necessary
that the assessee continues to be the owner of the property in the year of receipt also. (Section 25AA)
Arrears of Rent (Section 25B): When the owner of a building receives arrears of rent from such a property,
the same shall be deemed to be the income from house property of the year of receipt irrespective of
whether or not the assessee is the owner of the property in that year. 30% of the receipt shall be allowed
as deduction towards repairs, collection charges etc. (prior to the A.Y. 2002-03, the rate of deduction was
25%). No other deduction will be allowed.
Set off and carry forward of loss in cases of house properties: This matter can be examined under two
heads namely:
(A) Where the property has been let out: In the matter of set off of and carry forward loss from let out
properties, two Sections are relevant. Sections 70 and 71 provide that loss from one house property can
be set off against the income from another house property. The remaining loss, if any, will be set off
against incomes under any other heads like salary, business etc. In case the loss does not get wiped out
completely, the balance will be carried forward.
• In regard to carried forward losses, Section 71B is to This Section provides that where the assessee
incurs any loss under the head “Income from house property” and such loss is not fully adjusted
under other heads of income in the same assessment year, then the balance loss shall be allowed
to be carried forward and set off in subsequent years (subject to a limit of 8 assessment years)
against income from house property.
Illustration I: (i) year 2014-15

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‘A’ a salaried employee (salary Rs. 1,40,000/-) has two properties which are let out. The loss from one
property ‘X’ is Rs. 20,000/-. The income from the other property ‘Y’ is Rs. 14,000/-. The loss from property
‘X’ can be set off against income from property ‘Y’. There will still be loss of Rs. 6000/- in respect of
property ‘X’. This can be set off against his salary income.
(ii) year (as at (i) above)
B’s sources of income/loss are as under:
Rs.
* Interest income 10,000
* Income from other sources 6,000
Net loss from residential House Property (-) 36,000

(consequent to payment of interest on funds borrowed for the
construction of House after 3 1.03.1999)
Net loss 20,000
This loss of Rs.20,000 would be carried forward for being set off in accordance with the provisions of
Section 71B up to 8 years against income from house properties.
(B) Where the house is self-occupied: In so far as income from self-occupied property is concerned, the
same is to be taken as Nil (see next chapter). The only deduction permissible against this Nil income is
interest on borrowed capital which can be up to Rs. 30,000 or Rs. 1,50,000 (see discussion in chapter III).
No other deduction for self-occupied property is permissible. Hence only the interest claim would be
available for set off or carry forward, if the conditions mentioned earlier are satisfied.
Illustration II: (i) Asst. Year 2014-15
A’s sources of income are:
Rs.
* Salary 1,20,000
* Interest on loan taken for the construction of a house for residential purpose 30,000
The taxable income for this Assessment. Year would be Rs. 90,000 on which no tax would be payable.

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(ii) If the amount of interest in the above case is say Rs. 1,40,000 and funds had been borrowed for
construction of house property for self-residence after 31st March 1999, then Rs. 20,000 would be the loss
which can be carried forward for being set off from property income, if any, in future up to 8 years. It
would not be available for set off against other incomes.
COMPUTATION OF INCOME FROM SELF OCCUPIED PROPERTY

As mentioned earlier, where a person has occupied more than one house for residential purposes, only
one house, as chosen by him will be treated as ‘self-occupied’ and all other houses will be deemed to be
let out and the income from such houses would be computed as indicated earlier. In regard to one house
treated as used for own residential purposes throughout the year, Section 23 (2) (a) prescribes that annual
value of such house shall be taken to be nil, if the conditions mentioned below are satisfied:
a. the property (or part thereof) is not actually let during whole (or any part) of the previous year; and
b. no other benefit is derived therefrom
Interest on borrowed capital for self-occupied property: The maximum amount of interest permissible
in cases of self-occupied property is Rs.1,50,000 (in respect of funds borrowed on or after 01.04.1999).
Interest up to Rs.1,50,000 is deductible if the following conditions are satisfied:
• capital is borrowed on or after April 1, 1999 for acquiring or constructing a property;
• the acquisition/construction should be completed within 3 years from the end of the
financial year in which capital was borrowed; and
• the person extending the loan certifies that such interest is payable in respect of the amount
advanced for acquisition or construction of the house or as refinance of the principal amount
outstanding under an earlier loan taken for such acquisition or construction.
• The Finance Act 2014 has raised this limit. This interest payable on self-occupied property where
constructions or acquisition is completed within 3 years of the financial year in which capital is
borrowed will be deductible to the extent of Rs. 2 lakhs. This is applicable from AY 2015-16 (FY
2014-15)
In the above context the following further aspects have to be kept in view:
1. If capital is borrowed for any other purpose (e.g. if capital is borrowed for reconstruction, repairs or
renewals of a house property), then the maximum deduction on account of interest is Rs.30,000 (and not
Rs.1,50,000).
2. There is no stipulation regarding the date of commencement of construction. Consequently, the
construction of the residential unit could have commenced before April 1,1999 but, as long as its

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construction/acquisition is completed within 3 years, the higher deduction of Rs.1,50,000 (Rs. 2,00,000
w.e.f. AY 2015-2016) would be available. Also, there is no stipulation regarding the
construction/acquisition of the residential unit being entirely financed by the loan taken on or after April
1, 1999. It may be so in part.
However, the higher deduction up to Rs.1,50,000 can be taken for the loan which has been taken and
utilized for construction/acquisition after April 1, 1999. The loan taken prior to April 1, 1999 will carry
deduction of interest up to Rs. 30,000 only (CBDT’s circular No. 779, dated September 14, 1999).
Rs. 1,50,000 (Rs. 2,00,000 w.e.f. AY 2015-2016) maximum deduction will not be available in the following
situations:
i. if capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals
of a house property;
ii. if capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house
property; and
iii. if capital is borrowed on or after April 1, 1999 but construction is not completed within 3 years from
the end of the year in which capital was borrowed.
In the above situations only deduction up to Rs. 30,000 can be claimed.
DEDUCTIONS UNDER SECTION 80C IN RELATION TO INVESTMENT IN NEW RESIDENTIAL HOUSE

PROPERTY
Deduction under section 80C of the Income tax Act is available for investment in house property subject
to the satisfaction of the conditions of that section in regard to qualifying amounts in the following
circumstances to the individuals/Hindu undivided families.
Payments made towards the cost of purchase/construction of new residential house property during the
previous year are eligible for deduction under section 80C. The following payments qualify for deduction:
a. any instalment or part payment of the amount due under any self-financing or other scheme of any
development authority, housing board or other authority engaged in the construction and sale of house
property on ownership basis; or
b. any instalment or part payment of the amount due to any company or cooperative society of which the
assessee is a shareholder or member towards the cost of the house property allotted to him (it is not
applicable if the assessee is not a shareholder or member of the company/co-operative society which
provided house to the assessee); or
c. repayment of the amount borrowed by the assessee from-

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i. the Central Government or any State Government, or

ii. any bank, including a cooperative bank, or
iii. the Life Insurance Corporation of India, or
iv. the National Housing Bank, or
v. any public company formed and registered in India with the main object of carrying on the
business of providing long term finance for construction or purchase of houses in India for
residential purposes which is eligible for deduction under section 36(1) (viii), or
vi. any company in which the public are substantially interest or any cooperative society, where such
company or cooperative society is engaged in the business of financing the construction of
houses, or
vii. the assessee’s employer where such employer is an authority or a board or a corporation or any
other body established or constituted under a Central or State Act, or
viii. the assessee’s employer where such employer is a public company or public sector company, or
a university established by law or a college affiliated to such university or a local authority or a co-
operative society;
d. stamp duty, registration fee and other expenses for the purpose of transfer of such house property to
the assessee.
The following payments are not qualified for the purpose of section 80C:
a. the admission fee, cost of the share and initial deposit which a shareholder of a company or a member
of a co-operative society has to pay for becoming such shareholder or member; or
b. the cost of any addition or alteration to, or renovation or repair of, the house property which is carried
out after issue of the completion certificate in respect of the house property by the authority competent
to issue such certificate or after the house property (or any part thereof) has either been occupied by the
assessee or any other person on his behalf or been let out; or
c. any expenditure in respect of which deduction is allowable under the provisions of section 24.
Section 80C provides that in computing the total income of an assessee, deduction shall be provided in
respect of various payments/investments made as included in the aforesaid Section subject to a ceiling of
Rs. 1 lakh on the aggregate amount of such payments/investments.
Section 80C(5) stipulates that in case an assessee transfers the house property referred to above before
the expiry of five years from the end of the financial year in which possession of such property is obtained
by him, or receives back, whether by way of refund or otherwise, any sum specified above, then no
deduction shall be allowed with reference to any of the sums referred to above and the aggregate amount

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of deductions of income already allowed in respect of the previous year or years shall be deemed to be
the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant
to such previous year.
Q. Distinguish between the following:

i. Tax Planning and Tax Evasion
Definition of Tax Planning: By the term ‘tax planning’ we mean the arrangement of one’s financial affairs
in such a way that utmost tax benefits can be availed. This can be done by applying the majority of
advantageous provisions which are permissible by law and entitles the assessee to obtain the benefit of
the deductions, exemptions, credits, concessions, rebates and reliefs so that the incidence of tax on the
assessee would be minimum.
Tax planning is an art of logically planning one’s financial affairs, in such a manner that benefit of all eligible
provisions of the taxation law can be availed effectively so as to reduce or defer tax liability. As tax
planning follows an honest approach, by conforming to those provisions which fall within the framework
of the taxation law.
Definition of Tax Evasion: An illegal act, made to escape from paying taxes is known as Tax Evasion. Such
illegal practices can be deliberate concealment of income, manipulation in accounts, disclosure of unreal
expenses for deductions, showing personal expenditure as business expenses, overstatement of tax credit
or exemptions suppression of profits and capital gains, etc. This will result in the disclosure of income
which is not the actual income earned by the entity.
Tax Evasion is a criminal activity for which the assessee is subject to punishment under the law. It involves
acts like:
• Deliberate misrepresentation of material facts.
• Hiding relevant documents.
• Not maintaining complete records of all the transactions.
• Making false statements.
Key Difference between Tax Planning and Tax Evasion are:
1. Nature: Tax planning is legal whereas Tax evasion is illegal
2. Attributes: Tax planning is moral. Tax evasion is illegal and objectionable.
3. Motive: Tax planning is the method of saving tax. However, Tax evasion is an act of concealing tax.
4. Consequences: Tax planning has no adverse consequence whereas Tax evasion leads to penalty or
imprisonment.

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5. Objective: The objective of Tax evasion is to reduce tax liability by exercising unfair means whereas Tax
planning is done to reduce the liability of tax by applying the provision and moral of law.
6. Permissible: Tax planning is permissible whereas Tax evasion is not permissible.
7. BENEFIT- Benefits of Tax planning Generally, arises in long run on the other hand benefits of Tax evasion
do not arise but it causes penalty and prosecution.
ii. Earned Income and Unearned Income

Earned Income: For the most part, the difference between earned income vs. unearned income is fairly
straightforward. Earned income is something that you receive in exchange for the work you do or the
services you provide. When you make money in wages, tips, and professional fees, you have earned
income.
If you are involved in a business and help with the day-to-day running of the business, you have earned
income. You might also need to count foreign income as earned income, and you should talk to a financial
or tax professional if you aren't sure if your real estate income counts as earned income or unearned
income. But, for most people, the bulk of the income they have is earned.
It's also important to note that, for many people, earned income is taxed at a higher rate. When you talk
about your marginal tax bracket, this where earned income is considered. Your investment income might
be counted separately, especially if it's made off long-term investments.
When you're talking about effective tax rate vs. marginal tax rate, and the overall percentage of your
income that you pay in taxes, there's a reason that there is controversy over what the wealthy pay and
what working stiffs end up paying.
Unearned Income: Many people equate unearned income with passive income. In some cases, this type
of income is passive. Unearned income is money that you receive without doing “work” for it.
According to the IRS, unearned income includes your income from interest, dividends, and capital gains.
In some cases, this income is taxed differently. In fact, it might be taxed at a lower rate than your marginal
rate. This is why the wealthy try to make money off of assets, rather than offer their labor.
Long-term capital gains are taxed differently than short-term capital gains and regular income. This means
that if you are in a higher tax bracket, your long-term gains are often taxed at a lower rate. This can be
very helpful to you — especially if you have a lot of investment income.
Other unearned income sources include:
• Income from retirement account distributions
• Unemployment compensation (but you do pay taxes on unemployment benefits)

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• Social Security benefits

• Debt forgiveness
• Winnings from gambling
• Some real estate income
It's also worth noting that if you receive income from an estate, trust, partnership or S corporation,
without being an active part of the management, that might also be considered unearned income.
iii. Source of Income and Heads of Income

“Source of income”, as such, has not been defined anywhere in the Income-tax Act nor this phrase has
been used anywhere in the Act to give any special meaning to it. It should, therefore, be understood by
its simple dictionary meaning.
However, the phrase “Heads of Income” has got a significant place in the Act. As per section 14 of the
Act, all income that a tax payer may earn, has been classified in five specific “Heads of Income”. Those are
(A) Salaries
(B) Income from house property
(C) Profits and gains from business and profession
(D) Capital Gain
And finally, for the income that does not fall in any of the above categories, there is this residual head:
(E) Income from other sources.
Total income of a tax payer will be computed head wise and tax also may be different for different head.
For example, tax on capital gain is taxed at a ‘special rate’ which may not be same as that on income from
any other head. Method of computation also is different for different heads. And income that clearly, or
as per the law, falls in one head, cannot be taxed in any other head.
iv. Capital Receipt and Revenue Receipt

Definition of Capital Receipt: Capital receipts are the income received by the company which is non-
recurring in nature. They are part of the financing and investing activities rather than operating activities.
The capital receipts either reduces an asset or increases a liability. The receipts can be generated from the
following sources:
• Issue of Shares
• The issue of debt instruments such as debentures.

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• Loan taken from a bank or financial institution.

• Government grants.
• Insurance Claim.
• Additional capital introduced by the proprietor.
Definition of Revenue Receipt: Revenue Receipts are the receipts which arise through the core business
activities. These receipts are a part of normal business operations that is why they occur again and again
however its benefit can be enjoyed only in the current accounting year as its effect is short term. The
income received from the day to day activities of business includes all the operations that bring cash into
the business like:
• Revenue generated from the sale of inventory
• Services Rendered
• Discount Received from the creditors or suppliers
• Sale of waste material/scrap.
• Interest Received
• Receipt in the form of dividend
• Rent Received
Key Differences Between Capital Receipt and Revenue Receipt
1. Receipts generated from investing and financing activities are capital receipts, on the other hand,
receipts from operating activities are revenue receipt.
2. Capital Receipts do not frequently occur, as it is non-recurring and irregular. But, revenue receipts
do not occur again and again they are recurring and regular.
3. The benefit of capital receipt can be enjoyed in more than one year, but the benefit of revenue
receipt can be enjoyed only in the current year.
4. Capital Receipts appears on the liabilities side of the Balance Sheet whereas Revenue Receipts
appears on the credit side of the Profit and Loss Account as income for the financial year.
5. The capital receipt is received in exchange for the source of income. Unlike revenue received
which is a substitution of income.
6. Capital receipt either decreases the value of an asset or increases the value of liability, but
revenue receipt neither increases nor decreases the value of asset or liability.
Similarities
1. Both receipts are a part of business activities.

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2. Both are necessary for the survival and growth of the company.
3. The source of business income.
Conclusion: In general, Capital Receipts and Revenue Receipts play a vital role in the growth of business,
as the business may not be able to survive, in the absence of the two.
v. Cost of Acquisition and Cost of Improvement

Cost of Acquisition: Cost of Acquisition (COA) means any capital expense at the time of acquiring capital
asset under transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the
form of registration, storage etc. expenses incurred on completing transfer.
Cost of Acquisition with Reference to Certain Modes of Acquisition (Section – 49)
1. Where the capital asset became the property of the assessee:
a. on any distribution of assets on the total or partial partition of a Hindu undivided family;
b. under a gift or will;
c. by succession, inheritance or devolution;
d. on any distribution of assets on the dissolution of a firm, body of individuals, or other
association of persons, where such dissolution had taken place at any time before 1.04.1987;
e. on any distribution of assets on the liquidation of a company;
f. under a transfer to a revocable or an irrevocable trust;
g. by transfer from its holding company or subsidiary company;
h. by transfer in a scheme of amalgamation;
i. by an individual member of a Hindu Undivided Family giving his separate property to the
assessee HUF any time after 31.12.1969,
In all above cases, the cost of acquisition of the asset shall be the cost for which the previous owner of
the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by
the previous owner or the assessee, as the case may be, till the date of acquisition of the asset by the
assessee.
If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that
previous owner, who had acquired it by mode of acquisition other than the above, should be taken as cost
of acquisition.
2. Where shares in an amalgamated Indian company became the property of the assessee in a scheme of
amalgamation the cost of acquisition of the shares of the amalgamated company shall be the cost of
acquisition of the shares in the amalgamating company.

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3. Where a share or debenture in a company, became the property of the assessee on conversion of bonds
or debentures the cost of acquisition of the asset shall be the part of the cost of debenture, debenture
stock or deposit certificates in relation to which such asset is acquired by the assessee.
4. Where shares, debentures or warrants are acquired by the assessee under Employee Stock Option Plan
or Scheme and they are taken as perquisites u/s 1 7(2) the Cost of Acquisition would be the valuation
done u/s1 7(2).
5. Cost of Acquisition of shares in the Resulting Company, in a demerger.
The cost of acquisition of the original shares held by the shareholder in the demerged company will be
reduced by the above amount.
6. Where Capital Gains is not levied on a transfer of capital asset between a Subsidiary Company and a
Holding Company or vice-versa but the conditions laid down are violated subsequently and Capital Gains
is to be levied, the cost of acquisition to the transferee company would be the cost for which such asset
was acquired by it.
7. Where the capital asset is goodwill of a business or a Trade Mark or Brand Name associated with a
business, right to manufacture, produce or process any article or thing, right to carry on any business,
tenancy rights, stage carriage permits or loom hours, the cost of acquisition is the purchase price paid by
the assessee and in case no such purchase price is paid it is nil.
8. Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of
acquisition to the previous owner means the Fair Market Value on the date on which the capital asset
became the property of the previous owner.
9. Where the capital asset became the property of the assessee on the distribution of the capital assets
of a company on its liquidation cost of acquisition of such asset is the Fair Market Value of the asset on
the date of distribution.
10. Where share or a stock of a company became the property of the assessee on:
a. the consolidation and division of all or any of the share capital of the company into shares of
larger amount than its existing shares;
b. the conversion of any shares of the company into stock;
c. the re-conversion of any stock of the company into shares;
d. the sub-division of any of the shares of the company into shares of smaller amount; or
e. the conversion of one kind of shares of the company into another kind. Cost of acquisition of
the share or stock is as calculated from the cost of acquisition of the shares or stock from which
it is derived.

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11. The cost of acquisition of rights shares is the amount which is paid by the subscriber to get them. In
case a subscriber purchases the right shares on renunciation by an existing shareholder, the cost of
acquisition would include the amount paid by him to the person who has renounced the rights in his favor
and also the amount which he pays to the company for subscribing to the shares. The person who has
renounced the rights is liable for capital gains on the rights renounced by him and the cost of acquisition
of such rights renounced is nil.
12. The cost of acquisition of bonus shares is nil.
13. Where equity share(s) are allotted to a shareholder of a recognised stock exchange in India under a
scheme of demutualisation or corporotisation approved by SEBI, the cost of acquisition of the original
membership of the exchange is the cost of acquisition of the equity share(s). The cost of acquisition of
trading or clearing rights acquired under such scheme of demutualisation or corporatisation is nil.
14. Where any other capital asset has become the property of the assessee before 1st day of April, 1981,
the cost of acquisition of the asset to the assessee or the previous owner (depending upon the mode of
acquisition) or the fair market value of the asset on 1.4.1981, at the option of the assessee would be its
cost of acquisition.
15. Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost
of acquisition of such security or shares shall be the fair market value which has been taken into account
while computing the value of the respective fringe benefit.
16. Where the capital asset, being a share or debenture of a company, became the property of the
assessee in consideration of transfer of bonds or debentures or Global Depository Receipts purchased in
foreign currency, the cost of acquisition shall be deemed to be that part of the cost of debentures or bond
or deposit certificate in relation to which such asset is acquired by the assessee.
Cost of improvement: Cost of improvement is the capital expenditure incurred by an assessee for making
any addition or improvement in the capital asset. It also includes any expenditure incurred in protecting
or curing the title. In other words, cost of improvement includes all those expenditures, which are incurred
to increase the value of the capital asset. However, any expenditure which is deductible in computing the
income under the heads Income from House Property, Profits and Gains from Business or Profession or
Income from Other Sources (Interest on Securities) would not be taken as cost of improvement.
– Cost of Improvement in relation to below mention shall be taken to be nil.
i) Goodwill.
ii) Right to manufacture, produce or process any article or thing.

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iii) Right to carry on any business.

– Any other capital asset.
i) In case asset acquired before 01/04/1981 – Cost of Improvement incurred since 01/04/1981 either
by previous owner or assessee.
ii) In case asset acquired after 01/04/1981 – All cost incurred by previous owner and assessee.
If the assessee acquires any asset by way of inheritance, partition of HUF or by any other mode specified
in sec 49(1) and sec 47 then do the cost of acquisition of previous assessee shall be considered?
When a capital asset is acquired by an assessee by gift, inheritance, or partition of Hindu Undivided Family
or under any of the modes specified in Sec 49(1), or some other mode specified in certain clauses of Sec
47 under explanation 1 to Sec 2(42A), the period for which the asset was held by the earlier owner or in
the earlier form is also to be included as part of the holding period of the assessee for determining
whether the capital asset is a long term capital asset or a short term capital asset.
U/s 49(1), where the capital asset became the property of the assessee on the distribution on partition of
an HUF, under a gift or will, by succession, inheritance or devolution, on distribution on dissolution of a
firm to 1st April 1987, on distribution of assets on liquidation of a company, under transfer to a revocable
or irrevocable trust, or under transfers referred to in Sec 47(iv), (v), (vi), (via), (viaa), (vica) or (vicb), the
cost of acquisition of the previous owner is deemed to be the cost of acquisition of the assessee.
U/s 55(2)(b)(ii), where a capital asset became the property of the assessee by any of the modes specified
in Sec 49(1), and the capital asset was acquired by the previous owner prior to 1St April, 1981, the assessee
is entitled to substitute the fair market value of the asset as on 1ST April, 1981 for the actual cost.
Some Practical Issues

ISSUE 1 – Mortgage & interest expenses to form part of cost of acquisition: Where assessee purchased
a property and on same day mortgage it to raise loan to pay part consideration of property, mortgage
expenses incurred in connection with the acquisition of the property and the interest payable on the
mortgage amounts, which had been utilized as part of the consideration, would form part of the COA of
the property for the purpose of computation of capital gain.[CITV. K. Raja Gopala Rao 252 ITR 459 (MAD)
(2001)].
ISSUE 2 – Compensation paid for eviction.: Compensation paid for eviction of hutment dwellers from
land which is sold would be allowable as Cost of improvement. [CIT V. Miss Piroja C. Patel 242 ITR 582
(BOM) (2000)].

