What is the purpose of taxes? Provision of public goods and utilities; investment, subsidies etc.

In India, tax policies are being used for various purposes/objectives –

1. Revenue
2. Redistribution of income
3. Promotion of businesses
4. Price stability
5. Deductions and exemptions – exemptions under section 10 – every revenue receipt is subject
to tax unless exempted, and capital receipts are exempted unless specifically taxed. So
revenue receipts have to specifically exempted under section 10.
Deductions. – S 80 – income applies to you, you utilize it in the form of savings or
consumptions under section 80
6. Savings, health - life insurance for health, medical insurance, special types of business,
education
There has to be allocation and quantification of money – quid pro quo.

Stages –
1. Wealth – creation of wealth – income tax
2. Holding – creation of property both movable and immovable – in case of movable, putting the
wealth in banks in the forms of FDs etc. – here, the money will be in liquid form. Can money
be termed as wealth? Can gold be termed as money? Income may not be generated in the
form identifiable wealth, but rather in the form of debt. Up to 2015, there was tax on holding
wealth – wealth tax. But this was removed because compliance was considered tedious.
3. Transfer – usually falls within state taxes – seventh schedule, list 1 entry 80 onwards – centre
tax. State is in list 2. Eg – stamp duty
4. Spending – GST – flat tax rate to the economy. Rubber and hawai chappal example – the tax
goes into negative numbers, so these firms actually are owed money by the government

Difference between taxes and fees – taxes are voluntary in nature (not anymore) and there is no quid
pro quo. But for fees there is a quid pro quo. Taxes are one way. For purpose of taxes, sovereign
authority imposes tax, for fees it can be statutory levied as well.

Difference between levy and tax – levy is from a particular purpose. Levy may not be a type of tax
because it is related to a particular activity, but cess is always a type of tax. Levy is not a general tax.

Historical background of tax law

There was no such thing as tax in primitive times. Industrial revolution was the first time when there
was a generation of income over different sections of society. Hearth tax – tax on chimneys in the
house. All such weird taxes were there because there were no set methods to calculate income tax –
there was no such thing as slab system then.

No presumptive on the basis of previous year income from 1922. Previous year is an assessment for
the tax in the current year. 1922 onwards there was centralized assessment of income tax. Earlier
system did not take into account inflation etc. thus, 1922 onwards tax was included in the Financial
Act. Equalization levy is also included in the Financial Act. this structure is dynamic in nature,
therefore a little complicated.

Effective Income Tax 1961

What is income for the purpose of tax?

Doctrine of mutuality – you cannot transact with yourself as there is no quid pro quo - example –
there is a mutually created club, into which only those can enter who satisfy certain conditions and
have to pay subscription fees for it. Uses include recreation etc. The organization may or may not be
incorporated. Will it be subjected to tax or not?
 - Since there is a membership requirement, the usage of the facilities of the club are
channelized through membership. There has to be a quid pro quo between the parties and
there have to be two different parties at least. Whenever there is presence of mutuality, then it
would not be subject to tax, even if there is some profit, such profit will not be considered
profit for the purpose of tax.
- This happens when there are common members and they are transacting among themselves,
and there are no third parties involved.
- Example – there is a group, who gives a person within the group the power to deal with the
funds of the group for the increase in the funds. He puts the funds in an FD, and from that FD
gives loans as well. So, 2 branches of income – FDR and income from the loans. The income
is coming into the mutual group only, the concerned person is not keeping the interest with
himself. The returns from the FD are not taxable, as we are not transacting with the bank. But
regarding the loans, the loans given to third parties will not be covered by the doctrine of
mutuality and will be subjected tax. Bangalore Club v CIT (2013) 5 SCC 509- When
interest is generated by club from fixed deposits in the Banks then can be exempted on
grounds of doctrine of mutuality? If surplus from mutual concern is used for objectives other
than that of mutual concern then it won’t be mutual concern anymore and will be subject to
taxation.
- There is a restaurant which is a mutual concern, as there is a sister concern of the restaurant
which is another restaurant. Thereafter, both mutually entered into a tripartite agreement with
a third person, by virtue of which he would deal with marketing and sales, and has discretion
to invest in the business or not. Can it be subjected to tax? Mutuality expects everyone to
have equal rights to some extent. Since here, there is no such thing, and there is a third party
agreement taking place, this would be not be covered under the principle of mutuality.
Moreover, the first agreement between the two restrauteurs will also not be counted as
mutual. Yum! Restaurants marketing Pvt ltd v CIT 2020 SCC OnLine SC 388 1- This case
and Bangalore club cases brought in objectivity in the concept of mutual concept by outlining
the ‘common identity test.’
o You cannot engage in business with yourself
o It is deemed in law as oneness when the identity of the seller and the buyer, vendor
and consumer, is one
o If there is an essence of commercial nature between the two entities then it would not
be a case of mutuality

