18th Jan

CANONS OF TAXATION – INDIA

Cant be negotiated in any country – Quantum of tax depends on the need of the State
Not for the tax payer but for the State
 Ability to pay of the person – based on Income / wealth/expenditure/consumption –
income far better criteria to judge - consequences:
 Payment should be simple
 Benefit to taxpayer
 No double taxation
 No disincentive
 Exemptions
 Well defined
 Transparency in expenditure
 Uniform applicability
 Consistency
 Certainity – Tax liability, manner of collection - must be mentioned in the law itself
ex. Minimal Delegated legislation to be there, time of collection – CY , AY and FY is
different- two set of accounts – for the global purposes CY followed , fiscal laws FY
followed ; this govt wanted to make FY into CY
o Why could they not do so? Repercussions, various laws and compliances need to
be changed, whether it will suit our country
o Why FY is April to March - India has been an agrarian country – cropping
pattern comes to an end around March- hence April to March - but now no harm
to bring it to CY because global practices need to be followed as no longer
dependent on agriculture
 Convenience – as to time, as to the manner of payment – use of technology helps
 Principles of Economy –
o Cost of administration – minimal because otherwise net revenue goes down
o Cost of compliance – any bill’s financial implications. (Cost and benefit
analysis)- no addl expenditure for tax payer – ties in with simplicity
 Neutrality – neutral to your economic decision making – no scope of tax arbitrability.
Tax should not unduly interfere in the business.
 No disincentive should be created for the tax payers

Proportion and in progression

Manner in which taxes levied – proportion of income- no flat rate of tax should be applied –
gap b/w rich and poor (progression / regression)

OXFAM –

Should Rely more on direct taxes than on indirect taxes – regression inbuilt in indirect taxes –
Direct tax base is narrow while indirect tax base is wide

Implications if principle of taxes not followed in policy making, law making and
implication- evasion of taxes /black money
Part IV principles – DPSP – non enforceable but still important

These canons are not enforceable. No tax law challenged on the basis of these canons of
taxation.
If these principles are not followed, then there will be disaster, arbitrary. Although these
canons are not enforceable, they are fundamental to the governance of the country. Faulty
enforcement will have negative economic implications- widening economic disparities.

Simplification of Tax Laws

Compliance with tax laws become very burdensome due to the complicated tax laws.

Tax Management- Procedural compliances; Books of Accounts, filing returns in time.

Vodafone case- related to “TDS”. Vodafone claimed that it is not liable to deduct
TDS. Bombay HC held it is liable. Supreme Court overruled it and held that it is not
liable. TDS is merely compliance. No personal liability but if you commit default in
compliance, then there is liability. This was a simple case of TDS.

Online Gaming and GST implications- IMP issue. Games Car Online gaming
company- demand notice issued upon this company.

Tax Planning- Arranging the economic affairs as per text and spirit of laws. This is a win-
win situation for both the policy-makers and taxpayers.

How to bridge the wide economic disparities? Tax is one such tool used to address this
problem. That is how these exemptions are provided.

Tax holidays period- exemptions are not granted in perpetuity. Only for the time being,
maybe for 10 or 15 years. Inviting investments and the investors do not have to pay taxes.
These are incentives.

Transfer Price- Price at which the transfer is taking place. In our country, there is no law
which fixes the price of the transaction.
Genesis of Transfer Pricing Regulations- If transaction is taking place between 2 associated
entities, then the price which they are showing will be disregarding and independent
investigation will be carried out to determine the genuine transfer price of the transaction.
These methods are scientific guesswork. Not hundred percent correct propositions.

Lots of disputes happen; assessee dispute the guesswork methods used for determining the
genuine transfer price.

Advanced Pricing Agreements- there is an agreement between an assessee and the

department. Disclosure that this is their pricing policy. Government discusses with the
assessee and after they agree on certain terms and conditions, the government will later not
invoke transfer pricing regulations.

Tax Avoidance- Arranging the economic affairs as per text but against spirit of laws,
thereby, going against the intention of the lawmakers.
Entire genesis of tax avoidance is these tax incentives.
Tax Evasion- Arranging the economic affairs disregarding the text and spirit of laws. It is
unlawful, illegal.

Tax Avoidance is perfectly legal within the domain of the taxpayers though it may be
unethical/undesirable.

Which one is more problematic policy-vise? Tax Avoidance.

LT Swamiar v. Commissioner HRE- SC decision- How to make distinction between tax and
fees.

Interpretation of Fiscal Statutes- IMP case- Dilip Kumar and Co. v. CCE

This case deals with two aspects:

1. Interpretation of Fiscal Statutes
2. Interpretation of Exemption notifications issued in pursuance of Fiscal statutes
Whether there is any difference in the approach of interpretation of fiscal statutes and
exemption notifications- addressed by the SC in Dilip Kumar.
All statutes which attract some form of penalty shall have to be interpreted strictly, meaning
thereby that if there are two possible interpretations, one favourable for assessee and the other
favourable for the department, then the one which favours the assesee should be taken into
account.
Law must be clear and certain; no scope for ambiguity. If any scope for ambiguity, then
interpretation always in favour of assessee.
The larger issue in this case was with respect to the interpretation of exemption notifications
which are favourable for the assessee.
However, there were contradictory judgements of the SC. The Sun Pharma case wherein the
Court took a contrary view. As a result, it was referred to a larger bench.
Taxes are essentially a legislative power; not an executive power- Basis of this statement is
Article 265 of Constitution.
Exemptions are basically an exception. All the exemption notifications must be construed
strictly. The assessee has to prove the application of the exemption in his case. It is not
beneficial but must be interpreted strictly.
Rule is of taxation. Exemption is only an exception.

There are 2 things:

Exemption Notifications and exemption provisions given in the statutes by the Parliament.
The interpretation of an exemption notification is different from the interpretation of
exemption provisions- Discussed by the Supreme Court in the Dilip Kumar case is important.

IMP Project topic- Exemption notification interpretation: Using Dilip Kumar case.
Read the Vodafone case (IMP). On one side, government was there. On the other side, all
corporates were there.

Tax under 3 heads: Income, Consumption and Wealth.

Out of Evasion, the next thing which comes out is black money (money which is unaccounted
or undisclosed).

Question is how to prevent the generation of black money?

Black money into two categories- i. black money which is generated through illegal
transactions; ii. Doing legal transactions but manner of doing those is problematic, i.e., white
collar crime. Crimes committed by intellectuals. Hawala.

All activities should not be blindly criminalized without the application of mind.

IMP Document on Black money- White paper May, 2012

Task Force Report on Black Money

Voluntary Disclosure Scheme- Government creates a window period and asks individuals to
pay certain higher percentage of tax on the undisclosed income. Policy to unearth the Black
money. But government could not succeed.
VDA scheme problematic because favours perpetual offenders. Causes a lot of damage.
Rewards dishonest offenders and does not affect honest tax-payers.

UOI v. R.K. Garg (Bond Bearer case)

Issues arise with respect to the legality, morality or constitutionality of the schemes.
Whenever it is an economic policy, government gets more and more flexibility to decide.
Judiciary has very limited role. Very lenient approach adopted unless patent violation of FR.

Harbhajan Singh Dhillon v. UOI (1971)

Kesoram Industries v. WB
LT Swamiar v. Commissioner of HCE

Direct Taxes- going to directly affect all of us.

Constitutional Framework on Taxation

Special power has been given in respect of taxation. Special provisions. In all the lists, tax
entries are very specific. The last entries in the lists are dedicated for taxes. Specific
nomenclature for tax is given. Taxation power on specific items has been given either to the
Centre or States.
State- public expenditure is more compared to the Centre. But the financial resources
available to the states are relatively much less compared to what is present with the Centre.
Constitution has classified taxes between Centre and states on the basis of which authority
would be able to effectively administer that tax relatively better. Certain principles have been
followed in the allocation of taxes.

There is a clear-cut imbalances in the need and actual power of taxation given to the
centre/states.
In terms of financial resources, states are very weak. Political autonomy may be useless if
you do not have the fiscal autonomy.

Article 280- about Finance Commission. Finance Commission will recommend how much
will be retained by Union and the rest to be given to states. From among the states, how much
will be given to each state is also recommended by Finance Commission. However, the
recommendations are not binding.

Whatever taxes are being raised, states also get benefit out of them.

This is how the mismatch gap is being reduced and fiscal autonomy of states upheld.

Article 265- No tax shall be levied or collected except by authority of law.

Not by mere executive orders. Law is absolutely necessary for taxation.

No taxation without proper representation.

Tax laws enacted in the form of Money Bill.

Article 248- Residuary power.

List I Entry 97- Residuary power.

101st Amendment Act- GST. Introduced a new concept called concurrent power/simultaneous
power.

Article 246A- introduced the concurrent power.

Why such a provision has been made?

Article 245 of the Constitution- Union has the power to make the laws and State will have the
power to make laws over their territory.

Article 285-289- IMP

Article 301-304- Importance of economic integrity and unity across the nation.

Article 301. Freedom of trade, commerce and intercourse Subject to the other provisions
of this Part, trade, commerce and intercourse throughout the territory of India shall be
free.

Article 304. The Legislature of a State may by law

(a) impose on goods imported from other States or the Union territories any tax to which
similar goods manufactured or produced in that State are subject, so, however, as not
 to discriminate between goods so imported and goods so manufactured or produced;
and
(b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse
with or within that State as may be required in the public interest: Provided that no
Bill or amendment for the purposes of clause shall be introduced or moved in the
Legislature of a State without the previous sanction of the President

Atiabari Tea Estate v. State of Assam- 1960 case; 5-judge bench decision. Held that if
there is a direct and immediate effect as to the free movement of goods and passengers, such
tax will fall. Taxes will be hit by 301 if they have a direct and immediate effect on the
movement. Court said that they will not go for either of the extreme approaches. They will go
for only taxes which directly affect the free movement/transportation of goods, passengers,
etc. Taxes on sale will not be hit by 301.

Rajasthan Automobile Transport v. State of Rajasthan- 1962 case; 7-judge bench

decision. Held that Article 301 provides that there should be no hindrance to free movement
and transportation of goods and services. Court evolved the concept of Compensatory
taxes. State is exercising the power of taxation but it should not be more than what is spent
on promoting trade, commerce and intercouse. Those taxes which are otherwise hit by
Atiabari judgement. Those taxes which are being levied for trade, commerce and intercourse
and patently are not more than what is needed for promoting trade, commerce and
intercourse. Pro-State judgement.

Jindal Stainless Steel v. State of Haryana- 2016 decision; 9-judge bench headed by Justice
T.S. Thakur dealing with the economic history of India. Held that only those taxes are
violative of Article 301 if they are discriminatory in nature. Mere nexus theory propounded in
Bhagat Ram not valid. Held that taxes hit by Article 301 fall but not as understood by SC in
Atiabari and subsequently understood by SC. Positive discrimination is allowed. Hostile,
negative discrimination is allowed.

What is hostile discrimination?

Mahabir Oil Mill (Clear cut case of Hostile discrimination); and Videocon Electronics v.
State of Punjab (Case of Positive Discrimination).

In Mahabir Oil Mill case, State made a policy that whatever oil came from out of State of
J&K will attract sales tax. But if the oil was produced and traded locally by Small-scale
industries, then they need not to pay taxes on that oil. Prima facie there is a possibility that
import may get stopped and locally produced products would get cheaper. This kind of
practice happens in every state because otherwise, how will the state stand on its own feet.
Positive discrimination is allowed for a temporary period. But in this case, the problem was
that this incentive was constantly being extended by 5 years. Further, for qualifying as SSC,
the turnover was also being extended to bring a large number of entities within the ambit of
an SSC. In the garb of positive discrimination, Court held that you cannot engage in hostile
discrimination.

But in the Videocon case, the incentive was only for the time being. It was subsequently
discontinued after some time. So, it was not considered to be a hostile discrimination.

For Article 301, only hostile discrimination is prohibited.

For article 304, Court held that no measure can be imposed in the name of “reasonable
restrictions”. If it is hostile, it will be hit by 301. Absolute Prohibition.

Favour doesn’t directly imply discrimination unless there is an element of foul play.

Fee is not for the general public. There has to be a quid pro quo in case of fees. In taxes, quid
pro quo does not happen. Fees are always specific; for a specific class of persons. Taxes are
general.

Bhagat Ram v. State of MP, 1995- held that there has been a sea change in law on this
point. Therefore, a significant amount of compensatory tax jurisprudence. Even a mere
nexus between the tax and objective is sufficient and will not be hit by 301. Court tried to
misinterpret it, which got resolved finally in Jindal Stainless Steel.

Bihar Chamber of Commerce v. State of Bihar

2022 SC- Mohit Minerals v. UOI- nature of GST council

Kesoram Industries case- Whether the levy was a tax or a royalty.

(V IMP Case) (Question can come from here)

LT Swamiar v. Commissioner of HRE- difference between tax and fees. Why to make a
difference and how to make a difference

Under the Act, there were 2 provisions whereby government has created a machinery and an
office to take care over the affairs of the temple.
IMP Provision- S.76 which provides that there shall be a levy. Levy upto 5 percent of the
annual income.
There was a general levy and a specific levy for a special class of persons. Challenge on the
validity of the Act.
Whether the levy under S. 76 falls within the subject matter competency of the Parliament?
Whether the levy is in violation of Article 27 of the Constitution?

discussion on Section 76 and levy. It was argued that State lacks the competency to have levy
as given under S. 76 of the Act. Even if there was a competency, i.e., subject matter falling
within the domain of the state, it is hit by Article 27.