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vi. Tax Planning and Tax Avoidance

Definition of Tax Planning: By the term ‘tax planning’ we mean the arrangement of one’s financial affairs
in such a way that utmost tax benefits can be availed. This can be done by applying the majority of
advantageous provisions which are permissible by law and entitles the assessee to obtain the benefit of
the deductions, exemptions, credits, concessions, rebates and reliefs so that the incidence of tax on the
assessee would be minimum.
Tax planning is an art of logically planning one’s financial affairs, in such a manner that benefit of all eligible
provisions of the taxation law can be availed effectively so as to reduce or defer tax liability. As tax
planning follows an honest approach, by conforming to those provisions which fall within the framework
of the taxation law.
Definition of Tax Avoidance: Tax avoidance implies any arrangement of financial activities, though done
within the legal framework, overpowers the basic intention of the law. It involves taking benefit of the
shortcomings in the statute, by deliberately parking the financial affairs in a way that it neither violates
the tax law nor it attracts more tax.
Tax avoidance includes cases, wherein the assessee seemingly mislead the law, without making an
offence. And to do so, the tax payer uses any scheme or arrangement, which reduces, defers and even
completely prevents the payment of tax. This may also be done by shifting of tax liability to another
person, so as to minimise the incidence of tax.
Key Differences Between Tax Planning and Tax Avoidance
The difference between tax planning and tax avoidance can be drawn clearly on the following grounds:
1. Tax planning refers to a mechanism through which one can intelligently plan his/her financial
affairs in such a manner that all the eligible deductions, exemptions and allowances, as per law,
can be enjoyed. Tax avoidance is an act of intentionally structuring one’s financial affairs, in such
a way that his tax liability is minimum or even nil.
2. While tax planning is both legal and moral, tax avoidance is legally correct, but it is an immoral
act.
3. Tax planning is basically savings of tax. Conversely, tax avoidance is hedging of tax.
4. Tax avoidance is accomplished with a malafide motive. On the flip side, tax planning has the
element of bonafide motive.
5. Tax planning aims at reducing tax liability, by practicing the script and moral of law. As against
this, tax avoidance aims at minimising tax liability, by practicing the script of law only.

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6. Tax planning is permissible by law, as it involves adhering to the provisions of tax. In contrast, tax
avoidance is not permissible by law as it attempts to take advantage of the defects in the law.
7. Tax planning uses the advantages, provided by the law to the assessee. Unlike tax avoidance,
which uses the loop holes of the law.
8. The benefits of tax planning can be seen in the long run. On the contrary, the benefits of tax
avoidance are for short term only.
Conclusion: Both tax planning and tax avoidance require full and up to date knowledge of the tax laws.
Formerly, tax avoidance is considered legitimate, but with the passage of time tax avoidance is as evil as
tax evasion, and even attracts penalty when discovered. On the other hand, tax planning is completely
legal because it does not involve taking any advantage of the loopholes in the law, and so it is permissible.
vii. Tax Avoidance and Tax Evasion

Definition of Tax Avoidance: An arrangement made to beat the intent of the law by taking unfair
advantage of the shortcomings in the tax rules is known as Tax Avoidance. It refers to finding out new
methods or tools to avoid the payment of taxes which are within the limits of the law.
This can be done by adjusting the accounts in a manner that it will not violate any tax rules, as well as the
tax incurrence, will also be minimised. Formerly tax avoidance is considered as lawful, but now it comes
to the category of crime in some special cases.
The only purpose of tax avoidance is to postpone or shift or eliminate the tax liability. This can be done
investing in government schemes and offers like the tax credit, tax privileges, deductions, exemptions,
etc., which will result in the reduction in the tax liability without making any offence or breach of law.
Definition of Tax Evasion: An illegal act, made to escape from paying taxes is known as Tax Evasion. Such
illegal practices can be deliberate concealment of income, manipulation in accounts, disclosure of unreal
expenses for deductions, showing personal expenditure as business expenses, overstatement of tax credit
or exemptions suppression of profits and capital gains, etc. This will result in the disclosure of income
which is not the actual income earned by the entity.
Tax Evasion is a criminal activity for which the assessee is subject to punishment under the law. It involves
acts like:
• Deliberate misrepresentation of material facts.
• Hiding relevant documents.
• Not maintaining complete records of all the transactions.
• Making false statements.

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Key Differences Between Tax Avoidance and Tax Evasion

1. A planning made to reduce the tax burden without infringement of the legislature is known as Tax
Avoidance. An unlawful act, done to avoid tax payment is known as Tax Evasion.
2. Tax avoidance refers to hedging of tax, but tax evasion implies the suppression of tax.
3. Tax avoidance is immoral that tends to bend the law without causing any damage to it. Unlike tax
evasion, which is illegal and objectionable both according to law and morality.
4. Tax avoidance aims at minimising the tax burden by applying the script of law. However, tax
evasion minimises the tax liability by exercising unfair means.
5. Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax Evasion includes
the deliberate concealment of material facts.
6. The arrangement for tax avoidance is made prior to the occurrence of tax liability. Unlike Tax
Evasion, where the arrangements for it, are made after the occurrence of the tax liability.
7. Tax avoidance is completely legal however Tax Evasion is a criminal activity.
8. The result of tax avoidance is the postponement of the tax, whereas the consequence of tax
evasion if the assessee is found guilty of doing so, is either imprisonment or penalty or both.
Conclusion: Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately but what
makes the difference is that the former is justified in the eyes of the law as it does not make any offence
or breaks any law. However, it is biased as the honest taxpayers are not fools, but they can also make
arrangements for postponing unnecessary tax. If we talk about the latter, it is completely unjustified
because it is fraudulent activity, because it involves the acts which are forbidden by the law and hence it
is punishable.
Q. Define the term Salary, according to Income Tax Act. Explain the importance of employer-employee
relationship in the context of Salary.
Section 15 of the act lays down the conditions under which an income falls under the head of ‘salaries.’
1. Any remuneration is due from the employer to any former employee(assessee) for the due course
of his employment in the previous year, whether paid or not.
2. Salary paid to an employee by the employer or former employer in the previous year even though
it was not due to him.
3. Salary paid to an employee by the employer or former employer in the previous year which was
not charged under income tax in any other previous years.

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The key element of this head is that it mandates a relationship between employer and employee. If an
employer-employee relationship is not there, the income will not be accessible under the head of salaries.
Section 17 of the Act has mentioned the term ‘salary’, which included-
1. Wages;
2. Any annuity or pension;
3. Any gratuity;
4. Any charges, commissions, perquisites or benefits in lieu of or notwithstanding any compensation
or wages;
5. any advance of salary;
6. Any payment received by a worker in regard to any time of leave not benefited by him;
7. The yearly accumulation to the balance at the employee partaking in a perceived Provident Fund,
to the degree to which it is chargeable to assess under Rule 6 of Part A of the fourth schedule;
8. The total of all wholes that are included in the transferred parity as alluded to in sub-rule 2 of Rule
11 of Part A of the Fourth schedule of an employee partaking in a perceived Provident Fund, to
the degree to which it is chargeable to assess under sub-rule 4 thereof; and
9. The contribution made by the Central Government or any other employer in the previous year, to
the account of an employee under a pension scheme, referred to in Section 80CCD
Allowances: The employer pays allowances to his employees in order to fulfill his personal
expenses. Allowances can be fully taxable or partly taxable. Partly taxable allowances include house rent
allowance and special allowances under section 10(14) (i)&(ii).
Fully taxable allowances are:
• Dearness Allowance
• Overtime allowance
• Fixed Medical Allowance
• Tiffin Allowance
• Servant Allowance
• Non-practicing Allowance
• Hill Allowance
• Warden and Proctor Allowance
• Deputation Allowance

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Perquisites: In addition to their salary, the employees are often given some other benefits which may or
may not be in cash form. For example, rent-free accommodation or car given by the employer to the
employee.
Reimbursement of bills is not a perquisite. Perquisites are only given during the continuance of
employment.
Taxable perquisites include
• Rent free accommodation
• Interest free loans
• Movable assets
• Educational expenses
• Insurance premium paid on behalf of employees
Exempted perquisites include:
• Medical benefits
• Leave travel concession
• Health Insurance Premium
• Car, laptop etc. for personal use.
• Staff Welfare Scheme
Profits in Lieu of Salary: Section 17(3) gives a comprehensive meaning of profits in lieu of salary. Any
payment due or accrued to be paid to the employee by the employer. Payment to be valid under section
17(3), there are two essential features-
• There must be compensation received by an assessee from his employer or former employer;
• It is received at or in connection with the termination of his employment or adjustment of terms
and conditions.
‘Profit in lieu of Salary’ is taxable on ‘due’ or ‘receipt’ basis. Payment from unrecognized provident or
superannuation fund is taxable as “profit in lieu of salary” if that balance consists employer’s contribution
or interest on an employer’s contribution.
Exceptions to section 17(3) (exempted under section 10)
• Death cum retirement gratuity;
• House rent allowances;
• Commuted value of pension;
• Retrenchment pay received by an employee;
• Payment received from a statutory provident fund or recognized provident fund;

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• Any payment from an approved superannuation fund;

• Payment from the recognized provident fund.
Taxability of wages: All wages received in consideration of services rendered are taxable under the
Income Tax Act, 1961.
Taxability of Annuity: Annuity received from present employer is taxed as “Salary”

• Annuity received from past employer is taxed as “Profits in Lieu of Salary”
• Annuity received from a person other than employer is taxed under “Income from Other Sources”,
such as “LIC ANNUITY”.
All annuities received are chargeable to tax and there is no exemption whatsoever.
Taxability of Pension: Pension is any amount of periodic payment made by an employer to the employee
in consideration of past service payable after retirement.
Pension is of two Kinds
Uncommuted Pension: Uncommuted pension is pension received periodically. It is fully taxable in the
hands of both government and non-government employees.
Commuted Pension: Commuted pension means lump sum amount taken by commuting the whole or part
of the pension.
• Commuted pension received by employees of the central government/local authorities/ statutory
corporation/members of the defence services is fully exempt from tax.
• Commuted pension received by non-government employees is taxable subject to exemption u/s
10(10A) of the Income Tax Act, 1961 as under:
a) Where the employee has also received gratuity
b) Where the employee has not received gratuity

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Taxability of Gratuity: Gratuity is a voluntary payment made by an employer in appreciation of services

rendered by an employee.
• Any death cum retirement gratuity received by Central/State government employees is fully
exempt.
• Any gratuity received by an employee during the period of service is fully taxable.
Gratuity received by Non-government Employee: Gratuity received by non-government employees is
fully taxable under the income tax act 1961 subject to exemption provided by sec 10(10) which is
described as under:
Where the employee is covered by Payment of Gratuity Act 1972:
Least of the following is exempt:
a) Rs 20,00,000
b) Gratuity received
c) 15/26 * Last drawn salary * no of completed year of service or part thereof in excess of 6 Months
(Where an employee has worked for 8 years 7 months, the completed year of service shall be considered
9)
Salary for this purpose means: Salary + Dearness Allowance
Where the employee is not covered by the Payment of Gratuity Act 1972:
Least of the following is exempt:
a) Rs 20,00,000
b) Gratuity received
c) 1/2 * Average salary of last 10 months * completed year of service (where an employee has worked for
8 Years 7 Months, the completed years shall be considered as 8)
Note: Salary for this purpose means Salary + Dearness allowance (If provided in terms of employment for
retirement benefits) + commission as a % of turnover.
Taxability of Advance salary: Salary is taxable on due or receipt basis whichever is earlier. As such if any
salary has been received by an assessee in advance, the same is taxable in the year of receipt.
Taxability of Leave Encashment: Leave encashment means the amount received by an employee from his
employer on account of encashment of un availed leaves standing to the credit of his account.
• Leave salary received by an employee during the period of service is fully taxable.
• Leave salary received by a government employee at the time to retirement is fully exempt from
tax.

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• Maximum entitlement for leaves under the income tax law is 30 per year.
• In case of government employees, leave encashment is taxable subject to the exemption provided
u/s 10(10AA).
As per the provisions of sec 10(10AA), least of the following is exempt from leave encashment:-
a) Rs 3,00,000
b) Leave salary actually received
c) 10 months’ salary (on the basis of average salary of last 10 months preceding date of retirement)
d) Leave due * Average salary p.m.
30 Days
(Average salary to be calculated on the basis of average salary of last 10 months preceding date of
retirement)
Note: Salary for this purpose means Salary + Dearness allowance ( If provided in terms of employment for
retirement benefits) + commission as a % of turnover.
Steps to determine period of leave in months:
1. No of actual completed years of service
2. Number of days leave entitlement for each completed year of service as per rules of the employer (not
exceeding 30 days for each year)
3. Gross total leave in days (Step 1 * Step 2)
4. Less: Leave encashed & availed during continuation of service (in days)
5. Period of earned leave (in days) Step 3 – Step 4)
6. Period of leave in months (Step 5 / 30Days)
Taxability of Employers contribution to provident fund in excess of 12% of salary: Any amount
contributed by an employer to a recognized provident fund in excess of 12% of salary is taxable under the
head salary.
Contribution by employer to pension fund established u/s 80CCD: Any contribution by employer to a
pension fund established u/ 80 CCD of the
Income tax act is to be first included in the salary of the assessee and then deductible under section
80CCD/92) upto 14% of employee’s salary in case of Government employees and 10% in case of all Non-
Government employees.

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Taxability of Allowances: Allowance means any amount received by employee from employer in order to
meet some specific expenses.
Allowances can be classified into three categories:
• Allowances that are fully taxable
• Allowances which are exempted for a specific amount
• Allowances which are exempted on the basis of actual expenditure
• Allowance which are fully exempt
Allowances that are fully taxable: Entertainment allowance/ Dearness allowance/ Overtime
allowance/Fixed medical allowance/City compensatory allowance/Interim allowance/Servant
allowance/Project allowance/Tiffin/Lunch/Dinner allowance/Any other cash allowance/Warden
allowance/Non-practicing allowance are all taxable allowances.
Allowances which are exempted for a specific amount:
Name of Allowance Extent to which allowance is exempt
Hilly areas allowance or high-altitude allowance or Rs 300 to Rs 7,000 p.m. depending upon
uncongenial climate allowance or snow bound area the location.
allowance or avalanche allowance.
Border area allowance or remote locality allowance or Rs 200 to Rs 1,300 p.m. depending upon
difficult area allowance or disturbed area allowance. the location.
Tribal areas/schedule areas/Agency areas allowance. Rs 200 p.m.
Any allowance granted to an employee working in any 70% of such allowance upto a maximum
transport system to meet his personal expenditure during of Rs 10,000 p.m.
his duty performed in the course of running such (Exemption is not allowable if the
transport from one place to another. employee is in receipt of a daily
allowance)
Children education allowance Rs 100 p.m. per child upto a maximum

of two children

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Hostel Allowance Rs 300 p.m. per child upto a maximum

of two children
Compensatory Field area allowance Rs 2,600 p.m. in specified areas
Compensatory modified field area allowance Rs 1,000 p.m. in specified areas
Counter insurgency allowance Rs 3,900 p.m.
Transport allowance granted to an employee who is Rs 3,200 p.m.

blind/deaf/dumb or orthopedically handicapped with
disability to meet his expenditure for the purpose of
commuting between the place of residence and the place
of his duty
Underground allowance Rs 800 p.m.
Allowances which are exempt on the basis of actual expenditure: The following allowances are exempt
up to the amount of expenditure incurred by an employee:-
a) Traveling allowance
b) Daily allowance
c) Helper allowance
d) Uniform allowance
e) Scientific research allowance
Allowances which are fully exempt:
Allowances received by judges of high court/supreme court/employees of united nations organization.
Taxability of Perquisites: An employee may be provided with several perquisites by an employer. The
perquisites are any benefits provided by an employer to employee. Some of the major perquisites offered
by companies to its employees and their taxability are as under:
RENT FREE ACCOMMODATION

1. Rent free unfurnished Accommodation:
(i) Government employees: value of perquisite chargeable to tax: license fees fixed by government.

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(ii) Non-Government Employees:

1. Where accommodation is not owned by employer: Rent paid or 15% of salary whichever is lower
2. Where accommodation is owned by employer:
• Accommodation in a city having population up to 10 Lakhs: 7.5% of salary
• Accommodation in a city having population more than 10 lakhs up to 25 lakhs: 10% of salary
• Accommodation in a city having population more than 25 lakhs: 15% of salary
2. Rent free furnished Accommodation:
Value of furnishing to be calculated as under:
1. Furnishing are taken on rent: Rent Paid
2. Furnishing owned by employer: 10% of actual cost
Value of rent furnished accommodation: Value of rent free unfurnished accommodation + Value of
furnishings
OBLIGATION OF EMPLOYEE MET BY EMPLOYER

1. Electricity/Water/Heater/Gas:
Where employer provides the same from own sources:
Value of perquisite: Cost of production
Where employer provides from outside sources:
Value of perquisite: Amount Paid by the employer
2. Sweeper/Gardener/Watchman/Domestic Servant:
Value of perquisite: Amount paid by employer
3. Free Education:
Where employer provides free education in own college:
Value of perquisite: Fee charged by similar college in nearby area
Where employer provides free education in any other college:
Value of perquisite: Actual amount paid by employer
4. Free Transport:
• Free transport facility provided by employee engaged in the business of transportation of
passengers/ goods
Value of perquisite: Amount charged when similar services are provided to general public.
• Free tickets to railway and airline employees are exempt
5. Medical Facilities:

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• Medical facilities are provided in a government hospital in India/ Employer owned hospital in
India/ a hospital approved by the board are exempt from tax.
• Medical facilities in any other case up to a total value of Rs 15000 is exempt from tax.
• Medical Facilities provided by employer outside India:
a) Treatment and stay expenditure are exempt up to the limits permitted by RBI
b) Traveling expenditure is exempt where the Gross total income of the assessee is up to 2 Lakhs. IN case
of Gross total income being in excess of Rs 2 Lakhs, the traveling expenditure is chargeable to tax.
6. Telephone Facility:
Telephone facility provided by employer is completely exempt from tax.
ANY OTHER FRINGE BENEFITS

1. Free Meals:
• Free meals provided by employer to employee during working hours upto a total value of Rs 50
per meal is exempt from tax.
• Breakfast/snacks & tea/ brunch at work place are exempt from tax.
2. Use of Movable Property:
• Taxable @ 10% of actual cost or rent paid by employer in respect of that asset as the case may
be.
• Use of Laptop and Computer are exempt from tax.
3. Transfer of Movable assets:
• Transfer of Computer and Computer peripherals:
Taxable value of perquisite = W.D.V. of the asset as calculated after providing depreciation @ 50% p.a.
on written down value of the asset for each completed year of use.
• Transfer of Car:
on written down value of the asset for each completed year of use.
• Transfer of any other asset:
on straight line method for each completed year of use
4. Credit card Expenses:
Taxable Value of Perquisite = Actual amount of expenses incurred by the employer.
5. Club expenses:

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Taxable Value of Perquisite = Amount of expenses incurred by the employer.

• Corporate membership and club membership provided uniformly across all employees
is exempt from tax.
6. Interest free concessional Loan:
Taxable value of perquisite = interest rate charged by SBI on similar loan as on 1st April of the P.Y. (-)
interest rate recovered from employee.
However, no notional interest is charged to tax in case of the following loans:
a) A loan given for the purpose of medical treatment of certain prescribed diseases as mentioned in Rule
3A of the Income Tax rules (and is not reimbursed to the employee under a medical insurance scheme)
b) A loan not exceeding in the aggregate Rs 20,000/-
LEAVE TRAVEL CONCESSION:

• Exemption in respect of leave travel concession is provided in respect of 2 journeys undertaken
in a block of 4 calendar years.
• Exemption is available in respect of employee and his family members. Family means Self, two
children and dependent parents/brother/sister.
a) Taxable value of perquisite is calculated depending upon the mode in which journey is undertaken:
Air: Economy class fare undertaken by the shortest route
Train: First class A.C. fare by shortest route
Any other mode: Where public transport exists: Deluxe class fare by shortest route
Where no public transport exists: First class A.C. fare by train by shortest route.
CAR FACILITY:
• Where the car is owned by the employee, used completely for personal purposes and expenses
are incurred by employer:
Value of perquisite: Actual amount of expense incurred
• Where the car is owned by the employee, used partially for personal and partially for official
purposes and expenses are incurred by employer:
Less
1800 p.m. (where the car engine is up to 1.6L C.C.)
2400p.m. (where the car engine is above 1.6L C.C.)
Add

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900 p.m. for driver facility

• Where the car is owned/hired by the employer, used completely for personal purposes and
expenses are incurred by employer:
(+) Salary paid to driver (If any)
(+) Dep 10% of Cost
Where the car is owned/hired by the employer, used partially for personal and partially for official
purposes and all expenses are borne by employer:
Value of perquisite:
Rs 1800 p.m. (where the car engine is up to 1.6L C.C.)
Rs 2400p.m. (where the car engine is above 1.6L C.C.)
Add
• Where the car is owned/hired by the employer, used partially for personal and partially for
official purposes and only official expenses are borne by employer:
Value of perquisite:
Rs 600 p.m. (where the car engine is up to 1.6L C.C.)
Rs 900p.m. (where the car engine is above 1.6L C.C.)
Add
Note: In case of all perquisites, if any amount is recovered from the employee, then the same has to be
deducted from the value of perquisite to arrive at the taxable value of perquisite.
Q. Discuss the provisions under the Income Tax Act, 1961 relating to furnishing return in the following
situations:
(i) Return of Loss: If a person has sustained a loss in any previous year under the head "Profits and gains
of business or profession" or under the head "Capital Gains" and claims that such loss or any part thereof
should be carried forward under section 72(1) or section 73(2) or 73A(2) or section 74(1) and (3) or section
74A(3) then he may furnish a return of loss within the time prescribed under section 139(1) and all the
provisions of this Act shall apply as if it were a return under section 139(1).
The following Losses cannot be carried forward if the Return Of Loss is not submitted in time—
a. business loss (speculative or otherwise);

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b. capital loss; and

c. loss from the activity of owning and maintaining race horses.
It is not mandatory to file a return of loss (except in case of a company or a firm) as there is no taxable
income. However, as already discussed under section 80 in the chapter on 'Set off and carry forward of
losses', losses under the head business or profession and capital gain cannot be carried forward unless
the return of loss is submitted on or before the due date mentioned under section 139(1) and it is duly
assessed. If the return of loss is not submitted or is submitted after the due date, such losses cannot be
carried forward.
Some Points in respect of Return of Loss [Section 139(3)]
1. As already discussed, all losses are not allowed to be carried forward. Therefore, return of loss
should be submitted on or before due date only in case of business loss, speculation loss, capital
loss or loss on account of owning and maintaining the horses for running in horse races.
2. It may be noted that filing a return of loss within the due date is necessary for carry forward of
losses under sections 72(1), 73(2), 73A(2), 74(1), 74(3) and 74A(3). It does not cover section 71B
i.e. carry forward and set off loss of house property. Therefore, loss on account of house property
can be carried forward even if the return is submitted late.
3. Unabsorbed depreciation can also be carried forward even if the return of loss is submitted after
the due date, as it is not covered under Chapter VI of set off or carry forward of losses but covered
under section 32(2).
4. Section 139(3) read with section 80, does not prohibit the set off of losses of the current year
while computing the Total Income even if the return is filed after the due date. It only prohibits
the carry forward of such losses.
5. If an assessee has submitted a return of loss in response to a notice under section 142(1), such
loss cannot be carried forward unless it is a loss under the head income from house property.
However, unabsorbed depreciation can be carried forward in this case.
6. Although the loss of the current year cannot be carried forward unless the return of loss is
submitted before the due date but the loss of earlier years can be carried forward if the return of
loss of that year(s) was submitted within the due date and such loss has been assessed.
(ii) Belated Return: Any person who has not furnished a return within the time allowed to him under
section 139(1), or within the time allowed under notice issued under section 142(1), may furnish the
return for any previous year at any time.