Transfer pricing – sister concerns need to be identified. Arm’s length price has to be seen –
transactions among sister concerns (associated enterprises) dealing among themselves have to be seen
to determine the true income. Such transactions cannot be read as market transactions, these are
considered control transactions. Similar system is there under IBC. ALP is applied currently only to
international transactions – but should be applied to domestic sister concerns as well to weed out tax
avoidance strategies.
When tax avoidance is considered tax evasion, then the corporate veil can be lifted – McDowell case,
Azadi Bachao Andolan case.
Conglomerate taxation system in Britain – principally looks into the structure of the organization.

Application of income and diversion of income by an overriding title

Is it a case of him enjoying the fruits through some overriding title, or through application of income
(title belongs to him). In the case the title is overridden by a title, he remains the owner but the income
does not come to him, it is going directly to someone else. Application of income means whenever
income comes into the pocket of the assessee due to his title. If the income is diverted to any third
party before coming to the assessee by way of a legal obligation, then it will be a case of diversion of
income. Such overriding title should be legal in nature – decisive factor to identify diversion of
income by overriding title. The nature of the obligation has to be looked at – there should be some
mandate created out of you, should not be a mere duty to do something.
1
https://itatonline.org/archives/wp-content/uploads/Yum-Restaurants-mutuality.pdf
Tilak Raj Kalra case – gold will be given to persons who subscribe a certain amount of the scheme.
Before giving the gold, the government deducted 30 percent TCS. The assessee filed the case on the
grounds that the income he is receiving does not qualify as income as per section 2(24)(ix), and
government cannot deduct tax from it. (in 2(24)(ix) – after G Kartikeyan case, even games including
skill and chance are also included, even in television). Arun Puri case DHC is also similar – journalist
case – there is a random selection of best journalist. SC held in Kartikeyan case that the entries in the
Act were there for purpose of indication and if any entry does not fall into an indicative category in
the Act, it would not be considered as income and you are not to include that entry individually. Two
things –

 If it is not defined in the particular section

 If it is party to any of the entries but excluded as per the definition that has been given.

Court held that this cannot be said to be a case of chance as here this is PPF scheme, and your money
is secured. So it cannot be said to be a lottery as there is always a matter of chance with the lottery. So
will not fall in subclause ix. In Arun Puri case, it was also held to be not income as the group giving
the award was not the employer of the journalist, and the award cannot be considered to be a chance
game. Whatever chance situations are not covered in the section, cannot be included in by
implication.

In case of a person taking regular classes, another person making randomly teaching videos and a
third person making and uploading videos on YouTube regularly. In first situation, the income would
be considered salary as he is making use of his faculties and people are paying for it. There is causa
causana – quid pro quo and the student and teacher know each other. Second situation – no causa
causana. Student and teacher do not know each other, the teacher only makes the videos and uploads
it on YouTube. There is no subscription fees. There are no other expenses. This would still be
considered income as the reason behind doing the activity is to earn income. Fourth situation, person
who made and uploaded such videos, received gifts, etc. but has now retired and is still receiving gifts
for the work she had performed years ago. These gifts are coming from unorganized lobby and from a
celebrative mode, so will not be considered income, only gifts. In case students are giving, then it is a
case of gift, not income.
In case of a cricketer playing a charity match, it will be considered income because he is using his
skills to play and his board (like BCCI) is organizing the match.