Entry 10 and 28 of List III- based on which this law was enacted. The question is what is
the nature of this levy. Is it a tax or is it a fee?
It was argued that if the levy was a tax, then the state would need to show its subject matter
competency.

Tax power cannot be deduced from general entries of the provisions. Taxes are very specific.
Fees are general.

Measurement of taxes will not have a bearing on the nature of levy. Just because there is an
income linkage in the determination of income tax, it does not imply that it is an income tax.

Fees can also be charged in terms of income the way taxes are charged.
That is why the nature of levy becomes important. Petitioner argued it is tax because
concurrent list has no tax entry.

(IMP) Question will come from this area of tax and fees. Question will try to ask you
why do you need to make a distinction between tax and fees and how to make the
distinction between tax and fees. Why and how are not same. Why is for legislative
purpose and how is Article 265.

Whatever tax you are levying must be within your domain and not fall within the
restrictions.

Levy under S. 76 was held to be a tax.

How to make a distinction between a tax and fee?

What is the basis on which Court determined that the levy was a fee?

Distinction: Tax is compulsory levy. Fee is optional. Tax goes into consolidated fund. Fee
may also go into Consolidated fund. Consolidated fund cannot be criteria.

Taxes- there will always be a benefit but no quid pro quo.

Fees- There will always a direct quo pro quo unlike taxes. Fee payment made against the
services /privileges provided by the State.

How much fees you are collecting must always be commensurate with how much you are
spending. State cannot charge more than what it is spending.

Compensatory tax- State is exercising the power of taxation and it also has the attribute of a
fee, i.e., it cannot charge mor than what is spending.

The aforesaid tests are not conclusive tests for determining whether a levy is a tax or fee. But
it is almost conclusive. Most important is quid pro quo aspect.

In the LT Swamiar case, the levy was for regulation purpose. There was no correlation
between the levy and the expenditure which the State was incurring. The proceeds from the
levy were getting collected and it was just going to the Consolidated Fund. The levy was as
per certain percentage of income of the institutions. Had a link with income.
Income= Receipts - Expenditure.
Manner of exercising power of levy is important in determining the question of tax or fees.
Benefits that the government was providing, manner of exercising power of levy, etc. were
seen in totality and the Court held that the levy seems more of tax and not fees.

In taxes, law has to be there, and the Constitutional framework was very careful with respect
to power of taxation. In fees, there is reciprocity.
But in tax, reciprocity is not there. As a result, in taxes, there is an element of
compulsion.

If there are regulatory fees, then the government has to prove that the government is not
charging exorbitant fees from you.
In fees, benefits. But in taxes, if benefits are not given, then the government is very cautious
in holding if the levy is a tax or fee. Tax has a special footing in the Constitution.

Article 27- 27 is must in a secular country. Bars taxes on proceeds of promotion of any
particular religion.

Article 27. Freedom as to payment of taxes for promotion of any particular religion No
person shall be compelled to pay any taxes, the proceeds of which are specifically
appropriated in payment of expenses for the promotion or maintenance of any particular
religion or religious denomination

But taxes on promotion of all religions is not problematic. However, in Sir’s opinion, even
that will be a violation of Article 27.

Praful Goradia v. UOI (Haj Subsidy case)- Markandey Katju was the judge. Propounded
theory of “Substantial”. If the amount is not substantial, then it will not be a violation of
Article 27.

State of WB gave equal amounts to all Durga Puja committees of Kolkata. Whether it is
violative of Article 27? No because the amount is not for the promotion of puja but
government will argue that they are giving that amount for cultural heritage, and promoting
tourism.
But in Sir’s opinion, it clearly violates the spirit of Article 27 of the Constitution.

Funds for Amarnath Yatra. But government argues that these are not promotion of
religion, but for law and order, tourism, etc.

Article 27 is very weak. In Spirit, there is a violation but in text and letter, there is no
violation.

Union of India v. HS Dhillon (7-judge bench) (Justice Mitter’s basis of conclusion is

different from the rest)
Facts: UOI had imposed a wealth tax through Wealth Tax Act, 1957. Initially it was imposed
on the capital value of net wealth of individuals (exclusive of agricultural land). This was
amended through the Finance Act, 1969 to include agricultural land for computation of net
wealth. This was challenged by HS Dhillon stating that only the state legislature had the
competence under Entry 49, List II to enact a law on agricultural land.
Legal issue: Is the amendment within the competence of the parliament?
Analysis: Entry 86 List I – taxes on capital value of assets exclusive of agricultural land
Entry 49 List II – taxes on land and buildings
Entry 97 List I – any other matter not included in list II and list III
The argument was that since Entry 86 list I excluded agricultural land and Entry 49 List II
includes taxes on land, the amendment was ultra vires and only the state has the competence
to tax agricultural land. This argument is not tenable because Entry 86 Land I is on capital
value of assets, whereas Entry 49 List II is tax on land (wealth tax is not tax on the piece
of land but tax on what the value or gains on that land would be as a part of your
wealth).
Every express exclusion in one list must correspond to an express inclusion in another list.
However, the exclusion of agricultural land from Entry 86 List I has not been included in any
of the other lists. Does this mean that this is a subject matter which is not within the
legislative competence of either the parliament or the state legislature? – There cannot be any
subject matter which cannot be legislated upon unless there is an express prohibition (which
cannot come from the 7th Schedule which is more in the nature of limitation – limitation
means some regulation of the power to do; not an outright prohibition).
Why does List I exist? Why can’t just List II and List III Exist and Entry 97 of List I Exist? –
To ensure that the ambit of the entries of the other list is not attempted to be broadened. An
inclusion in List I of items is an explicit exclusion of that subject from the legislative
competence of the state. To create a strong centre.
7th schedule is a demarcation of field, not the distribution of power. The power comes from
Art. 245 (supposedly? I disagree). The entries in 7th schedule cannot be read as prohibition, it
is merely a demarcation of field wherein they can exercise their competence (My note –
sounds like a very artificial distinction). If a prohibition exists – then it has to be found in the
substantive provisions of the constitution.
Argument – exclusion of agricultural land from entry 86 means it is also an exclusion from
entry 97. Entry 97 starts with any other matter meaning that it excludes any matter already
included in List I. Counter – the exclusion is only from Entry 86 and not from List I. The
latter argument was accepted.
Conclusion – constitutionality of the amendment was upheld by the SC. It was accepted
that the exclusion of agricultural land is only from Entry 86 and not from the entirety of
List I and it would therefore fall within the ambit of Entry 97 List I read with Article
248 (substantive power not emanating from 7th schedule and therefore not a field of
demarcation).

UOI v HS Dhillon – 7 judge bench (4+2+1 or 5+1+1) (Rupanwita’s Note)

 
Wealth Tax Act, 1957 (tax on wealth of individuals) amended by the Finance Act 1969 (by
Parliament) - defn of wealth i.e. “assets” – all assets except agricultural land – Finance
Act removed “except agricultural land” and hence assets included agricultural land .
Therefore, wealth tax now imposed on agricultural land
 
·      [Wealth Tax Act levies tax of value on all the assets that an individual may have
on a particular date (31st March of the FY) MINUS all liabilities that person has (1.
associated with assets AND 2. on the land and he has]
 
Validity of law Challenged before the HC and the SC – that the Parliament lacked
competency
HC -unconstitutional and ultra vires
This amendment is not permissible by the union
 
Appeal to the SC
 
Parliament enacted it.
·      Power – Art 245 ; whether subject matter in Parliament domain ; restrictions
·      The procedure needs to be checked
 
Entry in
·      List I (Entry 86 – tax on capital value of assets exclusive of agricultural land of
individuals and companies; tax on capital of corporations) , Entry 97 (any other
matter not mentioned in List II or III including taxes) AND
·      List II (49 – tax on land and buildings,46 for illustration)
 
Wealth tax was contended to be in Entry 86 (which excludes agri land) and hence Parliament
cant legislate. Challenged before the SC
 
Petitioner (HS Dhillon represented by N. Palkhivala) argued “exclusive of agricultural
land” in Entry 86 means exclusion from Entry 97 (residual entry) also. Thus, Parliament does
not have competency to legislate upon it.
 
UOI by HC Setalvad
 
Entries have specific exclusion and inclusions. This is typical because excluded but not
included in any other places. So, prima facie appears that this subject matter can’t be
legislated upon.
He argued that under S. 86, it is mere exclusion. Should not be read as anything in addition to
that. This has to be read
 
HC declared the law ultra vires. Appeal to SC
 
In HC argued that matter falls in Entry 86 but since entry 97, hence power in 49
 
Is the nature of tax under 86 in List I and 49 in List II same or different?
Tax on land and Buildings Vs Tax on capital value of assets
 
·      49 In List II defines property tax imposed by municipality on land and buildings.
When imposing tax on land and building, land and building is a single units . eg I
have multiple lands and buildings, capital value of individual assets is taken I.e 2% of
the value of land . Value taken individually of land  (L1 seperate from L2)
 ·      If aggregate all properties values and then impose tax on that – called wealth tax
·      Eg. Sales tax – every individual transaction subjected to sales tax / in a year, total
sales I have – tax levied on aggregate which is called turnover tax
Eg. person who sells 1000 duster will pay lesser tax than one who sells 1 lakh dusters
·      Hence, nature of taxes are different – object of property tax is different from the
objective of wealth tax [ to control evasion]
·      Neither HC of SC agreed that wealth tax on agricultural land is subject matter for
49 of List II
 
Prima facie not falling in Parliament Or State Legislature.
 
Interpretation –
Do you think this exclusion has to be read as a prohibition ?
 
Palkhivala argued that this exclusion is a part of prohibition. Setalvad said mere exclusion
which doesn’t amount to prohibition. Palkhivala argued that exclusion doesn’t mean mere
exclusion and is prohibition.
 
·      Preamble mandates that three expressions are most important – sovereign (free as
a country from any kind of influences), democratic and republic (anyone may come
into power)
·      Hence, Is it possible that certain subject matter may not be legislated upon? Yes,
There may be . Unless mentioned specifically by the Constitution. Every matter can
be legislated upon unless a specific bar
 
 
Once the residuary power is given to Union, what is the need to have a list I?
 
Read What was the difference between the basis of confusion in what Justice Mitter and
majority said
 
9th Feb
 
True nature, extent and scope of residuary power in the Constitution
 
·      GOI, 1935 debate portrayed that residuary power is practically useless since we
have comprehensively divided powers.
·      Questions to be pondered upon:
In India, do you think, there are subject matters which cannot be legislated upon
(Parliament or State Legislature)?
 
Either of them will have power wrt certain matter based on provision of the
Constitution.

Court did not agree with Palkhiwala’s arguments. Court Held that under 97, Union has a
power in the Harbhajan Singh Dhillon case.

Article 248: Residuary powers of legislation

(1) Parliament has exclusive power to make any law with respect to any matter not
enumerated in the Concurrent List or State List.
(2) Such power shall include the power of making any law imposing a tax not mentioned
in either of those Lists.
Justice Mitter- separate but concurring judgement. Wealth Tax means tax on (Value of all
assets)- (Value of all liabilities)

Justice Mitter said that wealth tax which is envisaged under Entry 86 means value of all
liabilities which are personal or attached to the property. Hence, he says that it does not
fall under 86 but under 97.

Court makes a sweeping remark that, whenever a Parliamentary Law is under challenge,
we must always make the enquiry whether the State has power under List II. If the state
does not have the power, then Union will have the power. A slight modification is
required. That when a parliamentary law is under challenge, first we must ascertain
whether the State Legislature has power to make laws on that subject because in addition
to List II, substantive articles of the Constitution also confer power on the State.

Article 246A (Introduced by the GST Amendment-101st Constitutional Amendment)

(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and,
subject to clause (2), the Legislature of every State, have power to make laws with
respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and
services tax where the supply of goods, or of services, or both takes place in the
course of inter-State trade or commerce.
Explanation.—The provisions of this article, shall, in respect of goods and services
tax referred to in clause (5) of article 279A, take effect from the date recommended
by the Goods and Services Tax Council.

Simultaneous and Concurrent Power- Both Union and States will have the power to
levy goods and service tax under Article 246A. First time in Indian history, we have this
simultaneous and concurrent power.

There is a difference between Simultaneous and Concurrent Power vs Concurrent

Jurisdiction (List III). What is the difference- Doctrine of Repugnancy (Article 254)

254. Inconsistency between laws made by Parliament and laws made by the
Legislatures of States
(1) If any provision of a law made by the Legislature of a State is repugnant to any
provision of a law made by Parliament which Parliament is competent to enact, or to any
provision of an existing law with respect to one of the matters enumerated in the
Concurrent List, then, subject to the provisions of clause ( 2 ), the law made by
Parliament, whether passed before or after the law made by the Legislature of such State,
or, as the case may be, the existing law, shall prevail and the law made by the Legislature
of the State shall, to the extent of the repugnancy, be void.

(2) Where a law made by the Legislature of a State with respect to one of the matters
enumerated in the concurrent List contains any provision repugnant to the provisions of
an earlier law made by Parliament or an existing law with respect to that matter, then, the
law so made by the Legislature of such State shall, if it has been reserved for the
consideration of the President and has received his assent, prevail in that State: Provided
that nothing in this clause shall prevent Parliament from enacting at any time any law
with respect to the same matter including a law adding to, amending, varying or repealing
the law so made by the Legislature of the State.