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i. before the end of the relevant assessment year; or

ii. before the completion of the assessment,
whichever is earlier.
Consequences of Late Submission or Filing of IT Return -
If return is submitted after the due date of submission of return of income, the following consequences
will be applicable. These rules are applicable even if a belated return is submitted within the time-limit
given above— The assessee will be liable for penal interest under section 234A.
1. The assessee shall be liable for late filing fee under section 234F.
o Late filing fee under section 234F is Rs. 5,000 (if the return is furnished after the due date
but on or before December 31 of the assessment year) or
o Rs. 10,000 (if return is furnished after December 31 of the assessment year).
o However, in a case where the total income does not exceed Rs. 5 lakhs, the late filing fee
amount shall not exceed Rs. 1,000.
2. If return of loss is submitted after the due date, a few losses cannot be carried forward. However,
CBDT has power under section 119(2) to condone delay in case of a return which is filed late and
where a claim for carry forward of losses is made.
3. If return is submitted after the due date, deduction under sections 10A, 10B, 80-IA, 80-IAB, 80-
IAC, 80-IB, 80-IBA, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80LA, 80P, 80PA, 80QQB and 80RRB will not
be available.
(iii) Return on Computer Readable Media: All assessees shall now have the option to furnish their return
of income, in accordance with a specified scheme, in ways such as on a floppy, diskette, magnetic-
cartridge tape, CD-ROM or any other computer readable media). The return of income furnished under
such scheme shall be deemed to be a return furnished under section 139(1) and the provisions of the Act
shall apply accordingly.
Return through computer readable media [Section 139(1B)]: (1) This sub-section enables the taxpayer
to file his return of income in computer readable media, without interface with the department.
(2) It provides an option to a person (both corporate and non-corporate) required to furnish a return of
his income.
(3) Such person may, on or before the due date, furnish a return of income in accordance with such
scheme as may be notified by the CBDT, in such form (including on a floppy, diskette, magnetic cartridge
tape, CD-ROM or any other computer readable media) and manner as may be specified in that scheme.

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(4) Such return shall be deemed to be a return furnished under section 139(1).
Q. What is 'Permanent Account Number"? Discuss the procedure for allotment of this number and
issues. List out persons who are liable to apply for allotment of PAN. What are the cases where quoting
of PAN is compulsory?
Permanent Account Number is basically a method of identifying a taxpayer on the computer system
through a unique All-India number so that all information relating to that taxpayer, e.g. taxes paid, refunds
issued, outstanding arrears, income disclosed, transactions entered etc. can be linked to him through the
computer system. Processing of return of an assessee or other actions on AST software is not possible
unless PAN has been allotted to him and is linked to the AO code of the Assessing Officer who is trying to
process that return.
The old Series of Permanent Account Number: Earlier the assessees of the Income-tax Department were
identified by their General Index Register (GIR) Number. This was essentially a manual system. The GIR
number was unique only within an Assessing Officers Ward / Circle and not throughout the country. To
overcome these shortcomings, Permanent Account Number (old series) was first introduced in 1972 and
made statutory u/s 139A of the Act w.e.f. 1st April, 1976. Blocks of Permanent Account Numbers were
allotted to each Commissioner Charge by the Board. The Commissioners made the allotment of
Permanent Account Numbers to assessees under various Assessing Officers in their charge from within
the Block allotted to them. Initially the allotment was made manually. Computerised allotment was
introduced through 36 computer centres covering the entire country in 1985. However, the PAN under
old series failed to meet the desired objectives for following reasons:
• No database was maintained and there was no check to avoid allotment of multiple PANs to a taxpayer;
• The data captured under the computerised system was not structured and was limited to very few
parameters – Name, Address, Status and designation of A.O.;
• The allotment of PAN was not centralised- an assessee could apply for allotment of PAN in different
centres and get a distinct PAN from each centre, due to which all India uniqueness could not be achieved.;
• PAN was not permanent as jurisdiction of the assessee was part of the PAN and, therefore, was prone
to changes with the change in jurisdiction;
Permanent Account Number under new series: Since a taxpayer can make payment of taxes or have
monetary transaction anywhere in India, a unique all India taxpayer identification Number is essential for

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linking and processing transactions / documents relating to a taxpayer on computers, as also for data
matching. Therefore, a new series of Permanent Account Number was devised which took care of the
above limitations. Section 139A of the Act was amended w.e.f. 1.7.95 to enable allotment of PAN under
new series to persons residing in areas notified by the Board. Applications for allotment of PAN under
new series was made mandatory in Delhi, Mumbai and Chennai w.e.f. 1.6.96, and in rest of the country
w.e.f. 11.2.98.
Objectives sought: PAN was introduced keeping in view the following objectives:
i. to facilitate linking of various documents and information, including payment of taxes, assessment,
tax demand, arrears etc. relating to an assessee.
ii. to facilitate easy retrieval of information.
iii. to facilitate matching of information relating to investment, raising of loans and other business
activities of taxpayers collected through various sources, both internal as well as external, for widening of
tax base and detecting and combating tax evasion through non-intrusive means.
Structure of the new series of PAN: The Permanent Account Number under new series is based on
following constant permanent parameters of a taxpayer and uses Phonetic Soundex code algorithm to
ensure uniqueness:
i. Full name of the taxpayer;
ii. Date of birth / Date of Incorporation;
iii. Status;
iv. Gender in case of individuals; and
v. Father’s name in case of individuals (including in the cases of married ladies)
These five fields are called core fields, without which PAN cannot be allotted.
The PAN under the new series is allotted centrally by a customised application system (IPAN / AIS) for all-
India uniqueness. The system automatically generates a 10-character PAN using the information in above
five core fields. PAN has the following structure:
Structure of PAN- AAA S A 1234 A
First Three Digit Alphabetic series running from AAA to ZZZ

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Fourth Digit Status (I.e. P For Personal, C for Corporate, F for Firm, H for Hindu
Undivided Family Etc.)
Fifth Digit First character of assessee’s Last Name/ Surname
Next Digit Sequential Number running from 0001 to 9999
Last Digit Alphabetic Check digit
PAN STRUCTURE: The phonetic PAN (PPAN) is a new concept which helps prevent allotment of more than
one PAN to assessees with same/ similar names. AIS works out the PPAN based on some important key
fields of an assessee using an internal algorithm. At the time of PAN allotment, the PPAN of the assessee
is compared with the PPANs of all the assessees to whom PAN has been allotted all over the nation. If a
matching PPAN is detected, a warning is given to the user and a duplicate PPAN report is generated. In
such cases, a new PAN can only be allotted if the Assessing Officer chooses to override the duplicate PPAN
detection.
A unique PAN can be allotted under this system to 17 crore taxpayers under each alphabet under each
status (i.e. individual, HUF, Firm, Company, Trusts, Body of Individuals, Association of Persons etc.)
Jurisdiction: The Permanent Account Number! Card does not by itself indicate jurisdiction, as jurisdiction
gets changed frequently and is not a permanent information. However, in the database each PAN is linked
to a 10 digit Assessing Officer code indicating the jurisdiction of the taxpayer. This AO code defines the
Chief Commissioner Region, the Commissioner’s Charge, the Joint Commissioner Range, and the place
and designation of the Assessing Officer(s). Any authorised user of the Income Tax Application systems
can, by making a query on any PC on the Income Tax network find out the Assessing Officer for a given
PAN.
Mandatory Requirement to obtain PAN

The following persons are required to obtain a PAN –
If income Exceeds Exemption Limit or Turnover Exceeds Rs. 5,00,000 (Rs. 5 Lakh): Application should be
submitted to obtain PAN before May 31 of the assessment year for which the income exceeds the

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maximum amount chargeable to tax or before the end of the accounting year for which the gross turnover
or receipts exceed Rs. 5,00,000.
Charitable Trust: A person who is required to furnish return of income under section 139(4A) (i.e.,
charitable trust) is required to obtain PAN.
Financial transaction in aggregate of Rs. 2,50,000 or more: Any resident person (not being an individual)
who enters into a financial transaction of an amount aggregating to Rs. 2,50,000 or more during a financial
year (as well as managing director, director, partner, trustee, author, founder, karta, chief executive
officer, principal officer or office bearer of such person or any person competent to act on behalf of such
person) is required to obtain PAN with effect from April 1, 2018.
Person specified by the Central Government: The Central Government has power to notify (for collection
of any information) any person to apply for PAN. For this purpose, the following persons have been
notified by the Central Government and these persons shall apply to the Assessing Officer for PAN –
exporters/importers, assessees under central excise/service tax/sales tax.
Allotment by Assessing Officer of his own: Besides above cases, the Assessing Officer may also allot a
PAN to any other person by whom tax is payable. Any other person may also apply for a PAN.
Who is required to apply for Permanent Account Number: Under Section 139A(1) of the Income-tax Act,
1961 following categories of persons are expected to apply and obtain Permanent Account Number:
i. Persons who are already assessed or assessable to Income-tax;
ii. Persons who are carrying on any business or profession where total sales / turnover / gross receipts
are or is likely to exceed Rs. 5,00,000/- in any previous years;
iii. Trusts;
iv. Any class or classes of persons by whom tax is payable under the Income-tax Act or any tax or duty
is payable under any other law for the time being in force including importers and exporters whether any
tax is payable by them or not.
The Assessing Officer can also allot Permanent Account Number to any could other person by whom tax
is payable. Any other person can also apply to the Assessing Officer for allotment of a Permanent Account
Number. All assessees who had earlier been allotted a Permanent Account Number were expected to
apply for Permanent Account Number under new series, so that a structured data base be set up in respect
of all persons having Permanent Account Number under new series.
Coverage of PAN: Permanent Account Number covers individuals, HUF, partnerships, firms, companies,
body of individuals, trusts, and all other persons who are assessable to tax and /or come under the

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purview of Section 139A. PAN under the new series is allotted on the basis of Form 49A filled up by the
applicants. Section 139A provides that no person can hold more than one PAN.
Allotment of PAN
Bulk allotment of PAN in batch process through IPAN: PAN can be allotted in batch mode using IPAN
system centrally through Computer Centres. It can also be allotted on-line by Assessing Officers using AIS
system from their computers on the network. In Batch mode, applications in Form 49A for allotment of
PAN are received by the Assessing Officers. After basic verification, these are sent to the Computer
Centres where data is entered on computers using the IPAN application system, and is then transferred
to the National Computer Centre, Delhi through high speed dedicated leased data circuits. The National
Computer Centre checks the taxpayer database and allots a new PAN if the applicant has not been allotted
such a number earlier. The PANs thus allotted are transmitted back to the concerned Computer Centre
which prints the allotment letters / PAN Cards and issues the same to the taxpayers. This process is
adopted for:
i. initial bulk allotment of PAN, and also
ii. for stations where network is not yet operational.
iii. PAN allotment during peak periods e.g. at time of due dates for returns.
iv. PAN allotment when the network link between the AO’s building and the Computer Centre, or
between the Computer Centre and NCC is not available for any appreciable amount of time.
On-line allotment through AIS: On-line allotment of PAN by the AOs themselves is made using the AIS
application system at stations where network has become functional. Persons applying for PAN have to
file applications in Form 49A with their Assessing Officer. The A.O. or his staff enters the details in Form
49A on the computer using the AIS application. As soon as data entered on the A.O.’s computer is
transmitted to the National Computer Centre across high speed leased lines, PAN is allotted from NCC,
and the number is transmitted back to the A.O.’s computer. The A.O. can then generate the intimation
letter on his computer. Thereafter the A.O. must send the PAN application form and photograph of the
taxpayer to the Computer Centre for printing and issue of the PAN card to the latter.
Core deficiency cases: Allotment of PAN is made on the basis of certain constant parameters! details of
the person which are permanent and ensure uniqueness. In case any of the five core fields are incorrectly
or incompletely filled PAN cannot be allotted. In such cases deficiency letters are sent to the applicants
for obtaining the deficient information, and only after receipt of replies from the applicants can a PAN be
allotted.

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Correction / change in PAN data / address etc. : Any modification in core data relating to the name of the
taxpayer, father’s name, date of birth / incorporation can be made, based on documentary proof, by the
Assessing Officer in case the PAN, is in AIS, In cases in IPAN database, such modification can be made by
the data base administrator of the Computer Centre. The staff of the Assessing Officer can, however,
modify details in other columns including address. The details of a PAN can be verified from any of the
PCs on the Income-tax network.
Recording of events: As the name indicates the number is permanent throughout the life of a taxpayer.
The system provides for recording of events, such as:
i. the death of an individual;
ii. partition of a Hindu Undivided Family;
iii. dissolution of a partnership firm;
iv. Winding up, amalgamation, merger of companies etc.
PAN Cards: All individual taxpayers are issued PAN cards with their Permanent Account Number, name,
father’s name, date of birth, photograph and signature. All other categories of taxpayers are issued PAN
Card without photograph and signature. The photograph and signature of the applicant are scanned
stored in the Computer centre. PAN cards are printed and issued from the Computer Centre. Only the
permanent details of the persons are printed on the PAN cards. PAN Cards for Individuals contain:
i. PAN (with built in status of the assessee and check alphabet)
ii. Full name
iii. Full name of father
iv. Date of birth
v. Photograph
vi. Signature
PAN cards for persons other than individuals contain:
a. PAN (with built in status of the assessee and check alphabet)
b. Full Name
c. Date of Incorporation
In the case of bulk allotment, before a PAN card is printed by the Computer Centres, all the information
which is printed on the PAN card, namely, full name, father’s name, date of birth/incorporation etc., are
checked with reference to the application filed in Form 49A, through a process known “PAN preview”.
Address is not printed on the PAN Card as the same can change and is not permanent. Names of partners,
directors, members of HUF are not printed on the PAN cards as it is not possible to print a large number

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of names on one PAN card. The partners / directors / members can, however, be issued PAN cards in their
individual capacity.
Mandatory quoting of PAN: Under Section 139A (5) (a)/ (b) persons who have been allotted a PAN are
required to quote the same on their returns of income, challans for payment of taxes and all
correspondence with the Income-tax department.
Under Section 139A (5)(c) the Central Board of Direct Taxes has powers to notify transactions where
quoting of PAN would be compulsory. Rule 1 14B specifies the transactions where quoting of PAN is
mandatory by the concerned persons.
Q. Give a list of eight transactions for which furnishing PAN is mandatory. Who are exempted from the
requirement of quoting Permanent Account Number in their documents and correspondences?
Permanent Account Number or PAN serves as an important tool for estimating the total tax revenue
generated in the country. Apart from that PAN is also one of the ID proofs for many financial transactions,
including tax payments, TDS/TCS credits, returns of income, specified transactions, correspondence etc.,
and so on.
As per Rule 114B of the Income Tax Rules, the following are the transactions in which quoting of PAN is
mandatory by every person except the Central Government, the State Governments and the Consular
Offices:
1. Sale or purchase of a motor vehicle or vehicle as defined in the Motor Vehicles Act, 1988 other
than two-wheeled vehicles.
2. Opening an account [other than a time-deposit referred at point No. 12 and a Basic Savings Bank
Deposit Account] with a banking company or a co-operative bank
3. Making an application to any banking institution for the issue of a credit or debit card.
4. Opening of a demat account with a depository, participant, custodian of securities or any other
person registered under SEBI (Securities and Exchange Board of India). A demat account is an
account that is used to hold shares and securities in electronic format.
5. Payment in cash of an amount exceeding Rs. 50,000 to a hotel or restaurant against the bill at any
one time.
6. Payment in cash of an amount exceeding Rs. 50,000 in connection with travel to any foreign
country or payment for the purchase of any foreign currency at any one time.
7. Payment of an amount exceeding Rs. 50,000 to a Mutual Fund for purchase of its units.

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A mutual fund is a professionally managed investment fund that pools money from many investors to
purchase securities. These investors may be retail or institutional in nature.
1. Payment of an amount exceeding Rs. 50,000 to a company or an institution for acquiring
debentures or bonds issued by it.
Debentures are issued by private/public companies for raising capital from investors. Bonds are
backed by the assets of the issuer whereas debentures are not secured by any of the physical assets
or collateral.
1. Payment of an amount exceeding Rs. 50,000 to the Reserve Bank of India for acquiring bonds
issued by it.
2. Deposits of cash exceeding Rs. 50,000 during any one day with a banking company or a
cooperative bank. Moreover, even the deposits of cash aggregating to more than Rs. 2,50,000
during the period of 09th November 2016 to 30th December 2016 with a banking company,
cooperative bank or post office.
3. Payment in cash for an amount exceeding Rs. 50,000 during any one day for the purchase of bank
drafts or pay orders or banker’s cheques from a banking company or a co-operative bank.
4. A time deposit of amount exceeding Rs. 50,000 or aggregating to more than Rs. 5 lakh during a
financial year with – (i) a banking company or a co-operative bank (ii) a Post Office; (iii) a Nidhi
referred to in section 406 of the Companies Act, 2013 or (iv) a non-banking financial company
5. Payment in cash or by way of a bank draft or pay order or banker’s cheque of an amount
aggregating to more than Rs. 50,000 in a financial year for one or more pre-paid payment
instruments, as defined in the policy guidelines for issuance and operation of pre-paid payment
instruments issued by Reserve Bank of India under section 18 of the Payment and Settlement
Systems Act, 2007 to a banking company or a co-operative bank or to any other company or
institution. [As amended by Finance (No. 2) Act, 2019]
6. Payment of an amount aggregating to more than Rs. 50,000 in a financial year as life insurance
premium to an insurer
7. A contract for sale or purchase of securities (other than shares) for an amount exceeding Rs. 1
lakh per transaction
8. Sale or purchase, by any person, of shares of a company not listed in a recognised stock exchange
for an amount exceeding Rs. 1 lakh per transaction.