P Krishna Menon v CIT, Acharya BE Pandit v CIT 1965 56 ITR GUJ HC

Income can be generated by way of interest also. But can be compensation be termed as income? If
there are any immovable assets which carry any productive value – then would there be any quid pro
quo consideration? This would only be a case of transfer of property. But if there is some property on
which there is some productive thing – mine, quarry, etc. Then – it would be inclusive of the amount
of this thing as well, such as the amount of the lease. The transfer will include the value of the
product.
Consent or compromise decree – you have to see if it created any charge – if yes, then it is a case of
diversion of income. Bijoy Singh Bhaduria case – son had to look after the stepmother as per the
compromise decree, according to which he had to give assets for the maintenance of step mother
(giving a particular sum per month). Difference from the case of giving maintenance to wife via
consent decree – the term is ‘mutual consent’. Consent is more persuasive. Since they are themselves
agreeing, it is a case of application of income. In case of compromise, it is a case of diversion of
income as it is by way of an agreement. Charge cannot be merely created by the court, it can be
created by many other ways.

Fundamental rule of diversion of income – income should be diverted on the basis of a legal
obligation.

Example – excise licence issued to A for manufacturing of beverages. A enters into compromise
agreement with B, a brand for purpose of manufacturing beverages for B in the form of a joint
venture. Labelling etc is taken care of by B. The income being generated under this joint venture is
being accrued to B and it is a case of diversion of income by overriding title and is not a case of
application of income according to the IT Department. Decide whether this is correct. The distribution
channel belongs to B, and all the products go to B. But she has the license to manufacture. The
moment she had the license, she had the legal authority to work in India, which gives her a lot of
privileges. Income will apply first to the licensee. Thus, since there is no diversion of income from
source, this would be a case of diversion of income and there is no overriding title on the accrual of
income.

Example 2 – A represents Nike US in India, her duty is to collect orders from India and send them to
the USA, who then send the orders to her and she distributes them in India. Here she is controlled by
Nike (type of showroom, timings of store etc.) Thus there is an identifiable causa causana. There is a
presumption that Nike US is present in India, and thus they are liable to pay tax in India and file for
returns. A would also have to pay tax. – this is a case of application of income.

Now, A quits Nike. Thereafter she is independently collecting orders for Nike, and for Adidas etc but
primarily for Nike. They are sending, and now again she is distributing the orders. There is no
franchise agreement etc. Now, the income she is generating is independent income. The income
generated from other brands is meagre. IT authorities will look at various other factors like whether
she is working solely for Nike, and if working for other brands then up to what percentage and if she
working predominantly for Nike, and if the split was a sham or not. Azaadi Bachao Andolan and
McDowell’s case. If she is working predominantly for Nike, then it would be a case of application of
income.

Whenever profits generate in a partnership, this is done in name of the partner.

Example 3 – in case of partnership, a partner created a sub partnership with their granddaughter and
grandson etc. In another case, the partnership deed says that the capital of one of the partners (out of
the six), will be the capital of the partnership. Determine the nature of it.

Fraud – deliberate suppression of material facts.

Principle - First you have to identify if it is a case of application or of diversion. then you have to
identify who is the assessee. To see this – see allocation and quantification.