Under Concurrent jurisdiction, doctrine of repugnancy will come into play and only one
of the laws will prevail.
But under Concurrent and Simultaneous power introduced under Article 246A of the
Constitution, power to levy is for both centre and states.

GST is tax on supply of goods and services.

Article 279A- GST Council will make all recommendations with respect to all matters
relating to GST.

Extent of taxation. What can be taxed and cannot be taxed. Anything and everything on
the planet which has revenue potential can be taxed. Notional (deeming) or real- anything
can be taxed.
Taxation can be even more than 100 percent.

The problem is the higher the tax rates set by the government, the higher will be the
incidence of tax evasion.

Income Tax

Assessing Officer- CIT (Appeals) and Joint Commissioner (Appeals)- ITAT- HC- SC

IMP Primary Material for Income Tax:

 Act, 1961- contains substantive as well as procedural provisions. That is why Income
Tax is often referred to as a self-contained code. For interpreting of Income Tax
provisions, you are not allowed to refer to philosophy or interpretation of other
enactments.
 Rules, 1962- Executive has power.
 Notification- Executive has power. Rules and Notification are as good as the law
itself. Notification is binding because it is basically delegated legislation.
 Circular- Application of Income Tax is done by the Asssessing Officer (AO). Circulars
are not binding on the asseesee. But it is binding on the department. Circulars are
always interpretative documents issued by the Departments and Assessing
 Officers. Circulars are interpretation of the rules, Act and notifications. Once the
circulars have been set aside by the judiciary, they will no longer be binding.
 Cases
 Very few provisions of CPC and CrPC

It is a tax on income except agricultural income- Union List Entry 82.

Income Tax Act, 1922- superseded by the 1961 Act.

There are a number of Zones. Zones divided into Commissionerate. Commissionerate

divided into Divisions. Divisions divided into Range. Range is the smallest unit of
administration. For every range, there is an assessing officer (AO).

IT Act may be interpreted in a different manner by the AO.

Commissioner may thereafter issue a circular for interpreting the provision in a
specific manner. That circular is binding on the AO but it is not binding on the
assessees.

When interpretation is made in a different manner in various zones, CBDT (Central

Board of Direct Taxes) and CBIC (Central Board of Indirect Taxes and Customs) may
also release circulars. Department will provide their own views.
Should not be binding on the assesee because it is the own opinion of the
Department. They do not have the final power of interpretation like the judiciary.

Assessing Officer- will make the assessment of the income. If you dispute with his
assessment, you make the appeal to the Commissioner Income Tax (Appeals) (First
appellate court). Since the CIT (Appeals) is flooded with appeals, the Budget proposed
to create another parallel appellate body called Joint Commissioner (Appeals).
Government will notify which cases will go to the CIT (Appeals) and which will go to
the JCIT (Appeals).

Department cannot appeal against their own order. So, first appeal will always be filed
by the assessee against the order of the AO. If the AO passes a wrong order, then the
Commissioner can file revision under S. 263 and S. 264 of the IT Act.
Revision under the IT Act is different from the CPC.

S. 263. Revision of orders prejudicial to revenue

(1) The 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 2 Assessing] Officer is
erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving
the assessee an opportunity of being heard and after making or causing to be made such
inquiry as he deems necessary, 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.

S. 264. Revision of other orders

(1) In the case of any order other than an order to which section 263 applies passed by an
authority subordinate to him, the 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 the provisions of this Act, may pass such order thereon,
not being an order prejudicial to the assessee, as he thinks fit.
(2) The Commissioner shall not of his own motion revise any order under this
section if the order has been made more than one year previously.
(3) In the case of an application for revision under this section by the assessee, the
application must be made within one year from the date on which the order in question
was communicated to him or the date on which he otherwise came to know of it,
whichever is earlier: Provided that the Commissioner may, if he is satisfied that the
assessee was prevented by sufficient cause from making the application within that
period, admit an application made after the expiry of that period.
(4) The Commissioner shall not revise any order under this section in the following cases-
(a) where an appeal against the order lies to the 3 Deputy Commissioner (Appeals)] 4 or to
the Commissioner (Appeals)] or
to the Appellate Tribunal but has not been made and the time within which such appeal
may be made has not expired or, in the case of an appeal  1 to the Commissioner (Appeals)
or] to the Appellate Tribunal, the assessee has not waived his right of appeal; or
(b) where the order is pending on an appeal before the 2 Deputy Commissioner
(Appeals)]; or
(c) where the order has been made the subject of an appeal 3 4 to the Commissioner
(Appeals) or] to the Appellate Tribunal.

CIT (Appeals) is also a part of the Department itself. From CIT (Appeals), the appeal
goes to ITAT. From ITAT, the appeal goes to the HC and SC. But from ITAT, appeal
will go only if there is a substantial question of law involved.

Income Tax Substantive provisions

First of all, you should have income. Every kind of receipt that you are getting may or
may not be income. It is first important to understand the meaning of the term “income”.
You have to also see whether the income is taxable under the IT Act.

(V IMP) Income defined under S. 2(24) of the IT Act.

S. 10 talks about the exempted income, i.e., income not falling within the scope of “total
income” or exempted income. Income – Exempted Income= Taxable Income.
We are concerned with Taxable Income primarily under the IT Act.
S. 10 and S. 2(24) are two of the longest sections under the IT Act.

Residential Status is an important issue that is taken into consideration while computing
the income tax.

Scholarship also falls within the scope of S. 10. S. 10 is very important. Income falling
under S. 10- Tax-free income. Only the Parliament has the power to make income tax-
free under S. 10.
In-depth study

“Persons” defined under S. 2(31) of the Income Tax Act.

"person" includes-
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub- clauses;

Individual means human being irrespective of gender, age or mental status. Even a new
born baby is an “individual”.
“Cooperative societies” included within scope of “association of persons”.
Only in the company, double taxation happens.

How will you differentiate a “partnership firm” from an “association of persons”.

Concept of Mutuality is the test; it is mandatorily present in a partnership firm.

There is differential tax treatment for these persons.

Assessee is defined under Section 2(7) of the Act.

"assessee" means a person by whom  any tax or any other sum of money is payable under
this Act, and includes-
(a) every person in respect of whom any proceeding under this Act has been taken for the
assessment of his income or of the income of any other person in respect of which he is
assessable, or of the loss sustained by him or by such other person, or of the amount of
refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this
Act;

3 types of assessee:
1. Actual assessee
2. Deemed assessee
3. Assessee in default in compliance of their obligations.

If a person has failed to pay the tax and then dies, even then the litigation will continue.

“assessee” – is a person under IT by whom income tax is payable.

·      “actual assessee” -   asked to pay IT under the IT Act.
·      “deemed assessee” – in cases of persons of unsound mind who have to pay taxes
but cannot make compliances on their own.
 ·      “assessee in default” – prima facie not assessee. Tax liability not personal but will
be deemed personal if default. like TDS – you deduct or collect taxes while payment.
 
“Previous Year”- “Financial Year” in which you earn the income. It ends on 31st March.
[ 1st April to 31st March]
“Assessment Year”- 12 months starting on 1st April
 
Eg. if a person earns income on 31st March,1979.
PY will be 78-79, AY will be 79-80 [ Tip: First the PY is decided and then AY is decided]
 
Which law will be applicable to the income earned on 31st March,1979?
The law applicable will be the law which stands on the 1st day of the relevant AY. i.e here, it
will be the law applicable on 1st April 1979.
 
Ex.  So, the Finance Act, 2023 will be applicable from 1st April 2024. Finance Act tells you a
year in advance which law will be applicable
 
Retrospective legislation is very common in Income Tax. This is why lawyers keep Acts
of previous years.
 
“Income”- S. 224 of the IT Act
 
·      Inclusive definition – enumerates certain items but does not define income
·      Clauses to be read along with relevant sections
·      For working knowledge what is income under IT Act, 1961?
·      Eg. LPG Subsidies used to be indirect in past i.e. company used to get – now, we
buy at MRP and then the subsidy amount is credited to our account. So is subsidy an
income?
·      Eg. Participated in a competition and won an award in kind or cash –
·      Eg. Person committed heinous crime and generates income receipts
·      Eg. Finder of goods and cash
·      Eg. spouse transfers money to spouse  
·      Eg. Property owned by a person and not let out to anyone
·      Eg. Is scholarship deemed to be an income.
·      Eg. Employee provides services free of cost i.e. perks
·      Eg. When Loans are waived off. When a loan is taken, it is not income since it has
to be repaid.  But once its waived off, it is an income.
o   Waiver of principal amount-
o   Waiver of interest
o   Waiver of both  
 
1.     Sir’s definition - Anything which is obtained in cash or kind which generally does not
belong to the person and he is not under legal obligation to repay or restore. Sources of
income is immaterial. May be illegal or legal in nature.
2.     Judiciary- Anything which in practical sense can be called “income” is income. This
is deemed to be the best definition of income. 
Constitutionally, Entry 82 talks about income except agricultural income. Revenue receipts
only can be taxed under the IT Act and not capital receipts until specifically provision
made. No bar on taxation of capital assets. Hence, we have a head for capital receipts in the
IT Act.
 
Differentiating between capital and revenue assets – if you some receipts. Need to
understand Why and How you are getting assets.
 
Two kinds of assets –
1.     Trading or business assets (stock in trade)- circulating assets in which you deal
with eg. Dealer in pens – if source of revenue remains intact
a.     If you generate any revenue, it is called revenue assets (if they lease land)
2.     Capital Assets – when it is disposed off –(if they sell it)
a.     fixed assets – source of revenue is gone
 
Income may be taxable or not taxable income. S.10 of the IT Act enumerates income which is
non-taxable. [ we will study only agricultural income under S.10 of non-taxable income]
 
Residential Status
Residential status of the assessee important for determining taxation during with the
relevant Previous Year. Whether the person will be taxed locally or global. Residential status
has far reaching consequence.  [ Tax is an attribute of the sovereign] . WTO has tremendous
impact on investment policies and laws. Taxes are imposed on residents because government
is protecting the body and not the property.
 
Residential status in India of two types
1.     Resident – specific class of people (individuals and HUF) have further division .
Rest are divided
a.     Resident and ordinary resident
b.     Resident but not ordinary resident
2.     Non-Resident
 
Cannot have one and single test applicable to both
1.     Natural person – rely on natural test - legal personality like HUF
2.     Artificial person– have to rely on artificial criteria as much closer to real criteria
 
Criteria of determining residential status  
·      Physical state –[for natural persons] - how long you have physically stayed in a
country
·      Income – how much percent of income person is getting from Indian territory
·      Citizenship – if you are citizen of a country you are bound to be resident of a
country. India doesn’t have citizenship as a criteria of residential status [ or taxation
criteria]
·      Place of incorporation – [for artificial persons] – if they formed in India, there is
no harm country asking them to be resident of that country
·      Control and Management – [for artificial persons] – company may be formed
and incorporated in a country and controlled and managed in another country.
[ commercial decisions or policy decisions not day to day decisions]. Now it has been
replaced to be in tune with the global practice. Now , the “Place of effective
Management” Test is used in lieu of C&M test. Here it is de facto and not de jure .
  
S. 6 of Income Tax Act – Residential status of all persons
 
For individual and HUF , first resident or non resident and if resident , decide ordinary or non
ordinary.

Differential tests depending on the persons.

Either of 3 residential status. Need to see whether Resident or non-resident. If resident,

then whether ordinary resident or non-ordinary resident.
 
Residential Status For Individual,  
If they satisfy one of basic and both additional then ordinary.
 
1.     To determine whether resident –
Basic – there are two alternate residential tests – one has to be satisfied
a. person has been in India for at least 182 days during the relevant
Previous Year.
OR
b. atleast 60 days in the relevant Previous Year AND atleast 365 days out of
7 Previous Years immediately preceding the relevant PY. Eg. Income on
7th Jan 2019 . PY will be 18-19, Hence, person should have been in India
for 365 days in period 11-18.

2.     After it has been decided that you are resident, you have to then determine
whether you are ordinary or non-ordinary. Test for Resident and Ordinary
Resident (ROR) (Both conditions need to be cumulatively satisfied)
o   Resident for atleast 2 out of 10 Previous years immediately preceding the
relevant PY.
AND
o   Atleast 730 days in last 7 Previous years immediately preceding the
relevant PY

Assessee has to physically stay in India. If he is not physically present, then even these tests
will not be applicable.

Day= 24 hrs. If someone has stayed in India for 59 days + 23 hrs, it cannot be equated to 60
days, and he will not be considered to be resident.

India- entire territory of India, including airspace and territorial waters.

What is the Minimum threshold of being a resident in India – 60 days

 
In the basic test 1a, 60 days has to be read as 182 days for –
a.     Indian citizen who goes abroad in the PY for employment outside (even self-
employment is fine). This is an incentive for people to earn outside. Or as a member
of Indian ship crew.
OR
 
 b.     Indian Citizen and PIO who visits India. Purpose is not relevant. He will be taxed
in India if he stays in India for 182 days in India. Longer he stays, it is beneficial for
us.
 
2020 Amendment: Seen that There are certain people who are misusing this. Amended in
2020 by the Finance Act. 60 days will be read as 120 days or more if you stay in India till 120
days but not more than 182 days. [ PIO visits India; total income of the assessee except
foreign source more than 15 lakhs]

People are bypassing the residential status test. So, this deemed resident principle has been
developed.