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9. Sale or purchase of any immovable property for an amount exceeding Rs. 10 lakh or valued by
stamp valuation authority referred to in section 50C of the Act at an amount exceeding ten lakh
rupees.
10. Sale or purchase of goods or services of any nature other than those specified above for an
amount exceeding Rs. 2 lakh per transaction.
NOTE:
1. A minor person can quote PAN of his father or mother or guardian provided he does not have any
income chargeable to income-tax.
2. Any person, who does not have PAN and enters into any of the above transaction, can make a
declaration in Form No.60.
3. Quoting of PAN is not required by a non-resident in a transaction referred at point 4 or 7 or 8 or
10 or 12 or 14 or 15 or 16 or 17
4. Any person who has an account (other than a time deposit referred at point no. 12 and a Basic
Saving Bank Deposit Account) maintained with a banking company or a co-operative bank. He will
be required to furnish his PAN or Form No.60 on or before 30-06-2017 if he has not quoted
his PAN or furnished Form No. 60 at the time of opening of such account or subsequently.
Persons exempted from obtaining PAN

• Person who has agricultural income and is not in receipt of any other income chargeable to tax.
However, in case of specified transactions such person is required to furnish declaration in Form No.
61.
• Non-resident
• Central Government, State Government and consular offices in transactions where they are payer.
Q. What do you mean by ‘Income Exempted from Tax’? State eight incomes which are entirely exempt
from Income Tax.
Exempt Income

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Income that is non-taxable is called as exempt income. Under Section 10, there are different sub-sections
that define what kind of income is exempt from tax. This can range from agricultural to house rent
allowance.
Any income that an individual acquires or earns during the course of a financial year that is deemed to be
non-taxable is referred to as ‘Exempt Income’. As per the Income Tax Act, there are specific kinds of
income that are exempt from tax as long as these types of income fulfil the guidelines and provisions
outlined in the Act. Exempt income comes in many forms such as the interest received through agricultural
means, interest received through PPF, long term capital gains earned through shares and stocks, and much
more. However, there is still some debate on what exactly constitutes ‘exempt income’, and if such
income is required to be declared by the taxpayer when filing his or her income tax returns.
Income Exempt from Tax as Per Section 10: Most income that is exempted from tax is listed under Section
10 of the Income Tax Act. This section contains a list of income that is deemed or considered to be free
from taxation.
Exempted income specified under Section 10 is as follows:
• Section 10(1) - Income earned through agricultural means
• Section 10(2) - Any amount received by an individual through a co-parcener from an HUF
• Section 10(2A) - Income received by partners of a firm, as shared between them
• Section 10(4)(i) - Any interest that has been paid to a person who is not a resident Indian
• Section 10(4)(ii) - Any interest that has been paid to the account of a person who is not a resident
Indian
• Section 10(4B) - Any interest that has been paid to a person who is not a resident Indian, but of
Indian origin
• Section 10(5) - Concession on travel given to an employee who is also a citizen of India
• Section 10(6) - Any income earned or received by a non-Indian citizen
• Section 10(6A), (6B), (6BB), (6C) - Government tax paid on the income of a foreign firm
• Section 10(7) - Allowances received by government employees stationed abroad
• Section 10(8) - Income earned by foreign employees in India under the Cooperative Technical
Assistance Program
• Section 10(8A) - Income earned by a consultant
• Section 10(8B) - Income earned by a consultant’s staff or employees
• Section 10(9) - Income earned by any family member of a foreign employee in India under the
Cooperative Technical Assistance Program

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• Section 10(10) - Gratuity

• Section 10(10A) - The commuted value of the pension earned by an individual
• Section 10(10AA) - Any amount earned via encashment of leave at the time of retirement
• Section 10(10B) - Compensation paid to workers due to relocation
• Section 10(10BB) - Any remittance obtained as per the Bhopal Gas Leak Disaster Act 1985
• Section 10(10BC) - Any compensation obtained in the event of a disaster
• Section 10(10C) - Compensation in lieu of retirement from a PBC or any other firm
• Section 10(10CC) - Any income received through taxation on perquisites
• Section 10(10D) - Any amount acquired via a life insurance policy
• Section 10(11) - Any payment received via the Statutory Provident Fund
• Section 10(12) - Any payment received via a recognised or authorised Fund
• Section 10(13) - Any payment received through a Superannuation Fund
• Section 10(13A) - House Rent Allowance
• Section 10(14) - Allowances utilised to meet business expenses
• Section 10(15) - Income received in the form of interest
• Section 10(15A) - Income received by an Indian firm through the lease of an aircraft from a foreign
firm or government
• Section 10(16) - Income in the form of a scholarship
• Section 10(17) - Allowances granted to MLCs, MLAs or MPs
• Section 10(17A) - Income received in the form of a government award
• Section 10(18) - Income received in the form of pension by winners of awards for heroism
• Section 10(19) - Income received by family members of the armed forces in the form of pension
• Section 10(19A) - Income received from a single palace of an ex-ruler
• Section 10(20) - Income received by a localised body or authority
• Section 10(21) - Income received by an association involved with scientific research
• Section 10(22B) - Income earned by a news or broadcasting agency
• Section 10(23A) - Income earned by certain Professional Institutes
• Section 10(23AA) - Income acquired through Regimental Fund
• Section 10(23AAA) - Income acquired through an employee welfare fund
• Section 10(23MB) - Insurance pension fund income
• Section 10(23B) - Income earned by village industry development institutions
• Section 10(23BB) - Income earned by state level Khadi and Village Industries Board

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• Section 10(23BBA) - Income earned by regulatory bodies of institutions affiliated with religion and
charity
• Section 10(23BBB) - Income received by the European Economic Community
• Section 10(23BBC) - Income received through SAARC funded regional projects
• Section 10(23BBE) - Income received by the IRDA
• Section 10(23BBH) - Income received through Prasar Bharti
• Section 10(23C) - Income received by any individual through certain specified funds
• Section 10(23D) - Income earned via Mutual Funds
• Section 10(23DA) - Income earned via a Securitisation Trust
• Section 10(23EA) - Income earned through an IPF
• Section 10(23EB) - Income received by the Credit Guarantee Trust for Small Industries
• Section 10(23ED) - Income exemption of IPF
• Section 10(23DFB) - Income exemption of specified income received by Venture Capital Firms,
Funds or Businesses
• Section 10(24) - Income earned by authorised trade unions
• Section 10(25) - Income earned via provident funds and superannuation funds
• Section 10(25A) - Income earned via Employee’s State Insurance Fund
• Section 10(26), 10(26A) - Income earned by Schedule Tribe Members
• Section 10(26AAN) - Income earned by an individual of Sikkimese origin
• Section 10(26AAB) - Marketing regulation with regards to agricultural produce
• Section 10(26B) - Income earned by corporations established for the upliftment of backward
tribes and classes
• Section 10(26BB) - Income earned by corporations established for the protection of Minority
interests
• Section 10(26BBB) - Income earned by corporations established for former servicemen
• Section 10(27) - Income earned by cooperative societies established for protection of scheduled
castes and tribes’ interests
• Section 10(29A) - Income received by Community Boards
• Section 10(30) - Income earned in the form of subsidies via the Tea Board
• Section 10(31) - Income earned in the form of subsidies via the concerned Board
• Section 10(32) - Income earned by a child in accordance with Section 64 of the Income Tax Act
• Section 10(33) - Income earned through Unit Trust of India capital asset transfer

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• Section 10(34) - Income earned in the form of dividends through an Indian firm
• Section 10(34A) - Income earned by a shareholder through the buyback of unlisted companies
• Section 10(35) - Income received through the sale or transfer of Unit Trust of India units as well
as other mutual funds
• Section 10(35A) - Income from a securitisation trust that is exempt
• Section 10(36) - Income received on the sale of shares under specific conditions
• Section 10(37) - Any capital gains made on the mandatory acquirement of land in relation to urban
agriculture
• Section 10(38) - Any long-term capital gains made from share and security transfers that fall under
the purview of Security Transaction Tax
• Section 10(39) - Any income received from any international event or function relating to sports
• Section 10(40) - Any income acquired in the form of a grant from a company deemed to be a
subsidiary of the parent company
• Section 10(41) - Any income received on any asset transfer of a company or project that conducts
power distribution, generation and transmission
• Section 10(42) - Any income earned by any authority that has been established by more than one
country
• Section 10(43) - Any income in relation to reversal of mortgage
• Section 10(44) - Income generated through the NPS Trust
• Section 10(45) - Any allowance or perks granted to the chairman or any member of the UPSC
• Section 10(46) - Any income that comes under the category of ‘specified income’ with regards to
specific authoritative bodies
• Section 10(47) - Any income that is exempt under the category of infrastructure debt fund
• Section 10(48) - Any income earned by a foreign firm or company due to crude oil sales within
India
• Section 10(49) - Any income earned by the NFHC (National Finance Holdings Company)
Disclosure of Exempted Income for Salary Allowances: Those individuals or taxpayers who receive
income in the form of salaries are permitted specific allowances that are non-taxable. Disclosure of this
type of exempted income is required to be made under ‘’Schedule S - Details of Income from Salary’’ when
filing tax returns under ITR-2.

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Exemptions allowed under the following heads are required to be disclosed by a salaried individual when
filing his or her income tax returns:
• HRA
• LTA
• Encashment of Leave
• Pension
• Gratuity
• Voluntary Retirement Scheme
• Perquisites
Disclosure of Exempted Income for Non-Salary Allowances: The Income Tax Act also specifies specific
types of non-salary income that are also exempt from tax. These incomes include dividends, agricultural
income, interest on funds, capital gains etc. Disclosure of these types of income is required to be made by
the taxpayer under ‘’Schedule EI - Details of Exempt Income’’ when filing tax returns under ITR-1
Q. Explain the nature of exempted income of the Political Party. What are the conditions for exemption
from payment of Income tax by the Political Party?
The income tax law prevalent in India has shown a kind and compassionate treatment. Section 13A of the
Income-tax Act, 1961 confers tax-exemption to recognized political parties for income from house
property, income by way of voluntary contributions, income from capital gains and income from other
sources. In other words, only income under the head salaries and income from business or profession are
chargeable to tax in the hands of political parties in India.
These political outfits can enjoy the above-said tax-exemption if the following conditions are satisfied:
a) If such political party keeps and maintains such books of accounts and other documents as would enable
the assessing officer to properly deduce the income therefrom
b) In respect of each such voluntary contribution [other than contribution by way of electoral bond] in
excess of twenty thousand rupees, such political party keeps and maintains a record of such contribution
and the name and address of the person who has made such contribution.
c) the accounts of such political party should be audited by the Chartered Accountant.
d) The said political party should receive any donation in excess of Rs 2,000 by an account payee cheque
drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank

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account or through electoral bond (that is, cash donation in excess of Rs 2000 is not allowed) (wef A.y
2018-19).
Since the income of political parties are governed by the special provisions of section 13A of the Income
tax Act, 1961, the provisions of Chapter IV-D of the Act which are applicable for normal profits and gains
of normal profession cannot be applied in the cases of political parties. Further, income of political parties
from voluntary contributions cannot be said to be income from profession so as to attract section 44AA
or 44AB or section 271B of the Income-tax Act. However, the political parties are required to maintain the
accounts and getting them audited by a chartered accountant, as provided u/s 13A for claiming
exemption.
Under section 139(4B) of the Income tax Act, 1961, political parties are however under a statutory
obligation to file return of income in respect of each assessment year. If and when the total income of a
political party exceeds the maximum amount, which is not chargeable to tax, the liability of the political
party to file ROI voluntarily arises. For this purpose, total income has to be computed without giving effect
to provisions of section 13A. In case of political parties, the returns are required to be signed by the ‘Chief
Executive Officer’ of the parties.
Further, the amendment made in 2003 to the Representation of the People Act, 1951 requires that the
treasurer of every political party must file a declaration in respect of donations exceeding Rs. 20,000 at a
time.
Accordingly, the party treasurer must file a report of contributions received to the Election commission
before the due date for furnishing the return of income under Section 139 of the Income tax Act. More
importantly, section 13A has been amended and tax exemption for a political party is contingent upon the
submission of the report by the party treasurer. However, the parties can receive any amount below Rs
20,000 from any person without submitting the report from the party treasurer.
Section 80GGB is a new insertion in the Income-tax Act, 1961. This enables Indian companies to get full
deduction in their income-tax assessments for contributions made to political parties. Interestingly, there
is no ceiling fixed on the amount of such contribution. Section 80GGC gives similar deduction for non-
company taxpayers. Advertisements in souvenirs published by political parties would also be eligible for
deduction. However, cash donation is not eligible for deduction under the aforesaid section
For this purpose, the term “political party” means a political party registered under section 29A of the
Representation of the People Act, 1951.
NOTES
1. Tax exemption of political party is governed by – Section 13A

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2. Return of Income to be filed by Political Party – Section 139 (4B)

3. ITR -7 to be used for filing ROI-Political Parties to File ITR-7 electronically under digital signature
4. Deduction to the person giving Donation to Political Party:
• Companies- Section 80GGB
• Non-Companies – Section 80GGC
5. Political part to be registered u/s 29 of Representation of People act.
6. Books of Political Party should be audited in any case to get exemption.
7. Exemptions available u/s 13A:
• Income from H/P
• Income from Voluntary Contribution
• Income from CG
• Income from OS
8. Proper records should be maintained and a declaration is to be filed with Election Commission regarding
receipt of Donation exceeding Rs. 20000 before the due date of furnishing the Income tax Return.
9. Contribution exceeding Rs. 2000 should be received by an account payee cheque drawn on a bank or
an account payee bank draft or use of electronic clearing system through a bank account or through
electoral bond (wef A.y 2018-19)
10. Exemption u/s 13A is now contingent to the filing of declaration to EC.
Q. Explain the importance of notice under section 142(1) and 143(2) of Income Tax Act, 1961.
1. Notice under Section 142(1) is usually served to call upon documents and details from the tax payers,
and to take a particular case under assessment.
The basic purpose is to inquire the details of the assessee before making assessment under the Act. It can
be related to ‘Preliminary Investigation’ before starting the assessment.
By serving a notice u/s 142(1) the assessing officer, may call upon the assessee
1. To furnish a return of income in respect of which he is assessable, where he has not filed his return of
income within the normal time allowed.
– It may include return in respect of his own income or income of another person for which he is liable to
be assessable. Example- In case of legal guardian/ deceased person.
2. To produce accounts or documents which the AO may require for the purpose of making an assessment.

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3. To furnish in writing any information on matters including statement of the assessee. For Example-
statement of assets and liabilities of the assessee on a particular date.
The AO may or may not start assessment after compliance with this notice, dependent upon the facts of
assessee. If AO is satisfied with the produced documents or return, he may not start with the assessment
process.
Compliance with this notice u/s 142(1) is mandatory even if the tax payer is of the opinion that the
accounts/documents requested are irrelevant.
If assessee do not comply with the provisions of this section:
– It may result in Best Judgement Assessment u/s 144, or
– Penalised under Sec 271(1)(b) i.e. Rs 10,000 for each failure, or
– Prosecution under Sec 276D which may extend up to 1 year and with fine.
2. Notice under Section 143(2) – Scrutiny Notice: This notice is basically sent after notice u/s 142(1) has
already been sent. It means AO was not satisfied with the produced documents or may be AO has not
received any documents.
If you get Notice under Section 143(2) it means your return has been selected for detailed scrutiny by your
Assessing Officer.
No notice under this sub-section shall be served on the assessee after the expiry of six months from the
end of the financial year in which the return is furnished.
Where the assessee has not furnished his return of income, then notice under Section 143(2) cannot be
issued to him and also scrutiny assessment cannot be done. In such case, direct Best Judgement
Assessment under Section 144 is done by the AO.
The AO can reduce the income below the returned income and can assess the loss higher than the
returned loss under Scrutiny Assessment as per Sec 143(3).
The notice might ask you to produce documents in support of deductions, exemptions, allowances, reliefs
other claim of loss you have made and provide proof of all sources of income.
Section 143(2) enables the Assessing Officer to make a regular assessment after a detailed inquiry.
If assessee do not comply with the provisions of this section:
– It may result in Best Judgement Assessment u/s 144, or
– Penalised under Sec 271(1)(b) i.e. Rs10,000 for each failure, or
– Prosecution under Sec 276D which may extend up to 1 year and with fine.

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3. Notice under Section 143(1) – Letter of Intimation: Three types of notices can be sent under section
143(1)
1. Intimation where the notice is to be simply considered as final assessment of your returns since the AO
has found the return filed by you to be matching with his computation under section 143(1).
2. A refund notice, where the officer’s computation shows amount excessively paid by the assessee.
3. Demand Notice where the officer’s computation shows shortfall in your tax payment. The notice will
ask you to pay up the tax due within 30days.
No intimation under this sub-section shall be sent after the expiry of one year from the end of the financial
year in which the return is made
How to reply to notice received under section 143(1): 1. If details provided by the taxpayer and as verified
by the Income Tax department match. Then the notice will serve as final assessment of the return with
nothing to be done on part of the taxpayer and the department. Just a printout of the same shall be taken
and kept along with the income tax file. Take a printout of the same and file it with your income tax papers.
2. If you are getting Refund, wait for the cheque or transfer into your account.
3. If there is a tax demand then this intimation becomes Notice of Demand under section 156. The notice
says “In case of Demand, this intimation may be treated as Notice of demand u/s 156 of the Income Tax
Act, 1956. Accordingly, you are requested to pay the entire Demand within 30 days of receipt of this
intimation”.
For example, if Income as disclosed by taxpayer is Rs 6,00,000 and tax duly deposited on same but the
department computes his income as Rs 6,50,000, then tax on Rs 50,000 needs to be paid. The taxpayer
will have to pay such tax or of he thinks that the demand is wrong then he must prove his case and file
rectification.
4. Notice under Section 148 – Income escaping assessment: If AO has reasons to believe that any income
chargeable to tax has escaped assessments, he may assess or reassess such income, which is chargeable
to tax and has escaped assessment.
To initiate proceedings under Sec 147, the AO is required to have a reason necessarily.
The onus of stating the reasons is on AO. Also,
Notice under Sec 147 cannot be sent in regard to the income involving matters which are the subject
matter of any appeal, reference or revision.

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This tangible reason should give him a belief that there is income which has expected assessment. The
Supreme Court has clarified that the act nowhere states that the beliefs or reasons of AO should ultimately
prove to be escaped income in order to be valid reason.
Even though if the contention of the AO shall stand invalid in any case but the beliefs were reasonable on
his part, the Notice and such assessment shall stand valid.
5. Notice under Section 156- Notice of Demand: Where any tax, interest, penalty, fine or any other sum
is payable in consequence of any order passed, the AO shall serve upon the assessee a notice of demand,
specifying the sum do payable.
The notice of demand is received in the cases where assessment has been made in respect to assessee.
Generally, notice of demand is not received to every assessee for regular payment of taxes. Assessee on
his own pays the taxes with self-assessment.
The tax so demanded is payable, generally within 30 days of the service of notice of demand, which may
be reduced by the AO with prior approval of JCIT.
In case of delay in payment of tax, the assessee shall be deemed to be in default and liable to pay simple
interest u/s 220(2) @ 1% for every month or part thereof from the end of the period allowed u/s 156,
further penalty u/s 221(1) may be imposed.
6. Notice under Section 139(9) – Defective Return: A return shall be considered as a defective return
unless it is accompanied by the required documents under the Act.
e.g. – Annexures, statements, proofs of tax, reports etc.
If the AO considers that the return filed by the assessee is defective, he may intimate the defect to the
assessee and gave him an opportunity to rectify the defect within 15 days from the date of such intimation
or within such extended period as may be allowed by the AO.
If the defect is not rectified within the aforesaid period, the return shall be considered as an invalid return
and accordingly the assessee will be deemed to have furnished no return.
Provided in the case where assessee rectifies the defect after the aforesaid period but before the
completion of assessment, the AO may condone the delay and treat the return as a valid return.
7. Notice under Section 245 – Set off of refunds against tax remaining payable: Where under any of the
provisions of this Act, a refund is found to be due to any person, the Assessing Officer, Deputy
Commissioner (Appeals), Commissioner (Appeals) or Principal Chief Commissioner or Chief Commissioner

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or Principal Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund,
set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable
under this Act by the person to whom the refund is due, after giving an intimation in writing to such person
of the action proposed to be taken under this section.
Notice under Section 245 is more of intimation letter and less of demand notice.
Under this notice, the AO intimates the effect of the adjustments made with the amount due to assessee.
It indicates the adjusted amount which can be either merely intimation or demand notice of lesser amount
still payable after the adjustment.
Example: X filed his return of income for A.Y.2017-18 and the tax payable is Rs.5000. Mr.X is unaware of
this outstanding demand. Mr.X has filed his income tax return for A.Y. 2018-19 and the refund is due to
him Rs.10,000.
Now while processing the income tax refund of Rs.10,000 to Mr.X the income tax department deducts the
tax payable which is outstanding for A.Y.2017-18 and will pay the remaining Rs.5,000 to the assessee. But
the department can do so, only after intimate the same to the assessee by giving intimation u/s 245.
Q. Give a comprehensive study of Commissioner's Power of Revision w/s 263 and 264 of the Income
Tax Act, 1961. What is the remedy available to the 'assessee' against revisionary orders of the
Commissioner under section 263 of the said Act?
Section 263: The Principal Commissioner or Commissioner may call for and examine the record of any
proceeding under this Act, and if he considers that any order passed therein by the Assessing officer is
erroneous in so far as it is prejudicial to the interests of the revenue, he may after giving an opportunity
of being heard pass such order thereon as the circumstances of the case justify, including an order
enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
However, Assessee has an option to file an appeal in Income Tax Appellate Tribunal against the revision
order passed by CIT u/s 263.
Section 264: The Principal Commissioner or Commissioner may, either of his own motion or on an
application by the assessee for revision, call for the record of any proceeding under this act in which any
such order has been passed and may make such inquiry or cause such inquiry to be made and subject to

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the provisions of this act, may pass such order thereon, not being an order prejudicial to the assessee, as
he thinks fit.
However, in this case income tax act does not provide any remedy for filling appeal to higher income tax
authority. But, assessee has an option, he can take the benefit of Constitution of India. Article 226 provides
every citizen of India remedy to file WRIT petition in High Court against the order passed by income tax
department.
An assessee aggrieved by an order passed by the Assessing Officer (AO) may file an appeal against the
same, to the Dy CIT (A) or the CIT(A). As an alternative remedy the assessee may prefer an application to
the CIT for revising the orders passed by the AO. A remedy U/s 264 is contemplated by the Legislature
only to meet a situation faced by an aggrieved assessee who is unable to approach the appellate
authorities for relief and has no other alternative remedy under the Act. Even those orders which are not
appealable before the Dy CIT(A) or CIT(A), ma be referred by the assessee to the CIT for seeking revision
or modification. - Dwarka Nath Vs ITO 57 ITR p.349(SC).
A public duty is imposed on the revisional authority not only to entertain such application but also to deal
with the same in accordance with law after giving the aggrieved party a reasonable opportunity of being
heard as the discretion vested in him is a judicial discretion and has to be exercised judiciously. It is a
power to be exercised in the interest of justice to the assessee. It is also the duty of the revisional
authority to revise an assessment which is found to be erroneous on the admitted facts of the case OCM
Ltd (London) Vs CIT 138 ITR p.689(All). If he detects an error committed by the subordinate officer, he
has been given the right to correct it and pass such orders in relation thereto, as he thinks fit - Haryana
State Small Industries and Export Corporation Ltd Vs CIT 142 ITR p.293 (P & H).
By virtue of Explanation - 2 to S.264, the DyCIT(A) is deemed to be an authority subordinate to the CIT
and, therefore, orders passed by the DyCIT(A) can also be revised by the CIT.
2. Nature of Jurisdiction U/s 264: The power of revision conferred by S.264 on the CIT is not an
administrative power. It is a quasi – judicial power. He cannot permit his judgement to be influenced by
matters not disclosed to the assessee nor by dictation of another authority including any circular. — Sirpur
Paper Mills Ltd Vs CWT 77 ITR p.6 (SC).
The CIT has power to issue directions: S.264 is not a provision of law dealing with the question of
imposition of liability on the assessee. It is only a part of machinery section. It cannot be construed in a