Adani illustration – 2 departments. Reliance Electricity will distribute electricity based on the price
determined by the Electricity Department. To calculate the price, there will be a trust created to look
at the tariff collected. The trust will collect the money. Now this business was transferred to Adani,
but the trust remained with Reliance and would collect the amount from the market up to the
agreement for Reliance. To whom does this income belong? This will be read as income of Reliance.
In this case, the trust will be considered as a dead unit because it is a loss running unit. This is a kind
of expense. Here, Adani is the assessee. In an agreement, can you create charge in a way which
diverts income. Is this a case of application or diversion? This would be a case of diversion of income
at source. Reliance would have to pay the tax as the income has been diverted by way of trust. Sun
Pharma case. Ranbaxy purchased R&D unit of Sun Pharma which was had high expenses, to reduce
their tax.

Canes India case –

Any international transaction can be computed on two grounds – permanent establishment (S 9) or by

way of transfer pricing (Section 92). But they are both based on the documents submitted to the
income tax authorities by way of self-assessment.

What has to be seen whether there is a hold over the property – if legal title does not belong to the
assessee and he does not have hold over the property, it would be a case of divergence, but if he has a
hold and control over the property, it would be a case of application of income.

Example - A and B are sister concerns. A wants exemption (deductions) under 80HH as it is an
export house. Now, B is working with A but they are independent entities. Fair dealing is happening
between them. Now, there are certain job orders received between the two companies. A is export
house, B is the packaging company, packages A’s stuff as per customization and gives the packaged
stuff back to A who then exports it. Quid pro quo as B is charging service fee such labour charge,
transport cost etc. During computation of income tax, they realise if A gives the amount back to B
then A’s income will reduce, then they cannot take advantage of Section 80HH as it applies to
application of income. So they reduce the job order charges from Rs.40 to Rs. 20 before 31 st March,
so that A’s income increases so that they can avail the exemption, and B can show less income and
have to pay less tax. Will it be a case of application or diversion at all, and if yes, then which one. Can
discount be read as colourable device. – yes, these transactions have to be read as application or
divergence. Even though this is a sister concern, the corporate veil can be lifted to see the real nature
of the transaction. S 36(5) - deals with bad debts – what has to be seen as to whom the bad loan was
given. If between two sister concerns there is a transaction which has not taken place within the
course of business, it cannot be considered as a bad debt. The liability has to identified – by way of
fundamentals – like checking if the doctrine of mutuality applies.

In the present case, it may be presumed that this income, by way of colourable devices, may be being
shown as A’s, but actually belongs to B. The corporate veil may be lifted. The transaction took place
only a few days before the last date for filing.

S 131, 132 – to be read with reference to CrPC. Puran Chand case is the authority. How, on credible
information, IT authorities are supposed to work.

Chintamani case – he had issued a lease of a period of 30 years in 1944 of a piece of land. This 30
years lease consisted of 2 lakh 24 thousand as salami amount (this was a capital receipt). Apart from
this amount, there was rent as well. Along with this amount, per acre mining of the area, there was a
percentage for the profit generated as well.

The decisive test to determine if there is a diversion of income by overriding title and application of
income is legal obligation. What is legal obligation? Who can file a case in such a situation – the
person who has a right to file the case – the person to whom the title has been diverted will have the
right to sue.

Example – there was an HUF property. This was given on lease to a company. Lease amount is Rs.
21000 per month. By way of the lease deed, the company will pay a sum of Rs. 10,000 to X College
and the remaining 11,000 to the HUF. This college is run by a trust. Second agreement between the
HUF and the college that in case the company does not pay the money to the college, the college has
the right to sue the company. How much money actually belongs to the HUF for tax purpose? Lease
agreement is the source of the income. Once rent is generated in case of HUF, it is income of HUF.
This is a classic case of application of income. Once income is allocated, it is the income of the HUF.
After this, no diversion can happen. The second agreement is a sham agreement created. In company
accounts, it will show that 21,000 as due to the HUF, while allocation of the amount may be to
different entities. The subsequent agreement cannot create a diversion when the first agreement
already allocated the income. 1991 case Moti Lal something case SC.

Jeet X-Ray Clinic case

Get notes for last week (20th to 23rd)

In case of transfer – why is it a case of diversion, and not application

Legal obligation created by way of pledge – will be a case of diversion itself.