“Deemed resident” – S. 1A- Stateless persons- those persons, who for tax purposes, are not
residing in any state. They are not resident of any State for tax purposes; they just bypass the
threshold in all country. They are not paying tax on entire total income.
For such kind of persons, they are “deemed residents” in India.
Test- Only for Indian citizens and total income of assessee except foreign source is more
than 15 lakhs and you are not liable to be taxed in any other country because of your
residential status, domicile or any other criteria, you will “deemed resident” in India.

For this case, “citizenship” has been made a criterion.

There are certain persons- PIO and Indian Citizens for whom the requirement threshold has
been reduced.

For Firm/HUF/Rest of assesses except company and individual, all are residents in India
except:
When the control and management of affairs was carried out wholly outside India.

Residential Status for Company

Company is a resident if:
1. Company is an Indian company (registered as per the laws of India)
OR
2. Place of effective management of affairs of the company is in India.
Explanation: For this purpose, the place of effective management means a place where key
management and commercial decisions that are necessary for the conduct of the business of
an entity as a whole are, in substance made.

VV Ram Subbaiya Chettiar v. CIT, AIR 1951 SC 101- This case was related to the
determination of residential status of HUF. The Court tried to explain the principle of
“control and management” test.

Narattam Perriyar v. CIT, Bom HC- This was specific to determination of residential
status of a company. The Court held that the control and management test as applied in the
Subbaiya Chettiar case is applicable for the company.

(IMP) (Read it) De Beers Consolidated Mines v. Howe, House of Lords- Interpretation of
“control and management” and “place of effective management”. Basically where the
meeting of the BOD happens. For tax purposes, it has to looked at de facto, not de jure.
 Circular by CBDT 06/2016 – how they interpret key management decisions
 
BACK TO HUF
HUF may also be non -ordinary resident. Karta runs the entire household.
 
If they are residents, to determine if Ordinary or non-ordinary resident. [Cumulative
tests]
o   Resident for atleast 2 out of 10 Previous years immediately preceding the
relevant PY
o   Atleast 730 days in last 7 Previous years immediately preceding the
relevant PY
 
If satisfied, ordinary otherwise non ordinary. Deemed resident is ordinary.
SCOPE OF TOTAL INCOME U/S 5 OF THE IT ACT
 
If resident, global income gets taxed. If non-resident, local income gets taxed.
 
Global Income –
Local Income –
 
Four kinds of incomes which forms the scope of total income -
1.     Income received or deemed to be received in India in the relevant PY  
2.     Income accrue or arise or deemed to accrue or arise in India in the PY.
3.     Income accrue or arise outside India in the PY
4.     Income accrue or arise outside India in the PY from business controlled in India or
from a professional setup in India
 
If you are a resident and ordinary resident [ individual or HUF], then scope of total income
is 1,2,3,4. You have to pay global taxes for all. If a resident, place of income immaterial but
timing is material i.e. on PY.
 
If you are resident but not ordinary resident, [ individual or HUF], then scope of total
income is 1,2 and 3.
 
If you are non-resident, [ individual or HUF, companies and firms i.e for all persons], then
scope of total income is 1,2.
 
Place immaterial if resident. If non-resident, place is very important. Time is very important
regardless of residency.
 
Action verbs for income –
·      “income received”- for salaried class, salary received or salary has been given in
advance. Whichever is earlier is taken as the time.
·      “received” means – when income is credited in your account or in your hand. If
cheque given, (in cases of NI), it is received when it is given. If sending a representative,
it is received by him. Thus, “Received” means “actual” or “constructive” received.
·      “Income accrued or arise” – moment when you are supposed to receive the income [
when the person has the legal right to recieve] ex. When the AC delivered to the
premises of the buyer. Another example will be in construction contracts, when vendor
 will get payment. T&C to be seen for clarification. Right to received is in contradiction
with income received.
·      “due” – list given in bare act- when the liability to pay arises [ Right to enforce and
Right to receive]

Received or accrual forms the basis of taxation in our country.

Time and Place of Income is very important. Time of income should be necessarily in the
previous year.

Any receipt of income in India will be taxed irrespective of whether you are a resident or
non-resident. So, a non-resident never receives any payment in India.

Whatever digital transaction happens; you have to always see where the account is
situated.

IMP Question: When you do shopping online and then get cashback/reward points, is that
income in your hands?

Answer- Prima facie, it appears to be income. But if you go slightly deeper, it is purely a
form of discount or marketing technique. Not upfront discount but marketing technique to
ensure that you continue shopping on the same website or with the same company.

Upfront discount is one way of marketing. Cashback is used for retaining the customers. It is
also a form of mere discount.

Place and time of income will be the moment/place where the agent gets the payment.

In case of cheque, the place where the cheque gets delivered is the place of income.
In the past, we used to have money orders, wherein the place where the money order is
delivered will be considered to be the place.

You have to see where you are getting physical control of the income. The place where you
are getting physical control will be the place of income.

Post office cases- Post offices act in a mechanical manner. They are treated as an agent. Once
it is treated as an agent, then the place where they are obtaining the payment will be
considered to be the place of income.

But Palkiwala in his commentary has stated that they should not be treated as an agent
because they operate mechanically.

2 ways how we maintain the accounts:

1. Mercantile system/Credit System- Treated on the basis of accrual.
2. Cash Base system- Treated on the basis of actual receipt, i.e., when you actually receive
it.
It is your call as a businessman how you will maintain the accounts, i.e., accrual or receipt.
You can change the system of maintaining accounts only upon receiving the approval of the
assessing officer.

(Briefly) Definition of “Person” under Section 2(31) of the IT Act:

“person” includes-
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub- clauses.

Income Tax is an umbrella legislation covering all forms of persons. Many countries have
separate corporate taxation acts or separate capital gains tax. But India has an overarching
legislation covering all forms of direct taxes.

For the person to be taxed under the IT Act, he must have an “income”. Prima facie first
income, then we are concerned with the taxable income under the IT Act.

All income falling under S. 10 of IT Act- tax-free income.

After “income”, we come to “residential status” of the person.

For e.g.: if you are earning income all across the globe (situated in India as well as
outside India), then the question is whether you will paying tax on only income earned in
India or even income earned from outside the country? This question will be answered by
determining his “residential status”.

If you say that you are a resident, then all income, both local and global will be
taxed. Because as a resident, the Government is protecting you as a person as well as
may be your property. So you have to pay tax on all your local and global income.
If you say that you are a non-resident, then only local income will be taxed. Because
as a non-resident, the Government will protect only your property. So you have to pay tax
on only your local income.
Scope of total income will depend on the residential status.
This principle is followed in most countries.

Residential Status has nothing to do with citizenship.

S. 6 of the Income Tax Act.

For the purposes of this Act,-
(1) An individual is said to be resident in India in any previous year, if he-
(a) is in India in that year for a period or periods amounting in all to one hundred and
eighty- two days or more; or
(b) having within the four years preceding that year been in India for a period or periods
amounting in all to three hundred and sixty- five days or more, is in India for a period or
periods amounting in all to sixty days or more in that year. 

Explanation.- In the case of an individual,-

(a) being a citizen of India, who leaves India in any previous year  4 as a member of the
crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping
Act, 1958 (44 of 1958 ), or] for the purposes of employment outside India, the provisions
of subclause (c) shall apply in relation to that year as if for the words" sixty days",
occurring therein, the words" one hundred and eighty two days" had been substituted;
(b) being a citizen of India, or a person of Indian origin within the meaning of
Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to
India in any previous year, the provisions of sub- clause (c) shall apply in relation to that
year as if for the words" sixty days", occurring therein, the words  5 one hundred and
eighty- two days"] had been substituted.]

(2) A Hindu undivided family, firm or other association of persons is said to be resident
in India in any previous year in every case except where during that year the control and
management of its affairs is situated wholly outside India.

(3) A company is said to be resident in India in any previous year, if-

(i) it is an Indian company; or
(ii) during that year, the control and management of its affairs is situated wholly in India.

(4) Every other person is said to be resident in India in any previous year in every case,
except where during that year the control and management of his affairs is situated
wholly outside India.

(5) 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 sources of income.

[(6)
36
  A person is said to be "not ordinarily resident" in India in any previous year if such
person is—
(a)   an individual who has been a non-resident in India in nine out of the ten
previous years preceding that year, or has during the seven previous years
preceding that year been in India for a period of, or periods amounting in
all to, seven hundred and twenty-nine days or less; or
(b)   a Hindu undivided family whose manager has been a non-resident in India
in nine out of the ten previous years preceding that year, or has during the
seven previous years preceding that year been in India for a period of, or
periods amounting in all to, seven hundred and twenty-nine days or
less 36a[; or
(c)   a citizen of India, or a person of Indian origin, having total income, other
than the income from foreign sources, exceeding fifteen lakh rupees during
the previous year, as referred to in clause (b) of Explanation 1 to clause
(1), who has been in India for a period or periods amounting in all to one
hundred and twenty days or more but less than one hundred and eighty-
 two days; or
(d)   a citizen of India who is deemed to be resident in India under clause (1A).
  Explanation.—For the purposes of this section, the expression "income from
foreign sources" means income which accrues or arises outside India (except
income derived from a business controlled in or a profession set up in India)].]

Income deemed to be received- S. 7 and 8 of the Income Tax Act.

S. 7 Income deemed to be received. —The following incomes shall be deemed to be received in the
previous year: — (i) the annual accretion in the previous year to the balance at the credit of an
employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the
Fourth Schedule; (ii) the transferred balance in a recognised provident fund, to the extent provided in
sub-rule (4) of rule 11 of Part A of the Fourth Schedule;
3[(iii) the contribution made, by the Central Government 4[or any other employer] in the previous
year, to the account of an employee under a pension scheme referred to in section 80CCD.]

If the company decides not to distribute profits as dividend among shareholders, then there is
no tax payable. Here, the tax incidence is neutral. But if the company distributes profits as
dividend, then 2 modes of taxation:
Classical mode- Tax on income in the hands of the shareholder.
Dividend distribution tax- Tax paid by the company.

Deemed dividend- In a closely held public company and private companies, where only a
few people control the management and operations of the company, they know that if they
distribute the profits as dividend, then the shareholders will be taxed or dividend distribution
tax. So, they give loans and advances to members without giving dividend. On paper, it is
loan. But to avoid dividend distribution tax or tax on dividend, they do such a thing.
S. 222E- provides the definition of “Deemed dividend”.

S. 9. Income deemed to accrue or arise in India:

 Income arising from or through business connection in India. “Business Connection”
aspect was predominant when the physical form of business was there. Having
liaison officers, however, does not constitute “business connection” unless they are
engaged in business activities. If they have an independent status, then they will not
fall. But now this “business connection” seems to be outdated because a lot of
business happens virtually. “Business connection” is nothing but a permanent
establishment (physical presence), as provided in DTAs or other international
instruments.
As a result, the concept of “significant economic presence” has been introduced. A
person having “significant economic presence” will be deemed to have business
connection in India. Thus, even if you have virtual presence, you will be taxed.
 Property in India
 Assets/Source of Income in India
 Transfer of Capital Assets situated in India

 Salaries if earned in India

 Salaries payable by Govt. to its citizens for services outside India.

  Interest on Borrowed capital utilized for creating some sort of source or buying the
property in India

 Royalty

 Fees for Technical Service

 Gift by Resident to Non-Resident (except company).

Vodafone case- There is an X company in India. The rest of the companies are situated
outside India. Company A located outside India has almost 100 percent control over X
company in India.
Company B (Non-Resident) transfers its shares to company C (another non-resident).
Company B has shares in Company A (non-resident).

So, one non-resident transfers its shares in a non-resident to another non-resident. This
involves a transfer of capital assets.

Now the question is whether this transaction is amenable to Indian tax jurisdiction.
Another question should such a transaction be taxed.

Bombay HC held that Company B is transferring shares in A to C. Essentially, Company B

is also transferring Company A’s shares in X company (resident) to Company C (Non-
Resident). So, they held that these transactions are amenable to be taxed in India because it
constitutes transfer of capital assets situated in India.
It is not mere transfer of shares but transfer of control of assets. Not direct acquisition
of Hutch by Vodafone but indirect acquisition in this manner.
Bombay HC expanded the provision “transfer of capital assets situated in India”, and read the
deemed fiction in an expanded fashion on account of the nexus.

SC overruled the Bombay HC’s judgement and held that no transfer of capital assets situated
in India is not taking place.

Post the SC judgement, lots of amendments have taken place with an attempt to give
retrospective effect. Under income tax laws, retrospective effect is given from 1st April, 1962.

Explanation 5 to Section 9—For the removal of doubts, it is hereby clarified that an asset or a capital
asset being any share or interest in a company or entity registered or incorporated outside India shall
be deemed to be and shall always be deemed to have been situated in India, if the share or interest
derives, directly or indirectly, its value substantially from the assets located in India.

(IMP) If the transfer of shares takes place between 2 non-residents, and the shares
which are situated outside India derives a substantial value from the underlying assets
situated in India, then the shares which are situated outside India shall be deemed to be
situated in India.

Computation of Total Income:

We have 5 heads of income:
Income from House Property, Income from Business and Profession (This head of
income is complicated), Income from Capital Gains (One-time income), Income from
Salary, Income from other Sources (Residuary)

All these heads of income are mutually exclusive. The sources of income will fit in one head
only. In no other head of income. Once the source of income falls in one particular head, it
will not fall in any other head.