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narrow manner. The CIT has the power U/s 264, to issue directions to the AO — Mohammadi Begum Vs
CIT 158 ITR p.622 (AP).
New ground can be entertained by the CIT: The revisional powers conferred by S.264 on the CIT are very
wide. It is open to the CIT to entertain even a new ground, not urged before the lower authorities, while
exercising revisional powers. — C.Parikh & Co Vs CIT 138 ITR p.689 (All). A new claim for deduction made
by the assessee in revision petition is to be examined on merits - Rashtriya Vikas Ltd Vs CIT 99 CTR
p.68(All).
The assessee can file a revision petition against an addition erroneously accepted by him: The CIT cannot
reject a petition for revision on the ground that the assessee itself had returned income which it claims in
the revision petition as not its income. In such a situation the CIT is bound to apply his mind to the question
whether the assessee is liable to be taxed in respect of that income. - Pt. Sheonath Prasad Sharma Vs CIT
66 ITR p.647 (All).
Even an order passed in violation of the principles of natural justice can be corrected U/s 264: Even an
order wherein the principles of natural justice have been ignored, can be corrected in exercise of revisional
powers U/s 264. - Mohammadi Begum Vs CIT 158 ITR p.622 (AP).
3. Orders against which a revision U/s 264, lies: The opening lines of S.264 define the scope of the orders
which may be revised under that section. A revision petition may lie only after an order has already been
passed by the concerned authority. A petition filed during the pendency of assessment or other
proceedings, does not lie. — Bhavana Chemicals Ltd Vs CST (1978) TLR p.2210 (All). S.264(4)(b) places a
ban on the CIT to revise any order where an appeal is pending before the DyCIT, against that order. Further
by virtue of S.264(4)(c) where the order has been made subject of an appeal to the CIT(A) or to the
Appellate Tribunal, the revisional powers of the CIT U/s 264 come to an end. In other words, it cannot be
exercised at tall during the pendency, or even after the disposal, of the appeal. The position does not
change even if the order of the appellate authority is challenged before the Appellate Tribunal by the IT
Department and not by the assessee. - CWT Vs Mrs. Kasturbai Walchand and others 177 ITR p.188(SC).
Scope of the expression ‘Subject of an appeal’
a) The CBDT has, vide circular No 367 dt 26.7.’83, clarified the scope of the expression ‘Subject of an
appeal’ as used in S.264(4)(c). The aforesaid circular is reproduced as follows:
“Section 264(4)(c) if the Income-Tax Act, 1961, provides that the Commissioner shall not revise any order
under that section where the order has been made the subject of an appeal to the Commissioner

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(Appeals) or to the Appellate Tribunal. A doubt has been raised whether in the following situations the
order can be said to have been made ‘subject of an appeal’:
(i) Where the appeal was withdrawn by the assessee and it was dismissed as such;
(ii) Where the appeal was dismissed on the ground that the appeal was incompetent;
(iii) Where the appeal was dismissed on ground of limitation.
b) The Board are of the view that the order cannot be said to have been made ‘subject of an appeal’ if the
appeal has been disposed of by the Commissioner (Appeals) or the Appellate Tribunal, without passing an
order under section 251(1) or 254(1) on merits.”
Order not appealable, may be made subject – matter of revision petitions
A petition for revision U/s 264, may be made against orders which are not appealable under the Statute.
Dwarka Nath Vs ITO 57 ITR p.349. Thus, an order of the AO refusing to grant interest U/s 214, can be
challenged by way of a revision petition to the CIT U/s 264.
Revision against levy of penal interest: A revision lies to the CIT against the levy of penal interest U/s
139(8), 215 or 217, against which no appeal has been provided for — CIT Vs Geetaram Kaliram 121 ITR
p.708 (All – FB). In Gupta Builders (P) Ltd Vs CIT 191 ITR p.114 (Bom), interest charged U/s 139(8), was
directed to be waived in full.
4. Time limit for filing revision petition U/s 264: Where the CIT, on his own, revises any order, such
revision must be done within one year from the date of the original order. If, however, an assessee makes
an application U/s 264, the same must be made within one year from the date of communication of the
order, or the date on which, he otherwise comes to know of it, whichever is earlier.
Condonation of delay in filing petition U/s 264: Proviso to S.264(3) empowers the CIT to admit and
entertain an application for revision U/s 264(1), if the assessee is prevented by ‘sufficient cause’ from
making the application within the specified period. The word ‘sufficient cause’ occurring in the proviso to
S.264(3) should receive a libral construction so as to advance substantial justice. In Collector, Land
Acquisition Vs Mst. Katiji & others 167 ITR p.471(SC), it was held that the court should adopt a liberal
approach in the matter of condonation of delay.
5. Nature of orders U/s 264

The jurisdiction conferred U/s 264 is a judicial one. In the exercise of this power the CIT must bring to bear
an unbiased mind, consider impartially the objections raised by aggrieved party and decide the dispute
according to procedure which is in consonance with the principles of natural justice. He cannot permit his

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judgement to be influenced by matters not disclosed to the assessee, nor by dictation of another authority
including any circular. - Sirpur Paper Mills Ltd Vs CWT 77 ITR p.6(SC).
Writs lie against orders passed U/s 264.: An order U/s 264 refusing to revise the order passed by a
subordinate authority, is amenable to writ jurisdiction of the High court. If tax beyond the legitimate
amount has been levied in a given case, it will be a case of an illegal demand which contravenes the
constitutional provisions that tax has to be imposed in accordance with the law. In such a case a petition
under Article 226 for a writ of certiorari to quash an unjust or illegal order of the CIT, is maintainable.
Dwarka Nath Vs ITO. 57, ITR p.349(SC).
5. Whether hearing is to be granted to the applicant: An applicant must be granted an oral hearing by
the CIT before disposing of his application U/s 264. A written submission cannot be substituted for oral
argument before the CIT, while dealing with a revision petition. The CIT should fix the date for hearing
and give an opportunity to the applicant to have his say in the matter - Dulalchand Pramanick Vs CIT 84
ITR p.720 (Ori) and Industrial Rubber Products Vs CIT. 194 ITR p.141(Mad). The same view was expressed
by the Apex Court in the case of Dwarka Nath Vs ITO 57 ITR p.349(SC). It was held in this case that it is
implicit in such revisional jurisdiction that the revising authority should give an opportunity to the party
affected to put forward his case. The Madras High Court in the case of S.K.Veeraraghavan Vs CIT 71 ITR
p.823(Mad), held that if the CIT does not give an opportunity of being heard to the assessee, his orders
are liable to be quashed.
6. Whether a copy of AO’s report is to be served on the applicant.: If after going through the revision
petition the CIT calls for, and in compliance thereof, the AO sends, a report, it is not necessary to apprise
the applicant with the contents of the report, if it does not contain any new material. As per the decision
of Allahabad High Court in the case of Asharfi Lal Vs ITO 66 ITR p.63(All), copy of AO’s report filed in
response to revision petition, need not necessarily be given to the assessee but it would be in the interest
of justice and fair-play, if a copy of such report is made available to the assessee. The assessee would thus
be in a position to appreciate whether the AO has travelled beyond the material existing on the record.
7. No revision till period of limitation for filing appeal, expires: As per S.264(4)(a) the CIT cannot revise
any order where an appeal against that order lies to the CIT(A) / DyCIT(A) or to the Appellate Tribunal but
the same has not been made and the period, within which such appeal may be made, has not expired.
But so far, the orders appealable to the CIT(A) or to the Appellate Tribunal, are concerned, the CIT may

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revise such orders even before the expiry of the period of limitation for filing such appeals, if the assessee
waives his right of such appeal. The fact of such waiver of right is to be specifically stated in the application
for revision.
8. The order U/s 264 cannot be prejudicial to the assessee: As per the provisions of S.264(1), the order
passed by the CIT U/s 264, cannot be prejudicial to the assessee. An order by the CIT declining to interfere
shall not be deemed to be an order prejudicial to the assessee, according to Explanation – 1 to S.264.
The order passed by the CIT U/s 264 should not be prejudicial to the assessee even indirectly. It was so
held in the case of ACIT Vs M.V.Kenlucky, 60 ITD p.492 (Pune – Trib). In this case, on a petition U/s 264
by the assessee the CIT set aside the assessment, with a direction to make a fresh assessment. The AO
completed the fresh assessment without any change in total income and tax originally assessed. The AO
also initiated penalty proceedings U/s 271(1)(c), though no such penalty proceedings were initiated in the
original order of the AO. The Hon. Tribunal held that order U/s 264 of the CIT, had indirectly resulted in
the levy of penalty U/s 271(1)(c) and as such was prejudicial to the interest of the assessee. The
cancellation of order U/s 271(1)(c) was accordingly held to be justified.
9. A Suggestion to the I.T. Authorities: An assessee can file a petition U/s 264 against an order passed by
DyCIT(A). However, no revision petition can be filed to the CIT against an order passed by the CIT(A), as
the CIT(A) is not subordinate to the CIT. This leads to discrimination against those assessment orders,
against which appeal lies to the CIT(A), vis-à-vis the assessment orders against which appeal lies to the
DyCIT(A). It is, therefore, suggested that a provision may be made in the Act whereby the appellate orders
passed by the CIT(A) could be revised by the Chief CIT, the CIT(A)being subordinate to the Chief CIT.
Q. When does an appeal lie to the Supreme Court?

Appeal to Supreme Court [Section 261]: The assessee or the Principal Commissioner or Commissioner
may prefer an appeal to the Supreme Court from any judgement of the High Court. However, the appeal
can lie to Supreme Court only if the High Court certifies the case to be a fit case for appeal to the Supreme
Court. Thus, this certificate of fitness is a must for preferring an appeal to the Supreme Court. If, however,
the High Court decides not to give such a certificate, then the aggrieved party may make an application to
the Supreme Court under Article 136 of the Constitution for Special Leave to Appeal against the decision
of the judgment.

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Hearing and Judgment by Supreme Court [Section 262]: The Supreme Court upon hearing any such case
shall decide the question of law raised therein and shall deliver its judgement thereon containing the
grounds on which such decision is founded. Where the judgment of the High Court is varied or reversed
in appeal, effect shall be given to the order of the Supreme Court in the manner provided in section 260A
in the case of a judgment of the High Court. The cost of the appeal shall be in the discretion of the Supreme
Court.
Filing of Appeal or Application for reference by Income Tax Authority [Section 268A]: The Hon'ble
Supreme Court in Berger Paints India Ltd. v CIT, Kolkata (2004) 266 ITR 99 (SC) has held that if the revenue
has not challenged the correctness of the law laid down by the High Court and has accepted it in the case
of one assessee, then it is not open to the Revenue to challenge the correctness in the case of other
assessees without just cause.
With a view to protecting the Revenue's right to file or not to file an appeal, the Act has inserted a new
section 268A so as to provide that—
1. The Board may issue orders, instructions or directions to other income tax authorities, fixing such
monetary limits as it may deem fit. Such fixing of monetary limit is to be for the purpose of
regulating filing of appeal or application for reference by any income tax authority under the
provisions of this Chapter.
2. Where an income-tax authority has not filed any appeal or application for reference on any issue
in the case of an assessee for any assessment year, due to abovementioned
order/instruction/direction of the Board, such authority shall not be precluded from filing an
appeal or application for reference on the same issue in the case of—
a. the same assessee for any other assessment year; or
b. any other assessee for the same or any other assessment year.
3. Where no appeal or application for reference has been filed by an income tax authority pursuant
to the above mentioned orders/instructions/directions of the Board, it shall not be lawful for an
assessee to contend that the income tax authority has acquiesced in the decision on the disputed
issue by not filing an appeal or application for reference in any case.
4. The Appellate Tribunal or Court shall have regard to the above-mentioned orders/
instructions/directions of the Board and the circumstances under which such appeal or
application for reference was filed or not filed in respect of any case.
5. Every order/instruction/direction which has been issued by the Board fixing monetary limits for
filing an appeal or application for reference shall be deemed to have been issued under sub-

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section (1) of this new section and all the provisions of this section shall apply to such
order/instruction/direction.
Q. Write notes on Self-Assessment Income and Income Escaping Assessment.

Individuals have to pay the Self-Assessment Tax (SAT) for income from other sources. There is no
specification for the date of payment. It can be paid online through a few simple steps. It can also be
calculated with a simple procedure.
Individuals are expected to compute the final liability of income tax after deducting the TDS amount from
the source of income as well as the advance tax payable for the financial year. When the year is almost
over, if there is any tax pending before filing an individual’s income tax return, a final amount that the
individual is liable for is calculated is known as the self-assessment tax. This is the final calculation before
filing the tax return. This is also known as SAT.
Why Pay Self-Assessment Tax?
Generally, SAT is payable by an individual related to income from other sources. For example, if an
individual has missed out on an income when making the final payment in the form of installment of their
advance tax, etc. It could also be a possibility that TDS was not deducted or done at a lesser rate against
the higher tax rate applicable on your income tax filing. It happens often for salaried individuals that a
fixed deposit or from short term bonds he or she have been able to earn a sizable amount and hence have
not mentioned it to your employer, driving the amount not to be considered for tax deduction. Therefore,
the self-assessment tax will be required. SAT or self-assessment tax is paid for a particular financial year
end. There is no specification on the date of payment of this tax. The ideal time is to pay it as soon as
possible, without waiting for the tax returns filing date, as a way to avoid payment of interest on the tax
amount.
Income Escaping Assessment

Income Escaping Assessment under section 147 is the assessment which is done by the Assessing Officer if
there is a reason for him to believe that income chargeable to tax has escaped assessment for any
assessment year. It gives power to him to re-assess or re-compute income, turnover etc. which has
escaped assessment.
Objective: The objective of carrying out Income Escaping Assessment u/s 147 is to bring any income which
has escaped assessment in the original assessment under the tax net.

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The proceedings under Section 147 are for the benefit of the revenue and not an assessee and are aimed
at gathering the ‘escaped income’ of an assessee. The same cannot be allowed to be converted as
‘revisional’ or ‘review’ proceedings at the instance of the assessee, thereby making the machinery
unworkable.
Notice for Income Escaping Assessment issued under section 148
If the Assessing Officer has a reason to believe that any income has escaped assessment for any
assessment year which was chargeable to tax, then the notice may be issued under section 148:
Case 1: Within 4 years from the end of the relevant assessment, if the escaped income is less than Rs.
1,00,000.
Case 2: If the income which is escaped is equal to or more than Rs. 1, 00,000 then notice can be issued for
up to 6 years from the end of the relevant assessment year.
Case 3: If escaped income is associated with any assets located outside India, and then notice can be
issued up to 16 years from the end of the relevant assessment year. It includes financial interest in any
entity.
It may be noted that the notice u/s 148 can be issued by AO only after getting prior approval from the
prescribed authority mentioned in section 151.
Cases where Income chargeable to tax has deemed to Escaped assessment
(a) When the total income of any assessee during the previous year exceeded the maximum amount
which is not chargeable to income-tax and no return has been furnished by him.
(b) When Assessing Officer has noticed that the assessee has understated the income or has claimed an
excessive loss, deduction, allowance or relief in the return and no assessment has been made.
(c) When an assessee is required to furnish a return under section 92E about any international transaction
and he failed to do so.
(c) In the case where an assessment has been made, but
• Income chargeable to tax has been under assessed.
• The income which is assessed is being assessed at a rate which is too low.
• Such income has been made the subject of excessive relief under this Act.
• Excessive loss or depreciation allowance or any other allowance under this Act has been
computed.
• Where a person is found to have any asset located outside India.It includes the financial interest
in any entity.

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Submission of return after order in section 148: The assessee shall submit the return within the
time period prescribed in the Notice of Income Escaping Assessment. Assessee may demand reasons of
proceeding u/s 147 from AO. If such reasons are not demanded by the assessee, the AO can proceed to
complete assessment. If the assessee demands reasons, the AO must provide reasons to the assessee.
Assessing officer is duty bound to provide the copy of reason recorded within the reasonable time as per
guidelines of Hon’ble Supreme Court.
Conclusion: Section 147 empowers the Assessing Officer to assess or reassess income chargeable to tax if
he is an opinion that income for any assessment year has escaped assessment. The AO is said to have
reason to believe if he has cause or justification to know or suppose that income has escaped assessment.
Q. Discuss the provision relating to the best judgment assessment under the Income Tax Act. What is
the remedy against such assessment?
The best judgement assessment means evaluation or estimation in the context income tax law of income
of the assessee by the assessing officer. The assessing officer will not act dishonestly or capriciously, he
will give his best judgement.
Best judgement assessment types
1. Compulsory best judgement assessment- It is the judgement in which the assessing offer make
the judgement when the assessee is either not cooperating or when the Assessee has defaulted
in supplying any information.
2. Discretionary best judgment assessment- It is the best judgement assessment which is being
done by the assessing officer if there is inconsistency in the method of accounting or when the
assessing officer is not satisfied with the correctness or completeness of the accounts.
Cases when Best Judgement Assessment can be made
The Best Judgement Assessment is a procedure which is under the Income Tax Act in order to comply with
the principles of natural justice. As per section 141 of the Income Tax Act, there is an obligation for the
assessing officer in order to make an assessment of the total income in the following cases:
1. If under section 139(1), the person failed to file the return and also a return or a revised
return under sub-section (4) or (5) of that section has not been furnished by him.
2. If any person fails in order to comply with all the terms and conditions that are stipulated under
a notice u/s. 142 or either fails to comply with the directions requiring him to get his accounts
audited in the terms of section 142(2A).

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3. If the Assessing Officer is also not satisfied with the correctness and the completion of the
accounts of the Assessee or if no method of accounting has been regularly employed by the
Assessee.
Remedies available to the assessee
• Assessee is given a reasonable opportunity of being heard by the assessing officer before making
a judgement. Such opportunity is given by issuance of the notice.
• After completion of the best judgment assessment u/s 144 of the IT Act, the assessee has a right
to file an appeal to the Commissioner of Grant u/s 264A.The assessee can also ask for a fresh
assessment.
General Provisions
• The assessing officer is empowered u/s 144 in order to assess the total income according to the
best of his judgment if the Assessee fails to File Income Tax Return or has also not submitted the
documents or he fails to comply with any of the conditions. However, a reasonable opportunity
is being provided to the taxpayer of being heard.
• This is to the exclusion of the provision provided u/s 142(1) of the IT Act where the Assessee has
been given prior notice of the assessment. Taxing officers also have the jurisdiction in order to
make the assessment under the Central Act even if the same turnover had already been assessed
under the local Act.
• An assessment order which is made relying on the computations that are made in the previous
year’s records will not be invalid if the assessee was absent even after the notice was issued to
him.
• When the assessment officer sought for assistance and assessee is not assessing the assessment
officer, the officer has the right to make an assessment which is based on the reasonable
presumption of documents that are available to him for computation of the tax payable. However,
when the assessee will be present, he will be informed about the details on the basis of which the
assessing officer has made the judgement.
The term ‘best judgement assessment’ is however not a term of art. Best judgement assessment is quasi-
judicial in nature as this is estimation which based on the principles of justice, equity and a good
conscience and in common parlance the words ‘best judgement assessment’ means make the best
estimate.

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West Bengal Value Added Tax

Q. Write short notes on:
i. Capital Goods [Section 2(6)]: "Capital goods" means-
(a) machine, machinery, plant, equipment, apparatus, tools, appliances or electrical installation used for
producing making, extracting or procuring of any goods or for bringing about any change in any substance
for the manufacture of final products,
(b) components, spare parts and accessories of such machine, machinery, plant, equipment, apparatus,
tools appliances or electrical installation used for the purposes as stated in clause (a),
(c) moulds and dies,
(d) pollution control equipment,
(e) refractory and refractory materials,
(f) storage tank, and
(g) tubes and pipes and fittings thereof, used for the purpose of manufacture of goods;
ii. Input Tax [Section 2(18)]: "input tax", in relation to any period, means the amount of tax,

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(a) separately realised or realisable by a registered dealer from a registered dealer in respect of purchases
made by the latter dealer in West Bengal of taxable goods, other than such taxable goods as may be
prescribed, required directly in connection with his business, or
(b) paid or payable by a dealer (not being a shipper of jute) under section 11 or section 12 or section 13;
iii. Reverse Credit: Where input tax credit or input tax rebate has been enjoyed by a registered dealer on
purchases of such goods or such other purchases or purposes for which enjoyment of input tax credit or
input tax rebate is not permissible under section 22 of the Act or these rules, the input tax credit or input
tax rebate so enjoyed for such goods or part of the goods shall be deducted from input tax credit or input
tax rebate of the tax period in which such event took place.
Provided that if, as a result of such deduction, there is a negative balance of input tax credit or input tax
rebate or net tax credit as referred to in sub-section (17) of section 22 for a particular tax period, the
dealer shall pay such balance amount of tax forthwith as if the same is payable in respect of such tax
period.
(2) Where the goods purchased by a registered dealer are rejected or returned to the selling registered
dealer, the purchasing dealer shall reverse the input tax credit or input tax rebate which he has enjoyed,
if any, for purchase of such goods subsequently rejected or returned and such reversal of input tax credit
or input tax rebate shall be made at the time of making payment of net tax payable for that tax period in
which such goods were returned or rejected.
(3) Where the goods, on which purchase tax is paid or payable by a registered dealer under section 11 or
section 12, is returned to the selling dealer, there will be no reversal or adjustment of input tax credit or
input tax rebate availed of on such goods.
(4) Where a registered dealer cannot keep separate account of purchase of goods for the purpose of
determining reverse credit under sub-rule (1), the input tax credit or input tax rebate already enjoyed will
be reversed in the following manner: Y = [A x B / C] - X
Where- ‘Y’ = Input tax credit or input tax rebate to be reversed in the ‘tax period’;
‘A’ = Input tax credit or input tax rebate enjoyed in a ‘period’;
‘B’= Aggregate of sale price of goods for which reversal has been made till the ‘preceding period’ including
sale price of goods for which reversal is to be made in the ‘tax period’;
‘C’ = total sale price of goods in that ‘period’; and ‘X’ = Input tax credit or input tax rebate reversed till the
‘preceding period’.