Example – there was a family trust created by way of which it instructed the two assessee – first was
running a business, and second was not – both were to give cumulative amount of Rs. 18000 to their
grandmother (pertaining to the succession amount they were to receive from the trust). Both agreed by
a separate deed to give Rs. 15000 from each to their grandmother. Thus, it was 12000 more than the
stipulated amount (6000 excess amount from each). The initial 18000 will be a case of diversion. But
what about the excess 6000 of each? This was a voluntary deed. What will be the case if there was a
deed between the three of them?

In case the grandmother is also a part of the deed, then the second deed cannot be read with the family
trust deed because she will be a third person who was not a part of the first deed. She cannot sue the
family trust, only the grandsons. So, it is an independent deed. This would be a case of application.

However, if the grandmother is not a part of the deed, then it would be an extension of the first deed.
The two existing trustees are entering into another deed. So, it would be a case of application of
income. If there is a slight increase in the amount, it goes with the objective of the trust, but the
amount cannot be too much. Prince Khanderao Gaekwad

Section 11 – Public and charitable – only trusts created for this purpose would be exempted from
tax/given tax benefits.

Case – Amitabh Bachchan entered into an agreement with an agreement with CEO of Amitabh
Bachchan Entertainment in 1995. The terms of the agreement said that if AB was in a lead role in a
production, then a ratio was fixed as to how much amount would go to whom. Up to 2000, ABCL was
in losses. In 1996 (operating year for the agreement) onwards, ABCL had sponsored Miss India
pageants and suffered huge losses. After this AB entered into an agreement with Star India
(production house of KBC) and E- Entertainment (tripartite agreement) in 2001. The agreement said
that the amount which KBC earned, would be sent directly to ABCL. Arbitrator was appointed to see
how the losses caused by AB to ABCL were to be offset. It was held that 70 percent of the earnings of
AB as a villain or hero would go to ABCL. ABCL also became the owner of all the IPR of AB for 12
crore. And these 12 crores were shown as capital receipt in his income tax returns. But IT Authorities
claimed that this was a revenue receipts, and in case of the 1995 agreement between AB and ABCL
no one had signed on behalf of ABCL. Thus, it was claimed that this was a tax evasive device by AB.
So is it a capital or revenue receipt? This was a classic case of diversion of income by overriding title,
and the title was created by the arbitration award.

Definition of agricultural income – generated in huge amounts in India. Agricultural income is a

recurring income, but is exempted under S 10. Entry 46 List II – power to tax is with the state govt.
State governments don’t tax agri income because of political reasons. Section 2 (1)(a)(i) – defines agri
income – any rent and revenue derived from land situated in India and used for agricultural purposes
will make a case for agricultural income.

A is working in a company which deals with agriculture. He is the managing director, and is receiving
a salary for the purpose. In case the production is doubled, then he would get an additional sum of 1
lakh. B is a farmer appointed for farming purposes. The production is doubled. Thus, A receives the
salary and also the bonus of Rs. 1 lakh. A also has shares in the company. Thus, because of jump in
production, he also receives income in form of dividend. Can these incomes be considered
agricultural income?

Now, replace the director with a managing agency who is looking after the land, and has 10% of
sharing of the profits and can be outsted any time.
When any assessee received income from the land as agri income as defined under IT Act, by any
source and method, we will presume it to be agricultural income (defined in S 2(1)(a)(ii) – any
process adopted by the cultivator in an ordinary way. Third component – there should be sale of the
product.

Premium construction 1948 case – Lord Bemont

Response – when the director is performing the work of director for the remuneration and bonus, it is
not coming to him as per the definition of the agri income. He is getting salary as per the agreement
with the company and not from the sale proceeds of agriculture. He is not the owner as he can be
outsted any time. The bonus (one lakh increase) will also not be counted as agri income, it is as per
the agreement.