For every head of income, while you are calculating, you will show the receipts and then the
deductions. (Receipts – Deductions) will be the income of that head. Deductions varies from
one head to head.
Standard Deduction- Rs. 50,000. Lump Sum deduction.

If you are a professional, then the total income will be: (Receipts – All expenditures)

Under which head, your receipts will go- Very crucial. On account of the deductions which
vary from head to head, the determination of the head will be very crucial.
As a professional, it is absolutely essential for you to make the expenditures as a form of
deduction.

The law already lays down the test for determining the income falls under which head.

Clubbing of Income (including the issue of Husband and Wife as same Unit for tax
avoidance) (S. 60-65)
Normally under the income tax act, the rule is that you have to pay tax on whatever you earn
and you need not pay tax on what the other person is earning. Many people exploit this rule
for tax avoidance purpose. In India, husband and wife are considered to be the same unit
culturally. Lot of clubbing happens in case of husband and wife. In this context, it is
important to understand why should we protect the institution of marriage.

Let’s say the father has opened an FD in the name of the son. Now the son will be taken as an
independent assessee. In this way, lot of tax avoidance takes place just for the purpose of
saving tax liability. It cannot happen that I will be asked to pay tax on income which
someone else has earned. Exploitation of the general rule. Standard way of tax avoidance.
There are certain well-defined situations under S. 60-65 under which the income of
others shall be clubbed with my income and I will have to pay the tax.

The legislature has found out that there are certain specific ways by which tax-
payers are avoiding taxes. As a result, they have made specific provisions under the
Income Tax. These provisions are called Specific Anti-Tax Avoidance Rules
(SARR).

Provisions relating to dividend distribution.

Post the Vodafone controversy, General Anti-Tax Avoidance Rule (GARR)

provisions were brought in. GARR rules properly framed. GARR basically justifies
the bringing of substance over form. It is invoked primarily in cross-border transactions
within 2 associated parties. In those cases, which lack commercial substance, i.e., a
transaction does not make any sense in commercial terms; basically a transaction
that is structured for tax avoidance. Such transaction can be declared as an
impermissible transaction. We will not look into the form simply. But we will look
into the transaction cumulatively. AO cannot alone give a decision by applying GARR
rules. Discretion is to be reduced. By such provisions, an attempt is made to prevent
Vodafone-like episodes.

Lot of advantages/disadvantages to be taxed as a salaried person and not taxed as a

salaried person.

Set off and Carry forward of losses

When you compute the income, it may happen that only profits are added. But there is
also a possibility that within the heads, there is a plus and in the other head, there may be
a minus. This adjustment of losses is called set-off. Very minimal restrictions are there on
set off.
Losses from a non-salaried job, i.e., Income from profit and gains from Business or
Profession (PGBP) can be set off against the income from salary of that person. This
will be allowed. So, generally, a salaried person will start a business and for that business,
he will show that he has incurred losses in that business, i.e., his Income from profit and
gains from Business or Profession (PGBP) will be just losses. And after that, while
computing his total income, he will deduct the losses from income from salary.

Carry forward- When losses are so huge, he can carry forward the losses to the next
year and thereafter, compute the total income.

After doing all these things, what you get is Gross Total Income. Out of the Gross
Total Income, in order to promote savings as well as ensuring social security, Chapter
6A has been made for providing for deductions from the Gross Total Income. The
law says make investments in specific desired channels such as Provident Fund,
LIC, Home loan, and then you can get deductions from the Gross Total Income.

One purpose of this- So that they can get deductions from GTI.
Second purpose- Social security.

Subsequently, government has realised that irrespective of providing this tax incentive,
people are still investing in these social security bonds because of high return potential.
Government is of the opinion now that the borrowing cost of government from these
bonds is much higher compared to the government’s cost of borrowing from open market
since the people are obtaining very high returns from these investments.
So under the new tax regime, government is phasing out all tax incentives after
computation of Gross Total income. As a result, Chapter 6A is completely deleted.
The objective is to simply taxation.

After deducting these deductions from the GTI, we get the total income. Whatever
tax rates are there, will be applied on the total income. Once we ascertain the tax
liability, after that, the assessee is eligible for tax rebates. The rebate we get from the tax
amount, not from the income. After this, whatever we get, is the net tax liability. Out
of the net tax liability, whatever advance taxes we have paid, we will get the credit
thereof. And then we file the returns.

Three important questions:

1. For filing the income tax returns, which figure is relevant: Gross Total Income or Total
income? (Refer to S. 139 of the Act) Upon a literal reading, it may be that “Total
income” figure is relevant. But the opening line is deceptive prima facie.

But a reading of S. 139(1)(b) with Proviso 6, we can understand that GTI is the
relevant figure for the filing of Income Tax Returns without giving effect to the
deductions.

S. 139- V IMP

Proviso 6: “Provided also that every person, being an individual or a Hindu undivided

family or an association of persons or a body of individuals, whether incorporated or not,
or an artificial juridical person, if his total income or the total income of any other person in
respect of which he is assessable under this Act during the previous year, without giving
effect to the provisions of clause (38) of section 10 or section 10A or section
10B or section 10BA or Chapter VI-A exceeded the maximum amount which is not
chargeable to income-tax, shall, on or before the due date, furnish a return of his
income”.

Section 139 Proviso 1: that a person referred to in clause (b), who is not required to furnish a
return under this sub-section and residing in such area as may be specified by the Board in
this behalf by notification in the Official Gazette, and who during the previous year incurs an
expenditure of fifty thousand rupees or more towards consumption of electricity or at any
time during the previous year fulfils any one of the following conditions, namely :—
 (i)  is in occupation of an immovable property exceeding a specified floor area, whether
by way of ownership, tenancy or otherwise, as may be specified by the Board in this
behalf; or
(ii)  is the owner or the lessee of a motor vehicle other than a two- wheeled motor
vehicle, whether having any detachable side car having extra wheel attached to such
two-wheeled motor vehicle or not; or
(iii)  [***]
(iv)  has incurred expenditure for himself or any other person on travel to any foreign
country; or
(v)  is the holder of a credit card, not being an "add-on" card, issued by any bank or
institution; or
(vi)  is a member of a club where entrance fee charged is twenty-five thousand rupees or
more,
shall furnish a return, of his income during any previous year ending before the 1st day of
April, 2005, on or before the due date in the prescribed form and verified in the prescribed
manner and setting forth such other particulars as may be prescribed.

For claiming the refund, you have to file the income tax.
2. What is the tax exemption limit in our country, i.e., to what income limit, tax is
exempted?

Normal citizens- Rs. 2,50,00

Senior citizens- Rs. 3,00,000
Super Senior citizens- Rs. 5,00,000

3. Who is supposed to file mandatory income tax returns in the country?

Due date for filing returns for everyone- 31st march except only certain persons, who indulge
in transactions which have to be audited.

Filing with due date- Regular returns. You can revise it also later- Revised returns.
Revised returns date is till 31st December only.
Filing after due date- Belated returns.
Updated returns- you pay extra tax on the income which you had forgotten to disclose.
Updated returns you can file after 2 years also. But you cannot file updated returns once
raid takes place in your office. Updated returns is like an amnesty scheme essentially. But
you can also file updated returns if you make a genuine mistake in the assessment.

Advance Taxes. TDS- Increasing the tax base. Fighting the menace of tax evasion.
TDS- Tax Deduction at source. TDS generally applicable on salaried employees. While
making the payment, deduct some tax and deposit the tax to the government.

What about self-employed persons or professionals?

For them, we have the system of advance taxes since we cannot have TDS for them.
Payment of advance taxes is made on a 3-month basis.
So, whatever income you have earned say in 3 months, you have to project the revenue
for that entire year. Let’s say, you have earned Rs. 100 in 3 months and your projected
revenue for the entire year is Rs. 300. You will then pay the advance tax.
Read on Advance Taxes and S. 194.

TCS- Tax Collection at Source. Basically, here we don’t deduct. But rather we collect
taxes. Suppose, NUJS awards contract to a contractor at 1 crore rupees. TCS provision
will say that NUJS will have to collect 1% of the 1 crores rupees as TCS and deposit the
amount to the government.
Read S. 206 of the Act, which provides for TCS.

Regular assessment- file your returns. Not scrutinised.

Most of the returns are like this. Very small share of the returns are actually scrutinised.
99% returns get processed regularly without scrutiny.
Summary scrutiny- call for records and verify it prima facie.
Income tax Act lays down the general taxation rates. General taxation rates also provided
under Finance Act. Special tax regime depending on the special kind of person. Special kinds
of taxes.
S. 115 of the Income Tax Act- talks about the special tax rates.
Then capital gains. Special tax rates for the capital gains under S. 111, 112 and 112A.

Finance Bill- Rates are specified in the schedule.

TDS rate applicable on nature of income.

Finance Bill will let you know how much tax do you have to pay on your earnings.

Part I of Finance Bill is for whatever you have already earned. Applicable for complete
financial year. If you are leaving the country before the completion of the financial year, then
Part I will not be applicable. Then Part III of the Finance Bill will be applicable.
Part II provides TDS rates for salaried class of employees.

If financial year is going on, and you leave the country on 1st October, 2023, then you have to
apply the tax rates given in Part III of the Finance Act, 2023.

Finance Act, 2023 will be applicable only from 1st April, 2023.

Old Regime and New Regime under Finance Act, 2023.

Under the Old Regime, total income is computed after all deductions.
Under the New Regime, no deductions.

Flat rate system and slab rate system (schedular form of taxes).

Suppose you have 12 lakhs income, what will be your total tax liability. Tax Liability will be
1,72,500

Portion of income falling in a particular slab will be taxed at that rate.

Slab rate system- benefit of the slab will be given to everyone.
Flat rate system- Tax rates will be applicable on the entire total income. But the problem
with the flat rate system is that it does not provide the incentive to work hard. 100 % Rebate
for total income upto Rs. 5 lakhs.

Surcharge rate of 2 percent if total income exceeding 50 lakhs. Surcharge rate will be charged
on the total tax liability.

Marginal relief.
Marginal Relief given to the assessee whose total income exceeds Rs. 50,00,000/- or Rs.
1,00,00,000/- as the case may be. So, a minor increase in income which exceed the specified
limit and increase the tax liability to a huge extent.

Relief: Marginal relief is provided to ensure that the additional income tax payable including
surcharge on excess of income over Rs. 50,00,000/- or Rs. 1,00,00,000/- is limited to the
amount by which the income is more than Rs. 50,00,000/- or Rs. 1,00,00,000/-
Marginal relief calculation
Marginal Relief = Calculated Surcharge – 70% (Income – Rs. 50,00,000) Similarly, relief
shall also be provided where income exceeds marginally above Rs.1 crore. In that case, the
aforesaid equation shall be changed accordingly.
Marginal relief is available in respect of surcharge only. It is not applicable in case of CESS.

For Example, Mr. X aged 55 yrs. whose total income for Assessment Year 2018 – 19 is
Rs.50,10,000/-Calculate total tax payable and also show working for calculation of Marginal
Relief.

Income Up to Rs. 2,50,000 Tax Amount- Nil

Income 2,50,001 – 5,00,000 Tax Amount- 2,50,000 * 5% = 12,500 \
Income from 5,00,001 – 10,00,000 Tax Amount- 5,00,000 * 20% = 1,00,000
Income Above 10,00,000 Balance 40,10,000 * 30% =12,03,000

Total Tax Before Surcharge and CESS= 13,15,500

+ Surcharge 10% of 13,15,500 = 1,31,550 (-) Marginal Relief=
Calculated Surcharge - 70% (Income – Rs.50 Lakh) = 1,31,500 – 70% (50,10,000 –
50,00,000) = 1,31,500 – 7000 = 1,24,550 (1,24,550)

Tax Before CESS= 13,22,500

+ CESS 3% of 13,22,500 = 39,675
Total Tax Payable= 13,62,175

Note: – The concept of marginal relief is that the amount of increase in income tax
should not be more than the amount of increase in income

Taxation of Agricultural Income/Farmers

IMP Questions:
Status?
Why no tax?
If hypothetically they are taxed, the question is how to tax them?
What is the Meaning of Agricultural income?

Whether there was ever indirect tax on agricultural income?

There were customs duties earlier.
In the GST regime, only the process produced is taxed. But practically, there is no indirect
tax which farmers are paying.

Whether any direct tax is paid?

Land revenue- Yes. Since the introduction of income tax, agricultural income has never been
taxed. Depending upon the capacity of the agricultural land, land revenue is paid.
Capital Gain on Agricultural Land is tax-free.
Prima facie there is no income tax on agricultural income.
No Property Tax.
No wealth Tax.
No state duty on agricultural land.
No succession duty on agricultural land.
Thus, by and large, in substance, the farming community is free from taxation.

The question may be how do you bringing farmers within the purview of taxation.
Purpose of bringing them under purview of taxation:
1. Increasing revenue.
2. Non-taxation of agricultural income is used as a tool for tax evasion, i.e., people claim
that the money is agricultural income and thus, do not pay tax on that.
3. Equity considerations, i.e., if I am carrying out a business and paying tax; then why
should a farmer not be taxed.
4. Allocation of Resources. Many of the farmers with big landholdings have a lot of money
and do not pay taxes. Such people do not care about the money and engage in
intoxications. Since it does not attract any taxes, it is cheap money.