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Explanation I - For the purpose of this rule, “period” means the period starting from the first day of the
year and ending on the last day of the month when the occasion of reverse credit arises and “preceding
period” means the period starting from the first day of the year and ending on the last day of the month
preceding the month for which reverse credit is to be calculated.
Explanation II - Where the dealer has already reversed input tax credit or input tax rebate in the same
year on one or more earlier occasion or occasions, due credit of the same shall be given while determining
the reverse credit in a later occasion.
iv Zero Rated Supply: In countries that use value-added tax (VAT), zero-rated goods are products that are
exempt from that value taxation. Examples of items that may be zero-rated include certain foods and
beverages, exported goods, donated goods sold by charity shops, equipment for the
disabled, prescription medications, water, and sewage services, books and other printed publications, and
children's clothing.
Zero-Rated Goods Explained: In most countries, the government mandates a domestic VAT requirement
for goods and services. In most reported data, the total price of products sold in a country includes the
VAT and is an additional charge to sales tax in most transactions. The VAT is a form of consumption tax.
Designation of Zero-Rated Goods: Countries using VAT designate certain goods as zero-rated goods. Zero-
rated goods are typically individualized items. Countries designate these products as zero-rated because
they are leading contributors to other manufactured goods and a significant component of a
broader supply chain. Also, many food items are identified as zero-rated goods and sell with 0% VAT.
In many cases, buyers use zero-rated goods in production and benefit from paying a lower price for the
goods without the tax. A food manufacturer may use zero-rated goods in the manufacturing of a food
product, but when the consumer buys the final product, it includes a VAT.
Overall, the absence of VAT on zero-rated goods results in a lower total purchase price for the goods.
Zero-rated goods can save buyers a significant amount of money. In the United Kingdom, for example, the
standard VAT rate levied on most goods is 17.5%, and the reduced rate is 5%.
International Dealings with Zero-Rated Goods: When a consumer brings a good from one country to
another, either individually or via a shipment, there is generally an international VAT charge in addition
to any import or export tariffs due. Internationally designated zero-rated goods are not subject to
international VAT, so the cost of importing or exporting them is lower.
Exempt Goods: Some goods and services are also reported as exempt from VAT. These exempt goods and
services are typically a focused group provided by a seller that is not subject to VAT. The European

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Commission, for example, exempts goods such as finance and insurance services, and some land building
supplies. Other examples of exempt goods are those that serve the public interest, such as medical and
dental care, social services, and education.
v. Goods [Section 2(15)]: "goods" includes all kinds of movable property other than
(a) actionable claims, stocks, shares or securities,
(b) country liquor,
(c) foreign liquor, whether made in India or not, including brandy, whisky, vodka, gin, rum, liqueur,
cordials, bitters and wines, or a mixture thereof, beer, ale, porter, cider, perry, and other similar potable
fermented liquors,
(d) lottery tickets
(e) motor spirit having a flashing point below 24.4 degree Celsius, required for use as fuel in aircraft,
(f) motor spirit having a flashing point at or above 24.4 degree Celsius, required for use as fuel in aircraft,
(g) motor spirit, excluding motor spirit referred to in item(e) and item
(f) having a flashing point at or above 24.4 degree Celsius, and
(h) motor spirit of any other kind;
vi. Casual Dealer [Section 2(7)]: "casual dealer" means a person who, whether as principal, agent or in
any other capacity, has occasional transaction involving buying, selling, supplying or distributing goods in
the State, whether for cash or for deferred payment, or for commission, remuneration or other valuable
consideration and includes, whether he has fixed place of business in West Bengal or not,
(a) a transporter as defined in clause (52) who, while carrying any goods in his goods vehicle as defined in
clause (16), fails to dis
close the name and address of the consignor or consignee in West Bengal or fails to furnish copy of invoice,
challan, transport receipt or consignment note or document of like nature in respect of such goods, or
(b) an owner or lessee of a warehouse who fails to disclose the name and address of the owner of any
goods stored at his warehouse or fails to satisfy the Commissioner that such goods are for his personal
use or consumption, and such transporter, or owner or lessee, shall be deemed to have purchased such
goods on his own account
vii. Business [Section 2(5)]: "Business" includes

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(a) any trade, commerce, manufacture, execution of works contract or any adventure or concern in the
nature of trade, commerce, manufacture or execution of works contract, whether or not such trade,
commerce, manufacture, execution of works contract, adventure or concern is carried on with the motive
to make profit and whether or not any profit accrues from such trade, commerce, manufacture, execution
of works contract, adventure or concern; and
(b) any transaction in connection with, or ancillary or incidental to, such trade, commerce, manufacture,
execution of works contract, adventure or concern;
viii. Manufacture [Section 2(22)]: "manufacture", with all its grammatical variations and cognate
expressions, means producing, making, extracting or processing any goods and includes printing and
raising of natural resources like minerals, coal etc.
Q. Define ‘VAT’. Discuss the advantages and disadvantages of VAT System.

A value-added tax (VAT), is a type of tax that is assessed incrementally. Like an income tax, it is based on
the increase in value of a product or service at each stage of production or distribution. However, a VAT
is collected by the end retailer and is usually a flat tax, and is therefore frequently compared to a sales
tax.
VAT essentially compensates for the shared service and infrastructure provided in a certain locality by a
state and funded by its taxpayers that were used in the elaboration of that product or service. Not all
localities require VAT to be charged and goods and services for export may be exempted (duty free). VAT
is usually implemented as a destination-based tax, where the tax rate is based on the location of the
consumer and applied to the sales price. Confusingly, the terms VAT, GST, consumption tax and sales tax
are sometimes used interchangeably. VAT raises about a fifth of total tax revenues both worldwide and
among the members of the Organisation for Economic Co-operation and Development (OECD). As of
2018, 166 of the 193 countries with full UN membership employ a VAT, including all OECD members
except the United States, where many states use a sales tax system instead.
There are two main methods of calculating VAT: the credit-invoice or invoice-based method, and the
subtraction or accounts-based method. Using the credit-invoice method, sales transactions are taxed,
with the customer informed of the VAT on the transaction, and businesses may receive a credit for VAT
paid on input materials and services. The credit-invoice method is the most widely employed method,
used by all national VATs except for Japan. Using the subtraction method, at the end of a reporting period,
a business calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the

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VAT rate is applied to the difference. The subtraction method VAT is currently only used by Japan,
although subtraction method VATs, often using the name "flat tax", have been part of many recent tax
reform proposals by US politicians. With both methods, there are exceptions in the calculation method
for certain goods and transactions, created for either pragmatic collection reasons or to counter tax fraud
and evasion.
Merits of VAT
• Reduced tax evasion Increased tax compliance.
• VAT brings certainty as it is simple.
• VAT is transparent as tax charged is clearly shown in invoice.
• Cheaper exports as in case of exports.
• VAT is refunded.
• System promotes better accounting system as record of tax paid on purchases required to be
maintained.
• VAT is tax neutral. (There is no distinction between labor intensive industries and capital-intensive
industries as input of both purchases and capital goods is available).
Demerits of VAT
• TAX Evasion is possible through bogus invoices (fake invoices).
• Increased compliance cost as records of all purchases and sales required to be maintained.
• VAT system is distorted (not properly followed) due to various exemptions/concessions).
• VAT is a consumption-based tax (it is collected more by the state which consumes more goods and
not by state which produces more).
• Since, it is tax on expense, it is regressive in nature. It affects poor more as they spend more proportion
of their income then the rich.
Q. Who is liable to pay Value Added Tax (VAT)?

Section 10 Incidence of tax
(1) Subject to other provisions of this Act, with effect from the appointed day, every dealer who has been
liable immediately before the appointed day to pay tax under the West Bengal Sales Tax Act, 1994, shall
be liable to pay. Tax under this Act on all his sales effected on or after the appointed day.
(2) Every dealer to whom sub-section (1) does not apply, shall be liable to pay tax under this Act,

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(a) on all his sales, other than those referred to in section 14, of goods which have been imported
by him from any place outside West Bengal; or
(b) on all his sales other than those referred to In section 14, of goods effected on or after the
date immediately following the date on which his turnover of sales calculated from the
commencement of any year exceeds such taxable quantum as may be prescribed at any time
within such year and different taxable quantum may be prescribed for different class of dealers:
Provided that the taxable quantum as may be prescribed under this clause shall not exceed five
lakh rupees: Provided further that a dealer who has been registered under sub-section (2) of
section 24 on any date prior to the date on which he exceeds the taxable quantum prescribed
under this clause shall be liable to pay tax from the date of his registration under that sub-section.
(3) Any dealer who is liable to pay tax under the Central Sales Tax Act, 1956, shall also be liable to pay tax
under this Act on all sales and purchases effected by him on and from the date on which he becomes
liable to pay tax under that Act.
(4) Notwithstanding anything contained in sub-section (1), or subsection (2), every dealer,
(a) who has become liable to pay tax under clause (a) of sub-section (2) shall continue to be so
liable until the expiry of three consecutive years during each of which he has not affected any sale
of goods imported by him from outside into West Bengal;
(b) other than the dealer referred to in clause (a), shall continue to be so liable until the expiry of
three consecutive years during each of which his turnover of sales has failed to exceed such
taxable quantum as referred to in clause (b) of sub-section (2).
(5) The provisions of sub-section (2) shall apply to every dealer whose liability of pay tax ceases under sub-
section (4) as if such dealer has not ever become liable to pay tax under this section.
(6) The Commissioner shall, after making such enquiry as he may think necessary and after giving the
dealer an opportunity of being heard, fix the date on and from which such dealer has become liable to
pay tax under this section.
Section 11 Incidence of tax on purchase of raw jute

Every dealer, being an occupier of a jute-mill or a shipper of jute, shall, in addition to his liability to pay
tax, if any, under any other provision of this Act, be liable to pay tax on all his purchases of raw jute in
West Bengal.
Section 12 Contingent liability to pay tax on purchase

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Every dealer liable to pay tax under section 10 and registered under sub-section (2) of section 24 shall, in
addition to the tax payable under any other provision of this Act, be also liable to pay tax on all his
purchases in West Bengal of taxable goods from a dealer who is not registered under this Act for use of
such goods in West Bengal for the purpose of carrying on his business, after deducting therefrom such
purchases which are shown to the satisfaction of the Commissioner to have taken place in the course of
import of goods into, or export of the goods out of, the territory of India within the meaning of section 5
of the Central Sales Tax Act, 1956.
Section 13 Liability to pay tax on other purchases

Every registered dealer who is not liable to pay tax under section 11 and section 12, shall be liable to pay
tax on purchase of such goods and in such circumstances, as the State Government may, by notification
in the Official Gazette, specify.
Section 14 Liability to pay tax on the transfer of property in goods involved in the execution of works
contract
(1) Notwithstanding anything contained elsewhere in this Act, any transfer of property in goods (whether
as goods or in some other form) involved in the execution of a works contract herein after referred to as
contractual transfer) in West Bengal shall be deemed to be a sale of those goods by the person making
the transfer and a purchase of those goods by the person to whom such transfer is made.
(2) With effect from the appointed day, every dealer, who is liable on the day immediately before the
appointed day to pay tax under section 15 of the West Bengal Sales Tax Act, 1994, and who would have
continued to be so liable under the said Act had this Act not come into force, shall, in addition to the tax
payable, if any, under any other provisions of this Act, be liable to pay tax on all transfers of property in
goods involved in the execution of works contract referred to in sub-section (1) at the rate specified in
section 18.
(3) Every dealer to whom the provisions of sub-section (2) do not apply and whose contractual transfer
price calculated from the commencement of the year ending on the day immediately before the
appointed day exceeds two lakh rupees on the last day of such year shall, in addition to the tax, if any.
payable by him under any other provisions of this Act, be liable to pay from such appointed day tax on all
transfers of property in goods involved in the execution of works contract referred to in sub-section (1) at
the rate specified in section 18:

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Provided that where a dealer registered under sub-section (2) of section 24 for his liability to pay tax under
section 10 or section 11, shall, notwithstanding that his contractual transfer price does not exceed two
lakh rupees, also be liable to pay tax on transfer by him of property in goods involved in the execution of
works contract under sub-section (1).
(4) Every dealer to whom the provisions of sub-section (2) or subsection (3) do not apply, shall, if his
contractual transfer price calculated from the commencement of the year ending on any day after the
appointed day, exceeds two lakh rupees at any time within such year, be liable, in addition to the tax, if
any, payable by him under any other provisions of this Act, to pay tax on all transfers of property in goods
involved in the execution of works contract at the rate specified in section 18 on and from the date
immediately following the day on which such contractual transfer price first exceeds two lakh rupees.
(5) Every dealer who has become liable to pay tax under sub-section (2), sub-section (3) or sub-section (4)
shall continue to be so liable until the expiry of three consecutive years during each of which his
contractual transfer price does not exceed two lakh rupees, and on the expiry of such three years, his
liability to pay such tax shall cease.
Explanation. In computing the period of three consecutive years referred to in this sub-section in respect
of a dealer who has become liable to pay tax under sub-section (2) the year or years, if any, which expired
before the appointed day and during each of which the contractual transfer price did not exceed two lakh
rupees, shall be included.
(6) Every dealer whose liability to pay tax under this section has ceased under sub-section (5) shall, if his
contractual transfer price calculated from the commencement of any year again exceeds two lakh rupees
at any time within such year, be liable, in addition to the tax, if any, payable by him under any other
provisions of this Act, to pay tax on all transfers of property in goods involved in execution of works
contract referred to in subsection (1) effected on or from the date immediately following the day on which
such contractual transfer price again first exceeds two lakh rupees at the rate specified in section 18.
(7) The Commissioner, after making such enquiry as he may think necessary and after giving the dealer an
opportunity of being heard, shall fix the date on and from which such dealer shall become liable to pay
tax under sub-section (3), sub-section (4) or sub-section (6).
Section 15 Liability of a casual dealer to pay tax. Every casual dealer shall be liable to pay tax
(a) on all his sales in West Bengal of goods brought by him from any place outside West Bengal either by
way of purchase from a person, or procured by him otherwise, and
(b) on his every purchase of goods in West Bengal.

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Section 16 Levy of tax on sales

(1) Subject to the provisions of sub-section (2), the tax payable by a dealer, who is liable to pay tax under
section 10, section 14, clause (b) of sub-section (1) of section 24 or sub-section (3) of section 30 on his
turnover of sales, shall be levied on such part of his turnover of sales as remains after deducting therefrom
(a) sales of goods declared tax-free under section 21;
(b) sales of goods which are shown to the satisfaction of the Commissioner not to have taken
place in West Bengal, or to have taken place in the course of inter-State trade or commerce within
the meaning of section 3 of the Central Sales Tax Act, 1956, or in the course of import of the goods
into, or export of the goods out of, the territory of India within the meaning of section 5 of that
Act;
(c) sales of goods between dealers located in a Special Economic Zone (SEZ);
(d) sales of goods between Export Oriented Units (EOU);
(e) sales of goods between dealers referred to in clause (c) and clause (d);
(f) sales of goods by a dealer to another dealer located in a Special Economic Zone (SEZ), subject
to such conditions and restrictions as may be prescribed;
(g) such other sales on such conditions and restrictions as may be prescribed.
(2) The tax payable by a dealer on the turnover of sales as referred to in sub-section (1), shall be levied
(a) at the rate of one per centum of such part if his turnover of sales as represents sales of any
goods specified in Schedule B;
(b) at the rate, of four per centum of such part of his turnover of sales as represents sales of any
goods specified in Schedule C;
(c) at such rate as may be fixed by the State Government under section 19, on such part of his
turnover of sales as represents sales of any goods specified in Schedule D.
Explanation. For the purpose of this sub-section, it is hereby declared that the export of the goods out of
the territory of India shall be zero rated i.e. the tax paid under this Act shall be refunded or adjusted, as
the case may be, against the output tax payable, if any, by a dealer.
(3) Notwithstanding anything contained in sub-section (1) or subsection (2), any registered dealer other
than a dealer engaged in execution of works contract as defined in clause (57) of section 2 of the Act, or
an importer or a manufacturer having liability to pay tax under this Act, may, at his option, if his turnover
of sales in the preceding year does not exceed twenty-five lakh rupees, pay tax at such rate and subject
to such conditions and restrictions as may be prescribed, for each quarter of the year in lieu of tax payable

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under F section 10, on all his sales: Provided that such dealer shall not be entitled to issue tax invoice:
Provided further that the tax to be prescribed under this subsection shall not exceed twelve per centum
of the total turnover of sales of the dealer in the year immediately before the year for which the option
has been exercised: Provided also that a registered dealer who, in addition to the purchase of goods in
course of his business in a year, have also received goods from the supplier within or outside West Bengal,
not on branch transfer or on consignment basis,, for which no price has been paid, shall not be entitled to
opt for payment of tax under this sub-section.
(4) Notwithstanding anything contained in sub-section (1) of section 18, any registered dealer, who is
liable to pay tax under section 14, may, at his option, pay tax at such rate not exceeding five per centum
of the aggregate of the amount received or receivable by such dealer and subject to such conditions and
restrictions as may be prescribed, for each quarter of the year in lieu of the amount of tax payable by him
under section 18: Provided that such dealer shall not be entitled to issue tax invoice.
(5) Any registered dealer who intends to opt for payment under subsection (3) or sub-section (4) of this
section shall exercise his option by making an application to the Commissioner in such manner as may be
prescribed.
Section 17 Levy of tax on turnover of purchases

The tax payable by a dealer, who is liable to pay tax on his turnover of purchases under section 11 or
section 12, shall be levied
(a) at the rate of two per centum of such part of the turnover of purchases as represents purchases of raw
jute under section 11; or
(b) at the rate of tax as applicable to a sale of such goods under sub-section (2) of section 16 on such part
of the turnover of purchases as represents purchases in West Bengal under section 12.
Section 18 Levy of tax on contractual transfer price

(1) The tax payable by a dealer, who is liable to pay tax under section 14, shall be levied at the rate of
twelve decimal five zero per centum of such part of the contractual transfer price of goods during any
period which remains after deducting therefrom his contractual transfer price during that period on
(a) contractual transfer of goods, sales of which are declared tax- free under section 21;
(b) such other contractual transfers as may be prescribed.
(2) Where a dealer enters into a contract with, and engages, another dealt for execution of a works
contract, whether in part or in full, the contract transfer price relating to the execution of such works

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contract executed by the other dealer shall, subject to the production of the proof of payment of tax 1
that other dealer, be deducted from the contractual transfer price of the deal who engages the other
dealer for execution of the works contract.
Q. Discuss with suitable example of various methods for computation of VAT liability.
There are 3 methods of computation of VAT
1. Addition method
2. Subtraction method
3. Invoice method.
First 2 methods have many disadvantages and none of the countries have implemented it. However last
method also called Input tax credit method has lots of advantages which most of the countries has
implemented it. We have discussed all the 3 methods with advantages and disadvantages.
1. Addition Method Total Costs of All factors of Production (labor electricity)
(It does not include Raw Material Costs)
Add Profit Margin
= Total Value Addition.
Tax is imposed on this Value Addition.
Duty liability is calculated periodically (monthly or quarterly) and not invoice vise
Drawback: Matching of purchase and sale invoices is not done here, Hence, there can be evasion of taxes
Note: This method is normally used with Income Variant
2. Invoice Method: It is the most common method

In this VAT Payable
=Tax on Sales Bills
Less
Tax on Purchase Bills
Hence, tax is payable at each stage and there is less chances of loss of revenue.
If at any stage the transaction is kept out of the books, still there is no loss of revenue.
The Government can recover the full tax at the next stage.
This method is also called the 'Tax Credit Method' or 'Voucher Method'.
Drawback: There are chances of tax evasion by producing fake invoices. Hence, proper measures shall be
taken to avoid fake invoices.

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Cost subtraction method: In this method, tax is calculated as follows

Direct Subtraction Method: Taxable turnover = (Sales excluding taxes-Purchase excluding taxes)
Tax = Taxable turnover *Tax Rate
Intermediate Subtraction Method: Taxable turnover = (Sales including taxes-Purchase including taxes)
Tax= Taxable turnover*Tax Rate
This method is suitable for Gross Product Variant.
Drawbacks: Tax cannot be shown in Invoice Duty liability is calculated periodically (monthly or quarterly)
and not invoice vise
Q. Distinguish between VAT and Sales Tax.

VAT or value added tax has recently been subsumed by the Goods and Services Tax, also known as GST.
Earlier VAT was paid by the original producer when the said goods or services reached the end consumer!
Taxation is the process of an authority levying tax on various goods, services and transactions. Taxation is
one of the foremost powers held by the government, at the state as well as central level.
VAT or Value Added Tax: VAT is tax on consumption of goods and services which is paid by the original
producer when these goods and services are transferred to their ultimate consumers. VAT forms an
essential part of the GDP of any country and as such is an extremely important type of tax. Every seller of
goods and provider of services charges VAT from customers which in turn is paid to the government.
VAT is a multi-stage tax levied on the value added at each stage of production of goods and services.
Any person who makes an annual turnover of more than Rs.5 Lakhs by supplying goods and services is
supposed to register for VAT payment. VAT is an indirect form of tax that is levied at various stages of
production of goods as well as services. VAT is imposed on imported goods and local goods both. Since
VAT is transparent and neutral, it has emerged as a vital instrument of revenue for the government.
Main Features of VAT
• Uniform rates are applicable to goods in the tax system. For example, televisions of a particular
brand sold in West Bengal will have the same VAT as those sold in Himachal Pradesh unless
controlled by the respective state governments
• VAT is levied at successive stages of production and distribution of goods and services
• It is collected at each stage of sale of goods and as such the end user does not need to pay the
whole VAT amount
• VAT alleviates the cascading effect and as such related economic distortions

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• VAT introduces fairness and uniformity in the process of taxation

• VAT ensures better tax compliance and reduces chances of tax evasion
• Transparency in sale of goods and services is encouraged by VAT
VAT Calculation: Before we start calculating VAT, let us know what exactly VAT is.
VAT = Output Tax – Input Tax
Output Tax is the percentage of selling price received by the seller on the selling of his final product.
Input Tax is the percentage of cost price paid by a buyer for raw materials required to produce his final
goods or services
Suppose Ravi is a carpenter who bought wood for Rs.1000 and paid an input tax of 10% = Rs.100
Ravi made a wooden table out of the purchased wood and sold it for Rs.2000. On this he collected an
output tax of 10% on the selling price = 10% of 2000 = Rs.200
So, final VAT payable comes out to be Output Tax – Input Tax = Rs.200-Rs.100 = Rs.100
VAT and Sales Tax Calculation Chart
VAT/Sales Tax is one of the major revenue generators for the Indian government and is charged against
the purchase price of a certain type of goods and services. This rate often changes every year, depending
on the policy decision taken by the finance ministry.
Here is a tabular column that lists out the VAT percentage as was seen in 2016 an individual is expected
to pay:
Year VAT Tax Rate
2016 15%
VAT and Sales Tax Calculation Examples

Here’s another example for how VAT is calculated.
Mr. A runs an ice cream parlour and often buys raw materials from wholesale dealers to run the business.
He spends Rs.1,00,000 to buy the ingredients, which basically is considered as an input and is tax at 10%.
In this case,
Input Tax = 10% of Rs.1 lakh = Rs.10,000
After running the business with great enterprising knowledge, he makes sales worth Rs.5,00,000.Again,
there is an output tax to be paid for this as well, which stands at 10%.Here,
Output Tax = 10% of Rs.5 lakh = Rs.50,000

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Going by the formula for VAT, i.e., Output Tax - Input Tax, which is, Rs.50,000 - Rs.10,000 = Rs.40,000.
Therefore, Rs.40,000 is the VAT Mr. A is required to pay for his business.
Sales Tax
Sales tax is levied on sale of goods and services which have been produced or imported. If the same goods
and services are re-sold without any value addition, then sales tax is not levied again. Sales tax is levied
under the authority of both Central government as well as state governments. This tax is levied basically
on trading of goods within the states. Works of contracts and leases are also liable to pay sales tax.
Features of Sales Tax:
• It is a form of consumption tax. This means that tax is collected when goods or services are actually
purchased
• Easy to calculate as the tax amount is charged as a percentage of the final value of goods or
services
• Compliance rate is average and sales tax is easy to collect
• Sales tax is collected by the seller from the buyer at the time of purchase of goods and services
• Sales tax is determined by states, cities and local municipal authorities and as such varies
geographically
• Sales tax is collected completely by the end purchaser and the seller does not pay any part of it
Difference between VAT and Sales Tax

Although VAT and Sales tax are both parts of the taxation system in India. There are several features that
differentiate the two categories of taxes. Here is a list of how these taxes are distinct from each other.
• VAT is to be paid by both producer as well as consumer while sales tax is levied entirely on
consumers
• Calculation of VAT is complex because of various layers of buying and selling transactions involved
while that of sales tax is straightforward
• VAT is levied on various stages of production while sales tax is applicable on the final value of
purchase
• VAT is able to avoid evasion successfully while sales tax is easy to fiddle with
• VAT model increases the cost of production to business which in turn can lead to a higher burden
on purchasers whereas sales tax is easily handled

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• VAT tends to profit the government's more rather than sales tax. This is because tax from each
and every wholesale transaction also reaches the government unlike sales tax where just the end
amount of tax is levied
Q. Discuss the provisions relating to Registration of a Dealer under West Bengal VAT Act. Under what
circumstances the registration can be cancelled?
Section 24 Registration of a dealer
(1) Every dealer
(a) who is required by section 23 to be registered, shall, or
(b) who is not required by section 23 to be registered but intends to be registered at any time
after his turnover of sales during a year exceeds such taxable quantum as may be prescribed, may,
make an application for registration in the prescribed manner to the prescribed authority and
such application shall be accompanied by a declaration in the prescribed form duly filled up and
signed by the dealer making the application.
(2) If the prescribed authority is satisfied that the application for registration is in order, he shall, in such
manner and within such time as may be prescribed, register the applicant and shall grant him a certificate
of registration in the prescribed form from such date as may be prescribed.
(3) Any dealer who has been registered under sub-section (2) for his liability to pay tax under clause (b) of
sub-section (2) of section 10, or section 11, or who has been registered on an application made by him
under clause (b) of sub-section (1) of section 24, shall be liable to pay tax on all sales of goods effected by
him from the date from which his registration certificate is granted even where such dealer does not
exceed the prescribed taxable quantum in respect of such sales.
Section 25: Enrolment of transporters, carriers or transporting agents

For carrying out the purposes of section 73, section 80, section 81, every transporter, carrier or
transporting agent operating his transporting business in West Bengal of transporting any consignment of
taxable goods into, or outside, or within, West Bengal shall obtain from the Commissioner a certificate of
enrolment in such manner, and within such time, as may be prescribed.
Explanation. For the purposes of this section or section 70, the expression "taxable goods" shall mean all
goods excluding those goods sales of which are tax-free under section 21.