Assessee should be directly getting the rent or revenue from agri for it to constitute it as agri income
(should come directly from the land).

First we have to clear the nomenclature of the agri income. We have to see in what way the income
applies to the concerned person. Charge means – the finance act fixes the slabs on basis of which tax
is charged.

Example – there is a Waqf board which has agri land. The admin of the board gets fixed salary for
admin of the agri land. In the other case, he is getting a percentage from the profits of the sale from
the agri land. The agreement talks about agri produce. In case the agri produce is zero, then he would
get zero income from the land in the second case. Thus, in the second case, since the source of the
income of the admin is from the land itself (produce from the land), it would be considered to be agri
income. In the first case, he would receive his salary even if there is no agri income. In case of partial
fixation of salary also, it will not be considered agri income.

Usufructuary mortgage – X has taken a loan from Y for agri purposes of Rs.10 lakh. Here source and
method will not be applicable as it will be usufructuary mortgage. It will be considered agri income
for Y.

What if X has agri land, and has been giving it out on rent. Now, it is given on rent to Y. But Y does
not use it for agri purpose. In other case, X is living in the city, and has given land to Y who is not
using it for agri purposes. Now what if – X knows, and X doesn’t know.

If X is not aware of this, and has filed the returns, and income tax officer has not assessed it for past 3
years, then it will be considered agri income. If he is aware of this, then it will not amount to agri
income.

Maharaja Kamakhya Narayan case, Maharahja Kumar case.

14.3.23
Agriculture primarily involves human intervention also. Opium – when it is grown intentionally, vs
when it grows automatically.

X has a courtyard, where he is growing mulberry trees, and from that he is getting silk and selling it in
the market. Useless into useful income in an ordinary process – if there are 10 uses of a product, the
most approximate use would be considered ordinary use.

S 10 consists of all the revenue receipts which are exempted.

S 80 – says that if anything under this section such as expenses, savings are, then it is considered
exempted under this section.

Indirect usages of agricultural land – instances of milk product, etc. – indirect linkage will not make a
case of agricultural produce – Binoy Sahas Rai judgement – read case carefully to see which all cases
were reaffirmed or overruled. Earlier, milk products were part of agri income. But not dairy and dairy
products are not agri income.

E is having his own farm, growing potatoes and keeping them in cold storage to wait for the season
when potatoes are at a shortage and he will provide potatoes. One has to identify whether this process
is ordinary or not. Anything in reference to definition given is a case of matter of law. This would
depend on the type of refrigeration – whether home or industrial. If industrial, and if necessary, then it
will be considered exempted.
E then creates a pond in his agricultural land, and breeds fish in there and starts selling the fish. Will
this be considered agri income? No because it is not covered in the definition given in the agri act.

Can sale and purchase of honey comb growing on agricultural land be considered agri income? If any
product is the direct byproduct of an agri process, then it will be considered agri produce. Even in
case of mulberry trees, the sale and purchase of silk from the silkworm will not be considered agri
produce as it is a byproduct of the silkworm, and not the tree itself.

If from the leftover of sugarcane, electricity is produced and used for captive (own) purposes,
exemption would be given. But then if it was for out sourcing the electricity, then the court has not
answered the question.

Sericulture – K Lakshmanan and Co v CIT (2000) SC – in context of sericulture; CIT v HG Date – in

reference to sugarcane – conversion of sugarcane into jaggery will not be considered agriculture
income, unless it is done certain circumstances, such as the sugar factory is too far and the cane will
perish unless it is converted into jaggery, or if the cane is defected and cannot be used for making
sugar.

Satalal naraynlal case; CIT v Venkatah Subbaihah - regarding the harvest of opium

Palm tree – if the person with palm tree creates palm oil out of it – Oil Palm India Ltd. v ACIT (2012)
– only if it is converted into oil because there is no other use of it because it is bad, then it will be
considered agricultural income, but if it can be used in any other way and is still used as making oil,
then it will not be considered a case of agricultural income.