Various committees which have been set up for the purpose of determining whether to tax
agricultural income have argued in favour of taxing the agricultural income. According to
them, this will help fight tax evasion as well as help in the upliftment of the informal sector.

Majority of the states are not taxing agricultural income. Some of the states are collecting tax
from cash crops such as rubber, coffee.

If the question is how to tax agricultural income? Refer to the following:

K.N. Raj Committee Report, 1972 came up with a blueprint. The Committee’s mandate
was to suggest how to tax agricultural income. Suggested the following:
 Replace land revenue system with Agriculture Holding Tax (AHT) which is to be
implemented by the respective States.
 Partial integration of agricultural income with non-agricultural income, to be
implemented by the Union.

What is an AHT? So far, no state has implemented the AHT. Tested by few of the states but
those states found out that AHT is not viable considering the ground realities.

For the purposes of AHT, states have to go for stratification. Soil/climate. Lot of variations
are there. But soil/climate has to be homogenous. Based on the homogenous soil/climate, the
entire state has to be divided.

Yield Norms- Let’s say X land is suitable for paddy or other cash crops. Cannot mandate that
every farmer has to produce a particular crop. Has to identify which are the crops, and
accordingly, specify the standard of productions. Has to go for 10 years average, i.e., has to
see what was the productivity of the land for the last 10 years. Then we will come to know
what is the optimal productivity per hectare of land.
Must be valued @3years average price.

Gross Receipts will include the yield norms.

Taxable holding= Operational Holding, i.e., (Land owned + leased in) – (land leased
out)
Rateable value (RV)= Gross Receipts (GR) – (Cost paid out, i.e., expenditures incurred
+ Depreciation)

Taxable Rateable value= RV – Cost of Development (i.e., 10% of RV)

Tax Rate= (TRV/2 * 1000)/100 %, i.e., after you do (TRV/2 * 1000), divide it by 100 to
find out the percentage.

Whether the aforementioned recommendations have been implemented

 Replace land revenue system with Agriculture Holding Tax (AHT) which is to be
implemented by the respective States. (Not implemented by the states)
 Partial integration of agricultural income with non-agricultural income, to be
implemented by the Union. (Implemented by Union- S. 2(2) read with Part IV of
Schedule I of the relevant Finance Act provides for certain pre-requisites which
must be necessarily satisfied:
a. Assessee must be covered in Para ‘A’, i.e., basically where the slab rate system
applies. Excludes other cases where the flat rate system applies.
b. Total income exceeds exemption limit.
c. Agricultural income exceeds Rs. 5000 p.a. (5000 was fixed in 1972 by the
Committee, and till today, the limit is 5000)
If these 3 conditions are satisfied, then there will be a slight modification in
calculation of income tax.

Step 1: (Agricultural Income + Non-Agricultural Income). Apply the applicable income tax
rate on this combined income and get the amount.
Step 2: (Exemption Limit + Agricultural Income). On this apply the tax rate and get the
amount.
Step 3: Step 1 amount – Step 2 amount. Whatever you get as a result of the deduction is your
tax liability.

Example:
Mr. X- Total income of Rs. 4 lakhs. Total income does not include agricultural income.
Agricultural income- Rs. 1 lakh. Exemption limit= Rs. 2.5 lakhs
Here, all 3 conditions are satisfied.
Since these conditions are satisfied, the tax liability has to be calculated by following the 3
steps:
Step 1: (Agricultural Income + Non-Agricultural Income). 1 lakh + 4 lakh= 5 lakh.
Apply tax rate on 5 lakhs. The tax amount will be 12,500
Step 2: (Exemption Limit + Agricultural Income). 2.5 lakh + 1 lakh= 3.5 lakh.
Apply tax rate on 3.5 lakh= 5000
Step 3: Step 1 amount – Step 2 amount. 12,500 – 5000= 7,500

If I calculate income tax normally instead of using the partial integration, even then the tax
liability will be Rs. 7500 because I will apply tax rate of 5% of (4 lakh – 2.5 lakh) = 5% of
1.5 lakh= 7,500.

For certain class of assesses, there will be no impact if I calculate the tax by normal method
or by partial integration method. But for certain class of people, the partial integration method
may affect the quantum of tax liability. Only if the slab changes while calculating income tax
by including the agricultural income, there will be a change in tax liability.
Scholars are saying that agricultural income is being taxed indirectly by the parliament. But
agricultural income is not being taxed. The visibility happens that total income gets taxed at a
higher slab rate due to the inclusion of agricultural income.
Parliament is discriminating in case of people who have agricultural income and people who
do not have agricultural income. This is not at all a colorable legislation.
Read this case- K.J. Joseph v. ITO, ITL 178 Ker

Disclosure norms come into the picture. Partial integration of agricultural and non-
agricultural income has 2 objectives: disclosure as well as slight increase in revenue
incidentally.

Now the question is what is agricultural income?

Meaning and concept of agricultural income:
S. 10(1).
S. 2(1A) defines what is agricultural income:

Agricultural income means—

[(a) any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;]- CIT v. Raja Benoy Kumar Sahas Roy- Court defines what is
meant by “agricultural purpose”.

(b) any income derived from such land by—

(i) agriculture (Produce); or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily

employed by a cultivator or receiver of rent-in-kind to render the produce raised or
received by him fit to be taken to market
(Income generated from any processing ordinarily used for ensuring that the produce is
fit to be taken to market; whether a process is ordinary process or not is to be
determined from the point of view of the farmer community, i.e., whether they consider
it to be an ordinary process; the nature and character of the produce must not be
produced; whatever income is attributed to non-ordinary process is non-agricultural
income); or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by
him, in respect of which no process has been performed other than a process of the nature
described in paragraph (ii) of this sub-clause.

(c) any income derived from any building owned (farm house) and occupied by the
receiver of the rent or revenue of any such land, or occupied by the cultivator or the
receiver of rent-in-kind, of any land with respect to which, or the produce of which, any
process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on:

There are a lot of conditions for “building”.

Provided that-
i) The building is in the immediate vicinity of the land and is a building which the
receiver of the rent or revenue or the cultivator or the receiver of rent-in-kind by
reason of his connection with the land, requires as a dwelling house or a store-
house or other out-building, and
 ii) The land is either assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of government as such or where the land is not
so assessed to land revenue or subject to a local rate

Article 366 (1) of the Constitution- agricultural income means agricultural income as
defined for the purposes of the enactments relating to Indian income tax. Provides that
this definition given in S. 2(1A) of the IT Act has to be followed by the state governments
as well for the purpose of levying tax on agricultural income. This was given with the
objective of preventing any form of tussle between the Centre and states in respect of
taxation of agricultural income.

Income from poultry farming; income from honey; income from dairy; income from tea,
coffee, cash crops; income from orchard- whether they are agricultural income.

If I am a farmer and I borrow money, and thereafter, I say that I will repay the loan by
providing the lender a share in the agricultural produce, then will it be taxed in the hands of
the lender as well?

Moreover, if you have a piece of land; you visited the land and see that there is a natural
growth of plants there. You identify that there is a lot of commercial potential in the plants.
You nurture it and then you sell it off. The question is whether it is your agricultural income.

Ultimately, the issue whether something constitutes agricultural income is to be determined

with respect to S. 2(1A).

CIT v. Raja Benoy Kumar Sahas Roy- Raja benoy roy inherited a large piece of land.
There was dense forest in the land. Timber plants. Some plants got derooted due to natural
calamities. Plants were being cut and sold off. Whenever certain plants have been cut or
uprooted, on those places, this person used to replant the trees. This was going on for years
and years. This person used to file income tax as it is and he would always claim this income
was agricultural income. This way, exemptions were granted.
Once, the AO applied his mind and stopped giving exemption. Now the question was what
is meant by “agricultural income” and what is meant by “forest”.
In forest, the growth is always natural. What the court held was that they divided the
agricultural activities into certain parts:
1. Basic operation
2. Subsequent operation

Basic operation must be carried on the land before the germination of seeds. All activities
carried on before germination of seeds are basic operation.
All operations carried out after germination of seeds falls within “subsequent operation”.
Only if basic operation is carried out, then only it will fall under “agricultural income”. If
only subsequent operation is carried out, then it will not be considered as “agricultural
income”.
SC accepted this contention.
But the Raja contended that this forest was for years, but he planted a large number of trees,
i.e., the forest is the labour and investment of his family because he planted them. Court
accepted his contention as well.
Court came into the conclusion that his income is not from spontaneous growth but from
planting of trees.

Whether income from saplings grown in nursery is agricultural income?

Technically, no it does not fall within the scope of “agricultural income”.
But a deeming fiction has been created
Explanation 3.—For the purposes of this clause, any income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income.]

Search and Seizure

Purpose of conducting raid- to get hold of undisclosed income.

Satisfaction note is made out- Whether the person carrying out the raid is satisfied that there
is undisclosed income and what are the probable assets held. Once the search warrant is
issued, planning is made to raid various premises. All these premises are identified
beforehand; manpower identified.

The presence of a woman for raiding a residential premises is mandatory.

During the preparation of the route map, lots of team fail to mark the premises adjoining the
actual relevant premises and mar the other premises near the relevant premise. It is a matter
of utmost concerned secrecy.
IMP of strike time.
S. 132(1)A, B and C- Imp sections. Reason to believe for issuing a search warrant. Search
warrant is issued when a notice is issued or a notice under S. 142 is given but it is not
complied with.

Under S. 132, there is sufficient leeway to the officers to break open parts of the door.

S. 132- powers of seizure.

Statement on oath taken and assessee asked to explain the difference between the disclosed
income and what is found. This is done in the presence of two witnesses.

S. 132(3)- Prohibitory orders

S. 132(4)- Recording of statement under oath
S. 132(4A)- Presumption of ownership
S. 132(8)- Retention of the books of A/c and other documents seized
S. 132(8A)- Order under Section 132(3) shall not be enforced for more than 60 days
S. 132(9B)- Provisional attachment

Survey- How is it different from searches?

Earlier, authorisation had to be taken from the Range Head for carrying out raids.
Now the requirement for raid is given under proviso to S. 133A(6).

For the purpose of assessment, S. 292C was introduced.

S. 132(1)(a)- IMP

5 heads of income:
Income from House Property, Income from Business and Profession (This head of
income is complicated), Income from Capital Gains (One-time income), Income from
Salary, Income from other Sources (Residuary)

Income from Salary- S. 15 to 17

Two important points for every income-related provision:

Chargeability- Which kinds of income will fall within this head?

Computations- Quantification; and Deductions. But it must be noted that exemptions are
totally different from deductions. Legal impact differs.

What kind of income will fall within the head “Salary”? Given under S. 15 of the IT Act.

S. 15. Salaries.—The following income shall be chargeable to income-tax under the head
―Salaries—
(a) any salary due from an employer or a former employer to an assessee in the previous
year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, if not charged to income-tax for any earlier previous year.

Explanation [1.]—For the removal of doubts, it is hereby declared that where any salary paid
in advance is included in the total income of any person for any previous year it shall not be
included again in the total income of the person when the salary becomes due.
2[Explanation 2. —Any salary, bonus, commission or remuneration, by whatever name
called, due to, or received by, a partner of a firm from the firm shall not be regarded as
―salary for the purposes of this section.]

General Principle:
Payer and Payee- 2 people must be there. Whatever the payee gets from the payee on account
of employer-employee relationship will be taxed under the head “Salary”. Now the question
is how do you decide whether an employer-employee relationship exists? Exactly the same
tests which are applied in labour law.

Salaries received by the judges of Constitutional Courts, elected representatives- The

question is whatever they are getting, can that be also taxed. The general principle fails here.
The judgement of Justice Deoki Nandan Aggarwal v. UOI is relevant in this regard. In this
judgement, the SC held that for the purpose of income tax, the salary given to these
individuals will be taxed under “Salary”.
The Court held that:
“It is a far cry to conclude therefrom that the salary of a Judge is not taxable under
the Income Tax Act. The subject of the salary of a High Court and Supreme Court Judge
and the subject of tax on income are altogether different and the conclusion that is sought
to be drawn is quite unacceptable. The salary of a Judge of a High Court and the Supreme
Court is income and is taxable by Act of Parliament in just the same manner as is the
income of any other citizen.

It is contended qua the fourth question that, in any event, a Judge of a High Court and the
Supreme Court has no employer and, therefore, what he receives is not salary;
accordingly, what he receives as remuneration is not taxable under the head of salary
under the Income Tax Act. To our mind, there is a misconception here. It is true that High
Court and Supreme Court Judges have no employer, but that, ipso facto, does not mean
that they do not receive salaries. They are constitutional functionaries. Articles 125 and
221 of the Constitution deal with the salaries of Supreme Court and High Court Judges
respectively and expressly state that what the Judges receive are salaries. It is not possible
to hold, therefore, that what Judges receive are not salaries or that such salaries are not
taxable as income under the head of salary.”

Normal Salary will be taxed based on the date of “due” or “receipt” whichever is
earlier. This issue does not happen when both due and receipt are in the same financial
year. The issue arises only when “due” and “receipt” are in different financial years.

“Arrears of Salary” happens when there is a revision in salary with Retrospective effect.
When the retrospective effect is given, it will be deemed to be effected from the past.

Waiver of Salary/Foregoing of Salary- You are directing the employer that you will not
take the salary; you will tell your employer to pay to the general public like children or
disabled people. The question is whether you need to still pay tax in case of the
waiver of salary. You will have to pay tax because the waiver of salary is your voluntary
act after you are telling the employer to use that salary amount for some other purpose.