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Section 26: Security to be furnished by the dealer, transporter, carrier or transporting agents in certain
cases
The Commissioner may, by an order in writing, for good and sufficient reason to be recorded therein,
demand from any dealer, transporter, carrier, transporting agent, a security in such circumstances and in
such manner as may be prescribed.
Section 27: Amendment of certificate of registration

The prescribed authority may from time to time amend any certificate of registration in accordance with
information furnished under section 102 or otherwise received, after due notice to the dealer and such
amendment may be made with retrospective effect in such circumstances, and subject to such restrictions
and conditions, as may be prescribed.
Section 28: Suspension of certificate of registration

(1) Where any registered dealer has failed, without sufficient cause, to pay any tax, penalty or interest
payable under this Act or has failed to furnish a return referred to in section 32, the appropriate authority
may, after giving such dealer a reasonable opportunity of being heard and for reasons to be recorded in
writing, suspend the certificate of registration of such dealer.
(2) Where a dealer, after suspension of his certificate of registration under sub-section (1), pays in full the
amount of tax, penalty or interest payable by him under this Act, or furnishes the return referred to in
that sub-section, for default of which his certificate of registration has been suspended under that sub-
section, and makes an application to the Commissioner for withdrawal of such suspension of his certificate
of registration together with receipted challan evidencing payment of such tax, penalty and interest, or
together with a copy of the receipt evidencing furnishing of such return, as the case may be, within thirty
days from the date of such suspension or within such further time as may be allowed, the Commissioner
shall, by an order in writing, withdraw the suspension.
(3) Any certificate of registration which has been suspended under sub-section (1) may, upon an
application by the dealer whose certificate of registration has been so suspended, be registered by the
Commissioner, by an order passed in writing; if the Commissioner is satisfied that the dealer has, within
thirty days from the date of suspension, or within such further time as may be allowed by the
Commissioner, for reasons shown,
(a) paid the tax, penalty or interest for non-payment of which, or

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(b) furnished the return for non-furnishing of which, his certificate of registration has been
suspended under subsection (1).
(4) Every order passed under sub-section (2) shall be effective from the date from which the order passed
under sub-section (1) had taken effect.
(5) Where the certificate of registration of a dealer has been suspended under sub-section (1); such dealer
shall not be entitled to any input tax credit unless the certificate of registration so suspended is withdrawn
under sub-section (2).
Section 29: Cancellation of certificate of registration

(1) A certificate of registration granted to a dealer under sub-section (2) of section 24 shall be cancelled
by the appropriate authority where such authority, after giving a reasonable opportunity to such dealer
of being heard, is satisfied that
(a) the dealer has ceased to carry on business or has ceased to exist, or
(b) the dealer has ceased to be liable to pay tax under sub-section (3) of section 10, or
(c) the dealer, after suspension of his certificate of registration under sub-section (1) of section
28, has failed or neglected to pay the tax, penalty or interest for non-payment of which, or has so
failed to furnish the return for non-furnishing of which, his certificate of registration has been
suspended under that section.
(2) The cancellation of registration may be made on an application of the dealer or suo motu on the
satisfaction of the appropriate authority.
(3) The cancellation of registration shall take effect from the end of British calendar month in which the
registration is cancelled unless the appropriate authority orders the cancellation to take effect on an
earlier date.
Section 30: Issue of provisional certificate and imposition of penalty for committing fraud or breach of
terms and conditions for issuing such certificate
(1) Subject to such restrictions and conditions as may be prescribed, the Commissioner may, on an
application made by a person who is net liable to pay tax under this Act and who intends to set up an
industrial unit in West Bengal for manufacture of taxable goods for sale in West Bengal, grant to such
person a provisional certificate: Provided that the Commissioner shall not grant provisional certificate to
a person who is liable to be registered, or who is registered under the Act.

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(2) A provisional certificate issued to a provisional dealer under subsection (1) shall be valid from the date
of Its issue and shall remain in force up to such period and in such manner, as may be prescribed, or till
the day on which his turnover of sales of goods manufactured by him in his industrial unit exceeds the
taxable quantum specified in sub-section (3), whichever is earlier.
(3) Subject to the provisions of section 10, section 11, or sub-section (3) of section 24, every dealer, being
a provisional dealer, shall be liable to pay tax on all sales of goods effected by him on or after the expiry
of sixty days from the date on which his turnover of sales of goods manufactured by him in his industrial
unit exceeds twenty five thousand rupees during any year calculated from the commencement of such
year.
(4) A person who has been issued a provisional certificate under sub-section (1) shall furnish periodical
statements to the Commissioner in the manner which may be prescribed.
(5) Any person who has committed any breach of the terms and conditions under which a provisional
certificate has been issued under sub-section (2) or renewed or availing or attempting to avail the benefit
of certificate in respect of purchases of goods not specified in the certificate or after the validity of the
certificate has expired, shall be punishable with a penalty not exceeding one thousand rupees and if the
offence is a continuing one with a daily fine not exceeding five hundred rupees during the continuance of
the offence. All offence punishable under this sub-section shall be cognizable and bailable, and no court
inferior to that of a Judicial Magistrate of the First Class or Metropolitan Magistrate, shall try such offence.

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Service Tax
Q. What do you mean by ‘Service Tax'? - Explain. Discuss the salient feature of Service Tax in India
Definition: Service tax is a tax levied by the government on service providers on certain service
transactions, but is actually borne by the customers. It is categorized under Indirect Tax and came into
existence under the Finance Act, 1994.
Description: In this case, the service provider pays the tax and recovers it from the customer. Service Tax
was earlier levied on a specified list of services, but in the 2012 budget, its scope was increased. Services
provided by air-conditioned restaurants and short-term accommodation provided by hotels, inns, etc.
were also included in the list of services.
It is charged to the individual service providers on cash basis, and to companies on accrual basis. This tax
is payable only when the value of services provided in a financial year is more than Rs 10 lakh. This tax is
not applicable in the state of Jammu & Kashmir.
The salient features of levy of service tax are:

1. Scope: It is leviable on taxable services ‘provided’ or ‘to be provided’ by a service provider. The services
‘to be provided’ in future are taxed only if payment in its respect is received in advance.
Two separate persons required Payment to employees not covered: For charge of service tax, it is
necessary that the service provider and service recipient should be two separate persons acting on
‘principal to principal basis’. Services provided by an employee to his employer are not covered service
tax and, therefore, salaries or allowances paid to them cannot be charged to service tax.
2. Rate: It is leviable @ 12% of the value of taxable services. Education Cess @ 2% and Secondary
and Higher Education Cess @ 1 % are chargeable on the amount of service tax, thus, making the
effective rate of service tax at 12.36% of the value of taxable service.
Update: While presenting the Budget 2015, the FM had increased the Service Tax Rate from 12.36% to
14%. This new rate of Service Tax @ 14% was applicable from 1st June 2015. Moreover, from 15th Nov
2015, Swachh Bharat Cess @ 0.5% also got applicable. Budget 2016 has proposed to impose a Cess, called

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the Krishi Kalyan Cess, @ 0.5% on all taxable services. The new effective service tax rate in India could
henceforth be 15%.
3. Taxable services: Service tax is leviable only on the taxable services. Taxable services mean the services
taxable under section 65(105) of the Finance Act, 1994.
4. Value: For the levy of the service tax, the value shall be computed in accordance with section 67
read with Service Tax (Determination of Value) Rules, 2006.
5. Free services not taxable: No service tax is leviable upon the services provided free of cost.
6. Payment of service tax: The person providing the service (i.e. the service provider) has to pay service
tax in such manner and within such period as is prescribed in the Service Tax Rules, 1994. The service tax
is to be paid only on the receipt of payment towards the value of taxable services.
7. Procedures: Provisions have been made for registration, assessment including self-assessment,
rectifications, revisions, appeals and penalties on the service provider.
8. CENVAT credit: The credit of service tax and excise duty across goods and services is allowable in
accordance with the CENVAT Credit Rules, 2004. Accordingly, output service provider (i.e. provider of
any taxable service) can avail credit not only of the service tax paid on any input service consumed for
rendering any output service but also of the excise duty paid on any inputs and capital goods used for
rendering output service. CENVAT credit so availed can be utilized for payment of service tax on taxable
output service.
9. Services provided by an unincorporated association/body to its members also taxable [Explanation
to Sec. 65]: ‘Taxable service’ includes any taxable service provided or to be provided by any
unincorporated association or body of persons to a member thereof, for cash, deferred payment or any
other valuable consideration. Hence, the services (falling under any category of taxable service) provided
or to be provided by any unincorporated association/body to member thereof shall be liable to service
tax. This provision is an exception to the ‘principle of mutuality’.
10. Performance of statutory activities/duties, not ’service’: An activity performed by a sovereign/public
authority under provisions of law does not constitute provision of taxable service to a person and,
therefore, no service tax is leviable on such entities.
11. Import/Export of services: While import of services is chargeable to tax u/s 66A, the export of services
has been made exempt from tax. Import/export provisions are discussed separately.
Q. Who is liable to pay Service Tax? Explain the procedure for filling return of Service tax.

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Service tax levied is liable to be credited to the Central Government account. Sec. 68 of the Finance Act,
1994 ('Act' for short) provides that every person providing taxable service to any person shall pay service
tax at the rate specified in Sec. 66 in such manner and within such period as may be prescribed. Thus, the
service provider is liable to pay service tax. Now there are 106 services under the service tax net. This
Section further provides that in respect of any taxable service notified by the Central Government in the
Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be
prescribed at the rate specified in Section 66 and all the provisions of the service tax shall apply to such
person as if he is the person liable for paying the service tax in relation to such service.
Sec. 66 of the Act provides that the service recipient is liable to pay service tax in certain cases with effect
from 18.04.2006. It provides that where any taxable service is provided or to be provided by a person who
has established a business or has a fixed establishment from which the service is provided or to be
provided or has his permanent address or usual place of residence, in a country other than India and
received by person (recipient) who has his place of business, fixed establishment, permanent address or
usual place of residence in India, such service shall, for the purpose of this section, be taxable service, and
such taxable service shall be treated as if the service recipient had himself provided the service in India.
Rule 2(d) of Service Tax Rules, 1994 ('Rule' for short) defines the term 'person liable for paying service
tax' as-
(i) in relation to telecommunication service the Director General of Posts and Telegraphs referred
to in Sec. 3(6) of the Indian Telegraph Act, 1885; or the Chairman-cum-Managing Director,
Mahanagar Telephone Nigam Limited, Delhi, a company registered under the Companies Act,
1956; or any other person who has been granted a license by the Central Government under the
first proviso to Sec. 4(1) of the Indian Telegraph Act, 1885;
(ii) in relation to general insurance business, the insurer or re-insurer, as the case may be,
providing such services;
(iii) in relation to insurance auxiliary service by an insurance agent, any person carrying on the
general insurance business or the life insurance business, as the case may be, in India;
(iv) in relation to any taxable service provided or to be provided by any person from a country
other than India and received by any person in India under Sec. 66A of the Act, the recipient of
such service;
(v) in relation to taxable service provided by a goods transport agency, where the consignor or
the consignee of goods is
o Any factory registered under or governed by the Factories Act, 1948;

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o Any company formed and registered under the Companies Act, 1956;
o Any corporation established by or under any law;
o Any society registered under the Societies Registration Act, 1860 or under any law
corresponding to that Act in force in any part of time;
o Any co-operative society established by or under any law;
o Any dealer of excisable goods, who is registered under the Central Excise Act, 1944 or the
rules made there under; or
o Any body corporate established, or a partnership firm registered by or under any law;
Any person who pays or is liable to pay freight either himself or through his agent for the
transportation of such goods by road in a goods carriage;
(vi) in relation to business auxiliary service of distribution of mutual fund by a mutual fund
distributor or an agent, as the case may be, the mutual fund or asset management company, as
the case may be, receiving such service;
(vii) in relation to sponsorship service provided to any body corporate or firm located in India, the
body corporate or, as the case may be the firm who receives such sponsorship service;
The following are the case laws in respect of persons liable for paying service tax
1. Kerala State Electricity Board V. Commissioner of Central Excise, Trivandrum - [2007 - TMI - 2362 -
Supreme Court of India] Kerala State Electricity Board, recipient of consulting engineering service from a
Canadian company was held to pay service tax on the basis of the agreement between the parties.
2. Hanil Lear (I) (P) Ltd., V. Commissioner of Service Tax, Chennai - [2009 -TMI - 32140 - CESTAT CHENNAI]
The appellants received certain services from a few foreign companies under agreement executed
between them that these services received during the period from February 1999 to 15.8.2002 that these
services were designated as consulting engineers service by the department and that service tax was
demanded by lower authorities. In the present appeal the appellants submitted that there was no
authorization by the foreign companies to the appellants to pay service tax on their behalf in respect of
the amounts received from the appellants as consideration for the services in question. The tribunal
analyzed the provisions of the agreements. The relevant provision says that service tax liability shall be
borne by the recipient of service. That does not mean that the statutory liability to pay service tax is on
the appellants. This only means, that where the foreign companies discharge their tax liability it would be
passed on to the appellants. In view of this the tribunal found prima facie case for the appellants against
the impugned demand and waived the pre deposit.

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3. Invincible Security Service V. Commissioner of Central Excise, Noida - [2009 -TMI - 32156 - CESTAT
NEW DELHI] The appellants had entered into an agreement with BSNL, Moradabad for providing security
service. It is revealed from the agreement that the service tax would be paid by M/s BSNL. BSNL paid tax
and filed return in respect of services provided by the appellants. Show cause notices were issued
proposing demand of tax, penalty and interest for non-payment of tax by the appellants. The Adjudicating
Authority as well as the Commissioner (Appeals) confirmed the demand of tax. The Commissioner
(Appeals) however reduced the penalty imposed by the Adjudicating Authority. The Department
contended that the liability of payment of tax on the appellant cannot be discharged by BSNL. The tribunal
agreed with the department in this regard but it found from the order of the Commissioner (Appeals) that
BSNL is registered with Central Excise Department and filed the return and deposited the tax with the
Commissionerate of Moradabad which has been accepted by them. Therefore, the contention of the
department is not sustainable. Further the appellants paid the interest for delay in payment of BSNL. The
tribunal therefore set aside the demand of tax and penalty
4. Navayug Alloys Private Limited V. Commissioner of Central Excise & Customs, Vadodara II - [2008 -
TMI - 31916 - CESTAT AHEMDABAD] Service tax of Rs.51,385/- stands confirmed against the appellant
who is availing the Goods Transport Services. It is on record that the service tax on the said services stands
paid by the transporters. The Revenue's contention is that it was the liability of the appellant to pay the
tax and service tax paid by the transporter providing services cannot be treated as valid payment.
However, the Revenue has not refunded the tax paid by the transporter to them. The tribunal held that
once tax already paid on the services, it was not open to the department to confirm the same against the
appellants in respect of the same services.
5. Brahmputra Valley Fertilizer Corporation Limited V. Commissioner of Central Excise, Dibrugargh -
[2009 -TMI - 32626 - CESTAT, KOLKATA] The only dispute in this case relates to whether exemption under
Notification No. 32/2004- ST, is available to a person made liable to pay service tax. The matter has been
examined by the Central Board of Excise & Customs in the meantime and a clarificatory circular No.
5/1/07-ST, dt. 12.03.2007 has been issued. With the consent of both the parties the impugned order is
set aside and remanded to the original authority.
Q. Define 'Service'. What do you mean by 'Declared Service’?

The definition of service in the first instant is very wide to cover any transaction done for a consideration.
However, there exist few activities which would overlap with the other levies of state with a marginal
difference, thereby questioning the constitutional validity of the levy under service tax. In some cases,

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there may be a doubt whether that activity could possibly call a service at all. To rest the doubt about the
validity of a transaction to be considered as service, the authority has intended to declare such activities
to be a service. To give an instance, the first declared service “renting of immovable property service” was
challenged as to whether it was a “service” as well as the competence of the Union to levy the tax on a
property, which is a subject to state governance. Similarly, most of the declared services were challenged.
For all events and purposes these transactions shall be deemed to be service.
Declared Services are defined under Sec. 65B (22) of the Finance Act, 1994 to mean any activity carried
out by a person for another person for consideration and declared as such under Sec. 66E of the Finance
Act, 1994. It means for a service to come under the category of declared services, it has to satisfy two
basic conditions conjunctively:
a. it must be an activity by one person to another for consideration
b. it must be specified(i.e. declared) under Sec. 66E
In accordance with clause (44) of the newly inserted Sec. 65B of the Finance Act,1994 effective from July
1,2012, the term ‘service’ means any activity for consideration carried out by a person for another and
includes a declared service. Thus, whenever any activity is carried out in the taxable territory for a
consideration by one person for another then such activity is taxable service.
The word ‘Activity’ has not been defined in the Act and therefore it is a term with very wide connotation
to include an act or work done, to tolerate an act or a situation, any performance of an act, an operation
carried out, provision of a facility etc.
However, certain activities have been specifically defined by its description as service which is known as
“declared services” and the same phrase been defined under Sec.65B(22) as any activity carried out by a
person for another person for consideration and declared as such under Sec.66E.
The following nine activities have been specified in Sec.66E and these activities when carried out by a
person for another for consideration would amount to provision of service:
i. renting of immovable property;
ii. construction of a complex, building, civil structure or a part thereof
iii. temporary transfer or permitting the use or enjoyment of any intellectual property right;
iv. Services in relation to information technology software;
v. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an
act;
vi. transfer of goods by without transfer of right to use such goods;

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vii. activities in relation to delivery of goods on hire purchase or any system of payment by
installments;
viii. service portion in the execution of a works contract;
ix. service portion in an activity wherein goods, being food or any other article of human
consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the
activity.
Now we will discuss each of them in coming paras in more detail
1) Renting of Immovable Property: The term ‘renting’ has been defined in Sec.65B(41) as “allowing,
permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an
immovable property, with or without the transfer of possession or control of the said immovable property
and includes letting, leasing, licensing or other similar arrangements in respect of immovable property”.
The renting of immovable property has been upheld in the case of Shumb Timb Steels Ltd. Vs. UOI [(2010)
20-STR-737(P&H),
Under Renting Inclusions and exclusions:
INCLUSIONS EXEMPTIONS
Renting of vacant land, with or without a Renting of precincts of a religious place meant for
structure incidental to its use, relating to general public is exempt.
agriculture.
Renting of residential dwelling for use as Renting of a hotel etc, having declared tariff
residence. below rupees 1000 per day
Renting out of any property by Reserve Bank of To Educational institutes

India.
Renting out of any property by a Government or

a local authority to all non-business entity.
2) Construction of a complex, building, civil structure or a part thereof: Construction of a complex,

building, civil structure or a part thereof, including a complex or building intended for sale to buyer, wholly
or partly, except where the entire consideration is received after issuance of certificate of completion by

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a competent authority. The term “construction” includes additions, alterations, replacements or

remodeling of any existing civil structure.
In a judgement passed by the Mumbai High Court in the case of Maharashtra Chamber of Housing
Industry and Others Vs. Union of India [012-TIOL-78- HC-Mum-ST] has upheld the Constitutional validity
of levy of service tax, under clauses (zzzh) and (zzzzu) of Sec. 65, on similar construction services provided
by a builder. A relevant portion of the judgement is reproduced below-
“29. The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause
(105) of Section 65. The charge of tax is on the rendering of a taxable service. The taxable event is the
rendering of a service which falls within the description set out in sub-clauses (zzq), (zzzh) and (zzzzu). The
object of the tax is a levy on services which are made taxable. The fact that a taxable service is rendered
in relation to an activity which occurs on land does not render the charging provision as imposing a tax on
land and buildings. The charge continues to be a charge on taxable services. The charge is not a charge on
land or buildings as a unit. The tax is not on the general ownership of land. The tax is not a tax which is
directly imposed on land and buildings. The fact that land is subject to an activity involving construction
of a building or a complex does not determine the legislative competence of Parliament. The fact that the
activity in question is an activity which is rendered on land does not make the tax a tax on land. The charge
is on rendering a taxable service and the fact that the service is rendered in relation to land does not alter
the nature or character of the levy. The legislature has expanded the notion of taxable service by
incorporating within the ambit of clause (zzq) and clause (zzzh) services rendered by a builder to the buyer
in the course of an intended sale whether before, during or after construction. There is a legislative
assessment underlying the imposition of the tax which is that during the course of a construction related
activity, a service is rendered by the builder to the buyer. Whether that assessment can be challenged in
assailing constitutional validity is a separate issue which would be considered a little later. At this stage,
what merits emphasis is that the charge which has been imposed by the legislature is on the activity
involving the provision of a service by a builder to the buyer in the course of the execution of a contract
involving the intended sale of immovable property.
3) Temporary use of Intellectual property Rights: Intellectual property emerges from application of
intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill
etc. Temporary transfer or permitting the use or enjoyment of any intellectual property right viz. i) know-
how, ii) patents, iii) copyrights, iv) trade-marks, v) licenses, vi) franchises; or vii) any other business or
commercial rights of similar nature.