Surrender of Salary- You can surrender the salary in favour of the Central government
under Section 2 of the Voluntary surrender of Salaries Act, 1961.

Advance Salary & Advance against Salary- Not to be used interchangeably.

Advance Salary- you are taking the salary in advance before the salary becomes due.

Advance Against Salary- Type of Loan or debt. Need not carry any interest component.
There will be no tax payable on the loan. However, when the salary becomes due in every
month, the tax will have to be paid on the salary.

What constitutes the components of salary?

Salary= Basic Pay + Allowances + Perquisites (Perks) + Profit in lieu of salary (Like
Bonuses) + Retirement Benefits.

How to identify allowances- Allowances will always be in cash.

For taxation purposes, a distinction is made between “Allowances” and “Perquisites”.

Allowances and Perquisites- Expenditure which the employer is ready to incur.

Allowances- Always in cash. And Fixed irrespective of actual expenditure incurred.

Perquisites- in kind or in form of reimbursement subject to actual expenditure incurred.

For e.g., free electricity, free education etc.

Perquisites are always additional personal benefit which you get in kind. Anything that
you get for official purpose is not “perquisite”. For instance, during Covid, employer may
have provided you laptop and broadband free of cost for work from home. But these are
for official purpose; not personal purpose. So, this won’t be treated as perquisite.

Either employer will provide you accommodation free of cost or they will provide you
HRA (House Rent Allowance).

People working in embassies or people working in any international organisation to

which India is a party- All salary income is exempted.

House Rent Allowance

Income from House Property – S.22 to 27

-       Whether rental of bare land will fall under house property? or income from
other sources. It will not be taxed under income for the building and the land
adjacent which is attached to the building.
-       “building” -1 structure and should be attached to land. May be permanent or
temporary. Even jhuggis and jhopris will be treated as buildings. Need not be a
window or doors or roof or ceiling.
-       Buildings include commercial and residential buildings.
-       Ex. Boundary walls be considered house property. Let’s say I’m letting out ONLY
bare land for exhibition but not the building. Since land here is not used for. “effective
use of the building”. This will not be considered as part of the building and hence
cannot be treated as income under house property.
-       Ex. If you let out the quad, parking space, and roads in NUJS. Open land is rental
income because of the intrinsic part of the building. Hence “household income”
-       Ex. Many ad companies want to establish towers on terraces of buildings, walls. 
Whether income from PGDT, House property or other sources? Here, house property
income since roof is part and parcel of building
-       Assesses wants to get taxed under PGDT and income from other sources and vice
versa. There are disputes under house property because -
-       Under the House property there are two issues –
o   deemed income concept [ even if you don’t let out building, law presumes
income]
o   Limited deductions claimable on Gross receipts [standard deduction of
30% of GR AND interest of borrowed capital ] if constant maintenance
needed for the building there are not itemized deductions. ex. If you let out the
flat, you don’t need to maintain the flat and hence standard deduction better
-       You can exploit the building as a building and you can exploit it as a commercial
property too. If other property, then it will be under PGDT. Studios are buildings on
PGDT. “ letting out building with host of services or the host of services with the
building” If building main, House property , if incidental, PGDT.
 -       Ex. When building is stock and trade. Acquire the building or construct and let out
the property. Treated house property income under rental of the building. Specific
heads prevail over general heads.
-       V. IMP. Chennai properties. V. CIT, (2015) 373 ITR 673 SC

House Property
-       “Gross Annual value” has to be determined – notional or deemed income is also
subject of taxes.
-       Chances people can manipulate rental income
-       “Actual rent” (AR) vs “rent received” or  is it reasonable rent?  To be
clarified(RR) – whichever higher is taken as the income.
o   Illustration 1. If Actual Rent (1200) lower than reasonable rent  (800) (if
tenant left after 4 months but its vacant), thus, difference 400 is taken [ ONLY
because of vacancy became lower]
o   Illustration 2. AR is 1200 and reasonable rent is 800 , you will take
-       Every house property is a distinct source of income
-       Two types of properties:
1.     “Self-occupied” – which you yourself are residing and not let out [ friends not
in this category but family included]
o   previously only one house property out of let’s say 4 you own was
considered as self-occupied/ all were let out/ all were vacant. So previously,
vacancy was considered to be “occupied”
o   Previously was 1 but now you can have 2 “Self occupied” and rest shall
be “deemed to be let out”
o   GAV becomes 0  [ GAV = Actual rent/ rent receiveable/ reasonable rent
o   Fair rental value / municipal value [this is fiction] whichever is higher
subject to standard rent value [ not fiction] will be taken as the income.  
o   Standard rent applicable in few local areas [ standard rent value because
high migration in some areas like Mumbai otherwise they will be exploited]
o   “Municipal taxes paid” – there may be deductions claimed by owner – if
for last 5 years MT were accrued but you never paid, you’ll have to pay at the
end of the 5 years.
o   Net annual value (NAV) – two deductions allowed on this–
§  statutory or standard deduction = 30% OF NAV /
§  interest on value [clarify the term]
o   Vacant house is self-occupied and hence NAV is 0 and still entitled for the
above two deductions but you’ll get interest on borrowed capital – if self -
occupied , it is limited to 2 lakh Rs. ; set off of losses are allowed
2.     OR “deemed to be let out”-  
o   NAV is never 0
o   NAV may become negative when municipal taxes higher than GAV
o   Interest on borrowed capital claimed can be unlimited [ chances of income
hence deductions without ceiling]
o   No AR
 
 
-       For two years from Completion Certificate, all house property value treated as 0
-       Disputed ownership, tax assessment cannot be held 
PGBP

S. 28-44
-       Income from Profit and Gains
-       S.28-44

CHARGEABLITY
o   S.28 - General clause - Carried on at any time in the previous year.
o   Eg.  X is practicing in law. He maintains cash-based system books of account. One day, he
is designated as judge of HC on 31st July 2022. Earns past money in 21-22, 22-23, 23-24.
Law says B/P carried on at any time in the previous year. Taxable for 21-22 and 22-23 but
not 23-24. It is his income but not taxable in23-24 because business or profession not carried
at all.
o   V IMP. Cannot change source of taxation. If not chargeable under PGDT, then they
cannot be charged under any other heads of income and likewise.
o   176(4)
o   Nalinikant Ambalal Modi v CIT – Assessment under IT Act 1922. 1922 and 1961
charging sections were pari materia. Only thing changed was no section like 176(4) in old
law which says if any income not attracting taxes because discontd business, you have to pay
taxes under 176(4).
o   Anti- tax avoidance provision is s.176- So, now the above 50000 gained by the lawyer will
be taxed in above illustration in 23-24 u/s 176(4)
-------------------------------------------------------------------------------------------------------------
o   Pertinent issue: Revenue or capital receipts [ if capital receipts, then you can argue non
taxation]
o   Only revenue receipts is subject for tax under IT Act and not capital receipts.
§ Apart from provision of 28(1), all provisions are exceptions to the general clause [ Carried
on at any time in the previous year]
§ A list of capital receipts will be taxable which are exceptions
a)    Non -compete fee
b)    Value of benefit/perquisite
c)    Any compensation received on termination /modification of terms of agency
 
 
COMPUTATION
-       Computation = chargeable receipts – allowable deductions
-       On chargeable receipts
-       Deduct the Allowable deduction = expenditure + allowances + losses [ not DA but to
incentivize industry]
o   Expenditure = revenue expenditure+ capital expenditure
o   Capital expenditure in general not allowed. Capital expenditure not allowed as a deduction
because the benefits reaped are over long period of time. Normally on capital
expenditure, depreciation allowances allowed.
o   Depreciation
§  Basic – 32(1) (i) and(ii)
§  Additional – 32(iia)
§  Terminal – 32(1) (iii)
o   Expenditure is a cost incurred and not losses
o   Allowances include Depreciation allowances
o   Losses are suffered. Losses are divided into revenue losses and capital losses. Losses are
allowed under deductions if revenue losses and not capital losses.
-       “Weighted deductions” – A form of incentive where Govt allows more deductions
than your expenditure . ex. Expenditure of 100 Rs but get deductions of 150 Rs.
-       S.35 AD has eligible businesses
 
Three types of Books of accounts – can follow anyone
o   mercantile system / due based system / credit system- receipts accounted can be
received in future
 cash based – as per what you actually receive

-       Presumptive Taxation [ purely optional]

o   Why is this IMP?  
o   Supposed to maintain what receipts or receivables you have received in entire year
o   Certain percent thereof will be deemed to be your income and pay taxes based on it [ now
8% for trading communities and 50% for the professionals]
o   The entire series of S.44 will mention the rate for each category
o   Only if upto 1 crore turnover [ small businessman]
 We should raise the presumptions – govt should try to bring more people into this
system because very simple
 Presumptive taxation system simplifies the regime.

S. 28- IMP Chargeability Provision.

For a professional, 50 percent of whatever receipts you have got will be treated as
income.

S. 44. Insurance business.—Notwithstanding anything to the contrary contained in the

provisions of this Act relating to the computation of income chargeable under the head
―Interest on securities‖, ―Income from house property‖, ―Capital gains‖ or ―Income
from other sources‖, or in section 199 or in 2[section 28 to 43B], the profits and gains of
any business of insurance, including any such business carried on by a mutual insurance
company or by a co-operative society, shall be computed in accordance with the rules
contained in the First Schedule.

Presumptive Taxation scheme- with respect to PGBP.

Chargeability- S. 28 is a general clause. All others are specific provisions.

S. 28- Profits and Gains from Business/Profession carried on at any time in the
Previous Year/ See S. 176(4)

Nalini Kant Ambalal Modi v. CIT

Let’s say Mr. X is a legal practitioner. He is earning income and maintains his accounts
on cash-based system. One day, he is designated as judge of HC. 31 st July, 2022- He has
become judge of HC.
He got these money from his clients for his past service.

2021-22- 1 lakh

2022-23- 2 lakh

2023-24- 50,000

Now the question is on which amount will he pay tax because he has not paid tax on these
amounts.

2021-22- He carried on the profession

2022-23- He carried on the profession till 31st July, 2022

2023-24- He did not carried on the profession at all because he was judge of the HC.

So as per the provisions, whatever amount he got from profession in 2021-22 and 2022-
23 will be taxed under PGBP. Whatever amount he got from profession in 2023-24 will
not taxed under PGBP because he was working as judge of the HC.

Once an income falls under the chargeability provision of any specific head of income,
and it is found that the income is not taxable due to any reason, then it will be immune
from taxation.

So, he will not be taxed for 2023-24 under any other head of income as well.

In Nalini Kant case, the applicable act was Income Tax Act, 1922. But the charging
provisions of the 1922 and 1961 Acts were para materia.

The only thing that was not there under 1922 Act was a provision similar to S. 176(4) of
the 1961 Act.

S. 176(4)- Where any profession is discontinued in any year on account of the cessation
of the profession by, or the retirement or death of, the person carrying on the profession,
any sum received after the discontinuance shall be deemed to be the income of the
recipient and charged to tax accordingly in the year of receipt, if such sum would have
been included in the total income of the aforesaid person had it been received before such
discontinuance.

As a result, now, the 50,000 rupees that he received prior to the discontinuance of the
provision, will be taxed under the PGBP head. This is due to S. 176(4) of the 161 Act.

Profits and Gains- All receipts must be taxed. Revenue Receipts and Capital receipts.

Under Section 28 of the IT Act, only Revenue receipts are subject matter of taxation and
not capital receipts unless otherwise provided.
The following capital receipts will be taxed:

1. Any compensation received on termination/modification of terms of agency- will be

taxed
2. Value of Benefit/Perquisite
3. Non-Compete Fee.

Question will be whether it is a revenue or capital receipt. If revenue receipt, it will be

taxed definitely.

If you are getting property, then most probably, it will be a capital receipt.

Expenditure- will be of 2 categories: Capital and Revenue. In the same manner, only
revenue expenditure shall be allowed as deduction. Capital expenditure will not be
allowed as deduction unless otherwise provided.

Suppose you lost money. It does not imply that you have incurred expenditure. You have
just lost the money.

Computation= Receipts – Allowable Deductions (Expenditure + Allowances + Losses)

Stock in trade- is a revenue loss.

If your building gets damages, it is a capital loss.

There is a difference between Expenditure and Losses. Losses are also allowed as
deductions provided that the losses are capital losses and not revenue losses.

Weighted Deduction (S. 35)- Where you incur Rs. 100 expenditure but you get
deduction of Rs. 150. Where you incur an amount of expenditure but get a deduction of
an amount higher than the expenditure amount.

Why is Capital Expenditure not allowed as deduction- Because the benefits of the
capital expenditure will be enjoyed by you for a long period. Let’s say you buy a flat; you
will enjoy the benefit over a long time; and after ten years. So why will the govt allow
you capital expenditure as a straight forward deduction.

Normally for capital expenditure, the State provides for depreciation allowance. But S.
35AD provides for deductions in respect of expenditure on specified business.

S. 35 AD- Deduction in respect of expenditure on specified business.— (1) An assessee

shall be allowed a deduction in respect of the whole of any expenditure of capital nature
incurred, wholly and exclusively, for the purposes of any specified business carried on by
him during the previous year in which such expenditure is incurred by him:
The provisions of this section shall apply to the specified business referred to in sub-
section (2) if it commences its operations, —

(a) on or after the 1st day of April, 2007, where the specified business is in the nature of
laying and operating a cross-country natural gas pipeline network for distribution,
including storage facilities being an integral part of such network; 1***

2[(aa) on or after the 1st day of April, 2010, where the specified business is in the nature
of building and operating a new hotel of two-star or above category as classified by
the Central Government; (ab) on or after the 1st day of April, 2010, where the specified
business is in the nature of building and operating a new hospital with at least one
hundred beds for patients;

(ac) on or after the 1st day of April, 2010, where the specified business is in the nature
of developing and building a housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central Government or a State
Government, as the case may be, and which is notified by the Board in this behalf in
accordance with the guidelines as may be prescribed; 3***]

4[(ad) on or after the 1st day of April, 2011, where the specified business is in the
nature of developing and building a housing project under a scheme for affordable
housing framed by the Central Government or a State Government, as the case may
be, and notified by the Board in this behalf in accordance with the guidelines as may be
prescribed;

(ae) on or after the 1st day of April, 2011, in a new plant or in a newly installed
capacity in an existing plant for production of fertilizer; 5***]

6(af) on or after the 1st day of April, 2012, where the specified business is in the nature
of setting up and operating an inland container depot or a container freight station
notified or approved under the Customs Act, 1962 (52 of 1962);

(ag) on or after the 1st day of April, 2012, where the specified business is in the nature
of bee-keeping and production of honey and beeswax;

(ah) on or after the 1st day of April, 2012, where the specified business is in the nature
of setting up and operating a warehousing facility for storage of sugar; 7***]

8[(ai) on or after the 1st day of April, 2014, where the specified business is in the
nature of laying and operating a slurry pipeline for the transportation of iron ore;

(aj) on or after the 1st day of April, 2014, where the specified business is in the nature
of setting up and operating a semi-conductor wafer fabrication manufacturing unit,
and which is notified by the Board in accordance with such guidelines as may be
prescribed; 9***]
1[(ak) on or after the 1st day of April, 2017, where the specified business is in the
nature of developing or operating and maintaining or developing, operating and
maintaining, any infrastructure facility; and]

(b) on or after the 1st day of April, 2009, in all other cases not falling under 2[any of the
above clauses.]

Out of the allowances, depreciation allowance is the most important.

Depreciation under S. 32

Basic Depreciation S. 32(1) (i) & (ii)

Additional Depreciation S. 32(1) (iia)

Terminal Depreciation S. 32(1)(iii)

For claiming depreciation, you have to show that:

1. You own the specific asset (Tangible/Intangible) (The tangible asset must be
building/plant/machinery/furniture)
2. You must use the asset for business/profession

Methods:

1. Actual Cost Method

2. Written Down Value Method

Basic Depreciation- Everyone is entitled.

Additional Depreciation & Terminal Depreciation- additional incentives

What do you mean by building/plant/machinery/furniture?

Building/Plant- something with the help of which you carry on a business/profession.

Difference between Building and Plant: Building is where you carry on the business.
Plant- with which you carry on the business. Plant covers almost all assets with which
you carry on business/profession.

Depreciation will be based on lifespan. Longer the lifespan, lesser the depreciation rate.
Depreciation rate prescribed in Rule 5 and Rule 5A.

Plant- living organisms will not fall within “plant”. Only artificial things.

What is a building/Plant defined in S. 43 of the Act.

All assesses want to treat things like plant; not building because there will be higher
depreciation rate for plant compared to buildings.

CIT V. Anand theatres, AIR 2000 SC 2356

• Functional test- B/P- is it apparatus ‘with which’ the business is carried on OR is it the
setting or part of the premises ‘in which’ the business is carried on: if the former, it is
plant; if later, it is not (means building).

• The determination depends on the nature/type of business carried on by the assessee;

e.g. ‘road for testing’ is normally a building, but for automobile plant, it is plant and not
the building.

– CIT V. Karnataka power corporation, (2001) 247 ITR 268 SC- Distinction
between plant and building

 Court held that building is always a building. In certain exceptional situations, the
building may be treated as plant.
 If Building has been so planned and constructed so as to serve special technical
requirements, then it will be treated as plant.

For claiming depreciation, you have to show that:

1. You own the specific asset (Tangible/Intangible) (The tangible asset must be
building/plant/machinery/furniture)
2. You must use the asset for business/profession- An asset is not taken into consideration
for the purpose of depreciation unless it is ready for use. For instance, only an AC is
installed and is ready for use, then depreciation will be calculated on the asset. Use- active
and passive use.

Methods:

 Actual Cost Method- Certain fixed percentage of the actual cost of the asset shall be
charged as depreciation. If the actual cost is Rs. 100 and the depreciation is 10 percent,
then Rs. 10 will be deducted every year.

 Written Down Value Method- Actual Cost – Depreciation allowed/deemed to be

allowed.

Depreciation will be based on Written Down Value.

WDV= actual cost- depreciation allowed 100-0=100@10=10/ 100-10=90@10%=9/ 100-

10-9=81@10=8.10

Rule is Written Down Value Method.

 Actual Cost method is better for the assessee. Incentive for the assessee. If option is
given, assessee will blindly opt for the actual cost method.
Under the law, only one establishment can opt for actual cost method- Power sector.

How do we calculate depreciation?

Block of Assets- S. 2(11)
Block of Assets means group of assets falling in a class of assets consisting of Tangible
(B/P/M/F) and Intangible Assets, and subjected to same rate of depreciation.
Basically, there will be 5 Blocks:
B; P; M; F; Intangible Assets.

IMP to understand “block of assets”.

S. 2(11) ―block of assets means a group of assets falling within a class of assets
comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature, in respect of
which the same percentage of depreciation is prescribed.

1. If the value of the block of the assets is Rs. 100, and few of the assets are sold, and
the sale price of few of the assets are higher than the total value of the blocks. The
excess amount will be treated as Short-term capital gains. This will be taxed under
the head of “Capital Gains”.
If there is no excess, then it will be deducted as depreciation.

2. If there are 2 buildings and both the buildings are sold, then the block of assets will
no longer exist. In such a situation, there is no question of depreciation. In such a
case, there will be either short-term capital gains/short-term loss.

3. Once the block has been created, after that, what happens with the assets, i.e., if it is
used, it becomes dysfunctional- is no longer relevant. Only when the block is created,
all requirements have to be satisfied, i.e., the asset must be available for use. But
when it has been created, the requirements need not be seen.

Depreciation- always rule is that 100 percent depreciation allowed provided assets are ready
for use.

One exception- When the assets have been acquired and put to use in the previous year for
less than 180 days- 50% of eligible depreciation for use of less than 180 days applies here.
The remaining 50% can be availed in the immediate next PY.

If the asset is put to use for only one day in the next FY, even then, there will be 100 percent
depreciation.

Cost= Purchase Price + All the other expenditures which you are incurring till the assets are
put to use.

Challapalli sugar mill ltd v. CIT, AIR 1975 SC97

Actual cost S. 43(1)-

– Cost is not the same as price

– Cost means price plus all expenses incurred till its installation. It excludes the subsidy.

Terminal Depreciation applies only when you are using the Actual Cost method. If you
bought assets for Rs. 100, used it for 4 years, and depreciation is Rs. 40, then remaining is Rs.
60. Government can waive the Rs. 60 for actual cost method as an incentive and do not tax
Rs. 60.

S. 37- IMP

Expenditures

S. 31-36- deals with specific expenditures of revenue or capital

S. 37- residuary section; any expenditure not covered by S. 31-36. But not capital or
personal expenditures.

S. 37- Any expenditure (not being expenditure of the nature described in sections 30 to 36
1*** and not being in the nature of capital expenditure or personal expenses of the assessee),
laid out or expended wholly and exclusively for the purposes of the business or profession
shall be allowed in computing the income chargeable under the head ―Profits and gains of
business or profession.

Explanation 1 (by FA 1998)- any expense incurred for any purpose which is an offence or
which is prohibited by law shall not be allowed as deduction. – proposed to be Amended by
FB 2022.

Explanation 2 (by FA 2014)- any expenses incurred on activities relating to CSR as referred
u/s 135 of the Companies Act, 2013 shall not be allowed as deduction.

Explanation 2B- No allowance shall be made in respect of expenditure incurred by an

assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by
a political party.

These types of explanations are attached only to S. 37 of the Act.

Expenditures- whatever we incur. Expenditures doesn’t include losses. Loss and expenditure
are 2 different things.

Losses incurred during the course of business allowed to be deducted under S. 29 of the Act.
S. 37 does not apply to the losses.

If you visit a doctor, then can the expenditure incurred therein be deducted under S.
37? No, because it is a personal expenditure.
Test of personal expenditure is whether you are making the expenditure for business
purpose or otherwise. If you are making otherwise, then it is personal expenditure.

If you are running a business which is completely unlawful, and filing your return, can you
claim the expenditures incurred in running the business as deduction?

Pharmaceutical companies for promotion, provide free samples to medical professionals.

Court have held that if you are carrying out a lawful business but in the course of business,
you carry out any illegal activity, then the expenditures would not be deduction.

If entire business is illegal, then neither the income is legal or is the expenditure legal.

(IMP) However, at the present juncture, no distinction is made. If you carry any
prohibited activity, whether in a legal business or illegal business, then it would not be
allowed as deduction.

Dr. T.A. Qureshi v. CIT, (2006) 287 ITR 547 SC – The person was a doctor. But when
premises were raided, it was found that he was involved in consumption and running of
business of heroin and banned drugs and items. He claimed the expenditure and losses as a
deduction. Will it be allowed?

Expenditures would not be allowed as deduction under S. 37- held by Court. But losses
can be allowed as deduction.

CIT V. Piara Singh, AIR 1980 SC 1271 – gold smuggling -seizure of cash on border.
Losses claimed to be deducted. Same like Qureshi- losses allowed as deduction but not
expenditure.

Issue 1– Allowability of expenditure incurred by pharmaceutical companies on freebies

granted to medical professionals

– Medical Council Regulations prohibit medical practitioners from availing freebies- AO’s
contention.

Pharmaceutical Co.’s claim that Medical Council Regulations are binding on medical
professionals and not pharmaceutical companies and hence, freebies granted should be
allowable as expense.

– Contrary judgments of Tribunals exist on this issue:

• In favour of Assessee- DCIT v. PHL Pharma Pvt Ltd (2017) 163 ITD 10 (Mum)
• Against Assessee - CIT v. Kap Scan and Diagnostic Centre (P.) Ltd. [2012] 25
taxmann.com 92 (Punjab & Haryana)

Distinction made between government practitioners and private practitioners. So far as

government is concerned, court held that this is an offence like a bribe.

So far private practitioners are concerned, there is a divergence. Majority of courts held that
there is a bar on accepting the freebies; similarly, there is a bar on facilitating this; against
public policy because prohibited under Medical Council regulations.

One or two High Courts allowed deduction.

Specific explanations have come up which demarcates that such freebies which are
prohibited cannot be allowed as expenditure deduction.

The other question is whether free samples should be allowed. Department is saying that free
samples should not be allowed as deduction. Sir is saying that free samples should be allowed
as deduction because in Sir’s opinion, samples do not fall under “freebies”.

Issue 2– Allowability of expenditure incurred for a purpose which is an offence under

foreign law.

– Taxpayers claim that expenses for offences under only domestic law are not allowable as
deduction while the revenue alleges that expense under foreign law is also not allowable.

– Judgment in favour of taxpayer - Mylan Laboratories Ltd. v. DCIT [2020] 113

taxmann.com 6 (Hyderabad - Trib.)

Issue 3 – Compounding of an offence under any law has been allowed as well as
disallowed in different judgments:

– In EON Hadapsar Infrastructure (P.) Ltd. [2016] 71 taxmann.com 115 (Pune- Trib.), it is
allowed as expense

• In Millennia Developers (P.) Ltd. v. DCIT [2010] 188 Taxman 388 (Karnataka), it is not
allowed as expense.

(IMP) Now, an explanation has it has been clarified that the phrase ‘expenditure
incurred by an assessee for any purpose which is an offence, or which is prohibited by
law’ includes and shall be deemed to have always included:

– Expenditure incurred for any purpose which is an offence, or which is prohibited by any
law in India or outside India.

– Expenditure incurred to provide any benefit or perquisite to a person, whether or not

carrying business or profession, and acceptance of such benefit is in violation of any law,
rule, regulation or guideline.
– Expenditure incurred to compound an offence under any law for the time being in force, in
India or outside India.

• Accordingly, above expenses will not be allowable as deduction.

CIT V. Khemlal motilal jain (2011) MP (Jabalpur bench) – payment of ransom

If you are asked for ransom in naxal area, will the expenditure be allowed as deduction?

In Sir’s opinion, this expenditure of paying ransom to save the person from the naxals should
be allowed as deduction because it is neither an offence nor prohibited.

Income under Capital Gains- S. 45-55

Taxed under IT Act unlike other countries, which have a separate legislation.

Chargeability- S. 45 read with S. 54

Any gains or profit on transfer of capital assets, if not exempt, shall be charged and taxed
under the head.

• Conditions:

– There should be a capital asset.

– There should be transfer of it.

– The gains or profits should not be exempt u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA.

• If all the conditions are satisfied, the income shall be charged and taxed in the PY in which
transfer took place.

Quantification:

1. Computation of Capital Gain

2. Computation of tax on Capital Gain

Questions will be specific. Chargeability/Computation of Capital Gain/Computation of tax on

Capital Gain