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Provision of IPR registered outside India is covered under this service category. In the case of Redaan
Media Works (I) Ltd. Vs. CST, Chennai [(2010) 19-STR-740(Tri.-Chennai)], Tribunal held that permanent
transfer of IPR is not taxable.
4) Information Technology Software Service: The term ‘information technology software’ has been
defined in Sec.65B of the Act as any representation of instructions, data, sound or image, including source
code and object code, recorded in a machine readable form, and capable of manipulated or providing
interactivity to a user, by means of computer or an automatic data processing machine or any other device
or equipment.
Site Development of software, Development, design, programming, customization, adaptation, up
gradation, enhancement, implementation of information technology software has been included as a
information technology software.
Packaged information technology software is being exempted from service tax provided either the
customs duty or excise duty has been paid on the entire amount received from the buyer.
In the case of Infotech Software Dealers Assn. Vs. UOI [(2010)] 29-STT-132 (Mad.)], Court held that,
Software transaction sale or service depends upon the terms of end user license Agreement. If right to
use of software provided then Sale.
5) Agreeing to do or not to do an Act: Agreeing to the obligation, or to the act to refrain from an act, or
to tolerate an act or a situation, or to do an act. Therefore, non-compete fees would be taxable.
In the case of Landboden-Agradienste GmbH & Co. KG Vs. Finanzamt Calau [(2012) 36-STT-11(ECJ)] it
has been held that there cannot be provision of services without a consumption of same specific
consumer required for such service.
6) Supply of property without transfer of right to use: Transfer of goods by way of hiring, leasing, licensing
or any such manner without transfer of right to use such goods. None that transfer of right to use any
goods is leviable to sales tax/VAT as deemed sale of goods as per Article 366(29A)(d) of the Constitution
of India.
In a famous case BSNL Vs. UOI [(2006) 2-STR-161 (SC), the Supreme Court has clarified that following
ingredients may be used for determining the transfer of right to use:
a. There must be goods available for delivery;
b. There must be a consensus ad idem (consent to the same) as to identity of the goods;

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c. The transferee should have legal right to use the goods and consequently all legal consequences of such
use including any permissions or licenses required therefore should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the
transferor- this is necessary concomitant of the plain language of the statute, viz., ‘a transfer of the right
to use’ and not merely a license to use the goods;
e. Having transferred, the owner cannot again transfer the same right to others.
7) Delivery of goods on Hire Purchase: Activities in relation to delivery of goods on hire purchase or any
system of payment by installments have been included as part of taxable services.
Accordingly, the delivery of goods on hire purchase or any system of payment on installment is not
chargeable to service tax because as per Article 366(29A) of the Constitution of India such delivery of
goods is deemed to be a sale of goods. However, activities or services provided in relation to such delivery
of goods are covered in this declared list entry.
In the case of Association Of Leasing & Financial Service Companies Vs. Union Of India [(2010) 20-STR-
417(SC)], Supreme Court held that in equipment leasing/hire-purchase agreements there are two
different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-
purchase transaction and that the financing transaction, consideration for which was represented by way
of interest or other charges like lease management fee, processing fee, documentation charges and
administrative fees, which is chargeable to service tax.
8) Works Contract: Works contract has been defined in section 65B of the Act as a contract wherein
transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods
and such contract is for the purpose of carrying out construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable
property or for carrying out any other similar activity or a part thereof in relation to such property.
Service portion in execution of a works contract. Naturally every work contract involves an element of
sale of goods and provision of service. Further the Supreme Court in BSNL’s case [ (2006) 2-STR-161
(SC)] declared that a work contract can be segregated into a contract of sale of goods and contract of
provision of service.
However, in terms of Article 366(29A) of the Constitution of India transfer of property in goods involved
in execution works contract is deemed to be sale of such goods.

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9) Services of supply of food or drinks for human consumption: Services portion in an activity wherein
goods, being food or any other article of human consumption or any drink (whether or not intoxicating)
is supplied in any manner as part of the activity. It shall also include where services are provided during
provision of food or drinks for human consumption as in the case of restaurants, or outdoor catering etc.
In terms of article 366(29A) of the Constitution of India supply of any goods, being food or any other article
of human consumption or any drink (whether or not intoxicating) in any manner as part of a service for
cash, deferred payment or other valuable consideration is deemed to be a sale of such goods. Such a
service therefore cannot be treated as service to the extent of the value of goods so supplied. The
remaining portion however constitutes a service. It is a well settled position of law, declared by the
Supreme Court in BSNL‘s case [2006(2)STR161(SC)], that such a contract involving service along with
supply of such goods can be dissected into a contract of sale of goods and contract of provision of service.
Exemption under Notification 25/12 dt. 20.06.2012
Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other
than those having the facility of air-conditioning or central air-heating in any part of the establishment, at
any time during the year, and which has a license to serve alcoholic beverage. (Para 19 of 25/12 dt.
20.06.2012)
Q. Specify the services taxable in India. Specify the services not taxable in India.
As on 1st May, 2011, 119 services are taxable services in India. These taxable services are specified in
Section 65(105) of the Finance Act,1994. Section 64 of the Finance Act, 1994, extends the levy of service
tax to the whole of India, except the State of Jammu & Kashmir.
Generally, the liability to pay service tax has been placed on the 'service provider'. However, in respect of
the taxable services notified under Sec.68(2) of the Finance Act,1994, the service tax shall be paid by such
person and in such manner as may be prescribed at the rate specified in Sec.66 of the Act and all the
provisions of Chapter-V shall apply to such person as if he is the person liable for paying the service tax.
The following services have been notified under Sec.68(2) of Finance Act,1994:
A. the services, -
(i) in relation to telecommunication service;
(ii) in relation to general insurance business;
(iii) in relation to insurance auxiliary service by an insurance agent; and
(iv) in relation to transport of goods by road in a goods carriage, where the consignor or consignee of
goods-

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(a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
(b) any company established by or under the Companies Act, 1956 (1 of 1956);
(c) any corporation established by or under any law;
(d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any
law corresponding to that Act in force in any part of India;
(e) any co-operative society established by or under any law;
(f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944)
or the rules made thereunder; or
(g) anybody corporate established, or a partnership firm registered, by or under any
(v) In relation to Business Auxiliary Service of distribution of mutual fund by a mutual fund distributer
or an agent, as the case may be;
(vi) in relation to sponsorship service provided to anybody corporate or firm located in India;
Any taxable service provided or to be provided from a country other than India and received in India,
under Sec.66a of the Finance Act,1994. (Sec. 68(2) of Finance Act,1994, Notification 36/2004-S.T. dated
31.12.2004 as amended)
In the following situations, the liability to pay service tax is as follows:
1. in relation to [telecommunication service]
(a) the Director General of Posts and Telegraphs,
(b) the Chairman-cum-Managing Director, Mahanagar Telephone Nigam Ltd, Delhi, a company
registered under the Companies Act
(c) any other person who has been granted a license by the Central Government.
2. in relation to general insurance business, the insurer or re-insurer, as the case may be, providing
such service;
3. in relation to insurance auxiliary service by an insurance agent, any person carrying on the general
insurance business [or the life insurance business, as the case may be,] in India;
4. in relation to any taxable service provided or to be provided by any person from a country other
than India and received by any person in India under section 66A of the Act, the recipient of such
service;
5. In relation to taxable service provided by a goods transport agency, where the consignor or
consignee of goods is- any factory, any company, any corporation, any registered society, any co-
operative society, any registered dealer of excisable goods, anybody corporate or a partnership
firm;

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6. in relation to business auxiliary service of distribution of mutual fund by a mutual fund distributor
or an agent, as the case be, the mutual fund or asset management company, as the case may be,
receiving such services;
7. in relation to sponsorship service provided to anybody corporate or firm located in India, the body
corporate or, as the case may be the firm who receives such sponsorship service;
Exemptions/ Abatements under Service Tax
Some general exemptions are provided in respect of:
▪ Services provided to the United Nations
▪ Services to units in and developers of Special Economic Zones
▪ Services rendered free of cost and
▪ Services prior to the effective date of the service being included as a taxable service, even if
payments are realized later
Exemptions available for small service providers
Service Tax is fully exempted in respect of the taxable services of aggregate value not exceeding eight
lakhs rupees in any financial year.
The above-mentioned exemption based on the turnover is not available to the persons who are liable to
pay Service Tax but are not the service providers. For example:
1. The recipient of services from an overseas service provider who has no registered office in India
2. A company incurring the Transportation charges for availing the services from Goods Transport
Agencies, for transportation of goods by Road.
3. Whether the service charges were received for the services provided or to be provided.
In case the service provided by a person falls within the scope of the taxable services and if such service
is not fully exempted, the service tax is payable on the value of the taxable service received subject to the
eligible abatements, if any.
Abatements: Abatement refers to the portion of value of taxable service, which is exempt in terms of a
notification.
Q. Distinguish between VAT and Service Tax.

Definition of VAT: VAT is an abbreviated form of the term Value Added Tax. As its name suggests, it is a
tax on value addition made to a particular commodity by a party at the time of its production and

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distribution. The taxpayer will get input tax credit for the tax already paid on the product at the previous
stage, i.e. set off is available to the taxpayer for the tax paid on the preceding stage.
The right to levy VAT is in the hands of the State Government; that is why it is imposed only when the
sales are made within the state. Central Sales Tax is charged in case of interstate sales. It is also known as
the multilevel tax because it is levied at each stage of the supply chain of raw material, whenever the
value is added to the product, till it is sold to the end consumer. The burden of VAT is borne by the
customer itself but paid by the seller to the tax authorities.
VAT can be easily calculated by simply deducting input tax from output tax where input tax is the tax on
intrastate purchases from a registered dealer while output tax is a tax on intrastate sales.
More than 160 countries of the world had adopted the VAT system. In India, the VAT rate varies from
state to state. However, it is 0% for tax-free commodities, 1% for precious stones, jewellery, etc., this, 4%
for necessities, 20% on luxury goods and 13.5% on all other goods not falling into the above categories.
Definition of Service Tax: The tax charged on the services provided is known as Service Tax. The Central
Government has the authority to levy service tax, so it is applicable in the whole country except the state
of Jammu & Kashmir. The tax liability for the services can be determined from the Point of Taxation.
Normally, the person who renders services is liable to pay service tax, but the burden falls on the service
receiver. Although there are some notified services on which the tax is to be paid by the service receiver
itself, this is known as a Reverse Charge Mechanism. Furthermore, there are some services on which the
tax is to be paid by both service provider and service re; this is known as a Joint Charge Mechanism.
In India, the service tax was first introduced through the Finance Act, 1994, recommended by the Dr Raja
Chelliah Committee. At that time, it was levied only on three services, i.e. stock broking,
telecommunication, and insurance, at the rate of 5%. At present, the rate of service tax is 14%, and it is
levied on all the services except those which are included in the Negative List. The Negative List is the list
of the selective services which are exempt from tax.
Key Differences Between VAT and Service Tax
1. The tax imposed on the production and sale of a commodity is known as Value Added Tax (VAT).
Tax on services rendered is known as Service Tax.
2. VAT is a multi-point tax, whereas Service Tax is a single point tax.
3. VAT is charged on physical items i.e. goods while Service Tax is charged on non-physical items i.e.
services.
4. The State Government imposes VAT, but Central Government imposes services Tax.

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5. VAT is governed by the statute of the respective state. On the other hand, Service Tax is governed
by the Finance Act, 1994.
6. VAT was introduced in the year 2005, all over the country. Conversely, Service Tax was introduced
in the year 1994.
7. The VAT rate is different for different category of commodities. In contrast to Service Tax, has a
flat rate.
8. VAT is applicable within the jurisdiction of the state, whereas Service Tax is applicable all over the
country except in Jammu & Kashmir.
Conclusion: Both the VAT and Service Tax are indirect taxes; that is why they are under the control of
Central Board of Excise and Customs (CBEC). However, Goods and Services Tax (GST) is going to replace
the VAT and Service Tax in India in the next few years after which a single Act will govern both the taxes.
Q. Discuss the provisions relating to payment of Service Tax. State the consequences if a person is liable
to pay Service Tax fails to pay such Tax.
Provision relating to Payment (Section 68)
Section 68 contains statutory provisions relating to payment of service tax. According to Section 68,
following provisions exist:
(1) Every person providing taxable service to any person shall pay service tax at the rate specified
in section 66 in such manner and within such period as may be prescribed.
(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service
notified by the Central Government in the Official Gazette, the service tax theron shall be paid by
such person and in such manner as may be prescribed at the rate specified in section 66 and all
the provisions of this Chapter shall apply to such person as if he is the person liable for paying the
service tax in relation to such service.
Section 68 is only a payment or recovery provision and levy provision cannot be interpreted or influenced
by the collection section. Section 68 was amended significantly by the Finance Act, 1998 to the effect that
‘collection of tax’ had been replaced by ‘payment of tax’. It means that even if the assessee is not able to
collect the portion of tax, he shall be liable to make the payment of Service Tax on the amount received
and he will be liable for paying the Service Tax in relation to such taxable service.
As per Section 68(1), the responsibility of paying the Service Tax vests with the person who is providing
the taxable service except in cases where person liable to pay tax is not a service provider as per section
68(2).

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Charge of Service Tax (Section 66): Finance Act, 2006 has amended the rate of service tax, w.e.f. 18th
April, 2006.
Section 66 is the charging provision which states that there shall be levied a tax at the rate of twelve per
cent (five per cent up to 13-5-2003; eight per cent from 14-5-2003 to 9- 9-2004; ten per cent from 10-9-
2004 upto 17-4-2006) of the value of the taxable services as referred to in Section 65(105). The rate of
service tax has been enhanced from 10 per cent to 12 per cent by the Finance Act, 2006 w.e.f. 18.4.2006.
The effective rate of Service Tax has been concerned to 10 per cent by Notification No. 8/2009-ST dated
24-2- 2009. Thus it will be 10.30 per cent w.e.f. 24-2-2009 inclusive of cess. A 2 per cent education cess
thereupon was also levied. The effective rate of Service Tax was reduced to 10 per cent by Notification
No. 8/2009-ST dated 24-2-2009. Thus, it will be 10.30 per cent w.e.f. 24-2-2009 inclusive of both cesses.
Education Cess: An Education Cess levied on all taxable services shall be chargeable @ 2% of the amount
of service tax. The cess paid on input services shall be available as credit for payment of cess on output
services. Education cess is in nature of a surcharge and is not a permanent levy. It is temporary in nature.
Secondary and Higher Education Cess: A cess @ one per cent has been imposed on services liable to
service tax. It shall be levied on the service tax payable on such services. The cess paid on input services
shall be available as credit for payment of cess on output service. It will come into force from the date of
Finance Act, 2007.
Payment of Service Tax by Cheque: Rule 7 of Central Government Account (Receipts and Payments) Rules,
1983 provide that government dues which includes taxes, could be credited directly into any authorized
bank branch by assessees/taxpayers and that such payments can be made by cash or cheque/draft also.
It has been clarified that as per RBI instructions, when the payment is made either in cash or by the
demand draft, the immediate credit has to be taken. However, when a cheque is tendered, the money
still remains in assessees account and is not transferred to the bank. It is only when the cheque is cleared
by the clearing house of the bank that the money gets deposited in the bank. Till the date of clearance,
the money is not credited to the designated bank, i.e., the money is not credited to the Government of
India’s account as provided under Rule 6 of Services Tax Rules. In view of this, the payment of duly by
cheque may not be treated as discharge of duty by due date unless the cheque is encashed and the
amount is credited in the account of Government of India.
Service Tax (Amendment) Rules, 2002 provide that in case of payment by cheque, the date of presentation
of cheque shall be deemed to be the date of payment of tax subject to realization, in such case, the date

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of presentation of cheque shall be the date on which Service Tax has been paid to the credit of the Central
Government provided the cheque is not dishonoured in the course of clearing. Also refer Circular No.
86/2003–Customs dated 3-10-2003.
E-payment of Central Excise and Service Tax: E-payment is a mode of payment in addition to the
conventional methods of payment offered by the banks under specific security norms of Reserve Bank of
India. This scheme facilitates anytime, anywhere payment and an instant cyber receipt is generated once
the transaction is complete. It provides the convenience of making online payment of Central Excise and
Service Tax through Bank’s Internet banking service.
Payment of Tax in Designated Banks: It should also be noted that payment of Service Tax should be made
in the designated branches of the bank because payment of tax into non-designated banks would not
amount to paying Service Tax.
However, in Shaman Marketing Research Association v. Commissioner of Central Excise, Mumbai-V
2003 -TMI - 92 – (CEGAT, MUMBAI), where Service Tax was paid in Union Bank of India instead of State
Bank of India, it was held that appellants should have been guided to pay the Service Tax in appropriate
bank. When tax was already paid to one of the designated banks, order demanding tax again with interest
and imposing penalty was set aside. The lower authorities should have got the matter regularized by
transfer of amount from one authorized bank to other instead of issuing the impugned orders asking the
assessee to pay tax again along with interest.
Rounding off of Tax Amount: The amount of Service Tax payable by assessees or service providers is
required to be rounded off to the nearest rupee as per the provisions of Section 37D of the Central Excise
Act, 1944. If the amount of tax payable is less than fifty paise (i.e. up to 49 paise), it will be ignored and
where it is fifty paise or more, it will be rounded off to the next rupee. Section 37D applies to Service Tax
also. This has also been clarified vide [Circular No. 53/2/2003-ST dated 27-3-2003]
Accounting Codes for Services: Each service has been assigned a code (ECC code) for depositing the tax.
Assessees are required to mention proper service code while tendering the payment to get proper and
timely credit. Service tax assessees should quote new heads of accounts along with eight-digit serial code
numbers as allotted by Controller General of Accounts, CBEC. The new eight-digit code numbers have
been issued vide office memorandum dated 13-2-2003. With this, old account numbers have been

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withdrawn and need not be used. In case an assessee has mentioned wrong accounting code, he need
not make another payment but the Department would sort out the matter with public accounts office.
Consequences of Non-payment/Delay in Payment: As per Section 75, if a person defaults in making the
payment of Service Tax within stipulated time, he was liable to pay simple interest @15 per cent p.a. for
the period during which the payment was delayed (prior to 10.9.2004). Notification No. 26/2004-ST dated
10-9-2004 has fixed the rate of interest @13 per cent per annum w.e.f. 10-9-2004. The rate of interest
has been enhanced to 18 per cent p.a. w.e.f. 1.4.2011 vide Notification No. 14/2011-ST, dated 1.3.2011.
Interest payments are mandatory in nature and the same cannot be waived.
Service Tax Penalties: As per the provisions made under Sections 76, 77 and 78 of Finance Act, 1994, the
central government may charge penalty, if you fail to meet the following conditions:
• If you fail to furnish the ST-3 Return within the due dates which are 25th October and 25th April
of every year. In that case, you will be liable to pay penalty fee which may extend up to Rs.2,000
based on the period of delay.
• If a person fails to furnish information or appear before the Central Excise Officer when called for,
he/she shall have to pay penalty up to Rs.5,000 or Rs.200 per day after the due date, whichever
is higher.
• If you are a service provider and fail to register your service, it will draw penalty as per the
regulations mentioned in section 77 of the Finance Act, 1994 and the penalty fee may go up to
Rs.5,000. Because, registration serves as an identity of an assessee and it is mandatory to register
your services.
• If an assessee fails to keep or maintain records of account and other documents required by
service tax law, he/she shall be liable to pay penalty fee which may go up to Rs.5,000.
• If a person fails to pay tax electronically, he/she shall to pay penalty which may extend up to
Rs.5,000.
• Penalty fee is also charged on non-payment or delayed payment of service tax.
• Penalty shall be charged up to Rs.5000, if a person issues an incorrect invoice or fails to support
his invoice with valid details.
• Penalty shall be charge if a person suppresses the value of taxable services or provides wilful miss-
statement about the service provided.

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Not only there are provisions for imposing penalty if you fail to meet the above-mentioned criteria, there
are also provisions for not imposing penalty in the service tax rules. As per section 80 of the Finance Act,
1994, if a person can provide sufficient cause to support his failure to pay service tax, he/she can be
exempted from paying penalty fees. However, insufficient funds or lack time are not considered as
adequate causes to waive penalty.

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Page 1 of 126

Compiled by Rahul Kumar Singh

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IV) Assessee [sec.2(7)]

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ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]:

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Q. How to determine Residential Status of an individual under Income Tax Act?

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Basic rules for determining Residential Status of an Assessee

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Test B – RESIDENT (Ordinary Resident) -ROR

Test C – RESIDENT (NOT Ordinary Resident) – “RNOR”

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Tax Residency of FIRM and AOP or BOI

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Tax Residency of HUF

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3. Voluntary Contributions received by a trust. Voluntary contributions received by a trust are

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12. Any sum chargeable to tax u/s 28 (iiic) , -

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Compiled by Rahul Kumar Singh

Compiled by Rahul Kumar Singh

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Who should file an Income Tax Return?

Why should one file a return of income?

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What are the different modes of filing return of income?

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Q. Discuss the assessment of Income from House Property.

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by a cooperative society or a company to its members/shareholders who enjoy the flat,

DETERMINATION OF INCOME FROM HOUSE PROPERTY

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* Interest income 10,000

* Income from other sources 6,000

Net loss from residential House Property (-) 36,000

Net loss 20,000

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COMPUTATION OF INCOME FROM SELF OCCUPIED PROPERTY

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DEDUCTIONS UNDER SECTION 80C IN RELATION TO INVESTMENT IN NEW RESIDENTIAL HOUSE

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i. the Central Government or any State Government, or