Peas – if you are growing peas, and selling them as seeds for industrial purposes (not for the purpose
of consuming as vegetables). Will this be considered an ordinary process of agriculture? CIT v Rawa
Gurjeet Singh (2012) P&H HC – when you grow pea seeds particularly for this purpose, then it will
be considered a case of agricultural income, but if you are selling seeds when they can also be sold as
ordinary peas, then it will not be considered agricultural income.

Golka leaves tree – the purpose of the leaves is to make loofah, but only if the leaves are more than a
metre long. For this purpose, X had imported seeds from Europe, and sown them into sand. He grows
the seeds, puts them in solution etc., and cuts them into the requisite size, does a long process
including machines etc. and sends them to Japan to the manufacturers. But they return it and claim
that they do not meet the requirements. Now he is claiming exemption. Would this be considered
ordinary process. He is doing primary and secondary activities, but the market for the product is only
in Japan, and there is no other use of the produce except for manure – Sakal Lal Narayan Lal v CIT. –
We have to see what is the ordinary process in context of the ordinary market or industry it is meant
for.

Those buildings which are within the vicinity of the land, only if they are occupied by the owner, or
those who have rented the land, and is being used for the purpose of agriculture, like being used as
outhouse or for storage, will be exempted for purpose of agri income. This should be a dwelling unit
and not an industrial unit. E.g., you are providing the building for providing dwelling to the farmer,
then using of the unit would also make a case for agricultural income. Occupier – the occupier (not
owner) of the building – income generated by such person will also make a case of agricultural
income, provided that it is related to agriculture.

Decisive test is to look into the connection of the dwelling unit with the land.

Deputy CIT (Hyderabad) v Inventa Industries (2018) Hyderabad Tribunal – Spl bench – one issue was
in reference to whether anything being grown could count as agricultural income, and if anything
being grown vertically could be considered agricultural income. Mushroom – since it is algae, and is
grown vertically – court held that this would be considered a case of agricultural income only.

If any plant requires only water to grow – will it make a case of agri income – yes.

PHI Seeds Pvt Ltd v Dty CIT 2014 Delhi Tribunal – assessee took on lease, the land of the farmers,
and on those lends he sold patent or primary seeds, and then reverted the land back to the farmers.
Can this be considered a case of agri income? All the primary activities were done by the assessee to
create a conducive env for the plants to grow. Payment was given to him to plant the seeds. Padh ke
ana.

Landscape artist – generating 2 incomes

20 March 2023
Residence
6(3) – any company registered in India would be considered resident of India.
If a person is in India, 181 days only, then would they be considered resident of India – that person
would be considered if for the past 4 years cumulatively, he was a resident of India 365 days total
plus, 60 days in the immediate previous year. 365 days is inclusive of those 60 days.

If any person whose parents are of Indian origin, and that person is visiting India and earning from
foreign sources, then such person will be considered resident, provided that he is not paying taxes in
any other jurisdiction. – S 6(1)(c).

What if there is an involuntary stay in India, which forces a person to live in India for more than 182
days? EG – X is a resident of London, but comes to India every year and leaves just before the
threshold period. Tax authorities are aware of it. One time, they illegally impound his passport,
forcing him to stay for more than 182 days in India. Will this be counted?

Transit route in India, person is put behind bars under NDPS and stays in India for more than 182
days. Can he be considered resident for the purpose of ITA?

CIT v Suresh Nanda (2015) – because impounding was involuntary and unauthorized also, therefore,
it could not be read as voluntary stay, and would not be subject to residence for tax purposes.

What will happen in the case of smuggling under NDPS? In case he is arrested and there is a
generation of passive income to him. But what if he is generating active income while inside the jail.

Tie breaker rule – double taxation avoidance agreement. A person along with his family is living in
Singapore. India and Singapore have such tie breaker rule.

Sameer Malhotra v ACIT (2023) Delhi Tribunal –

In Re Mrs. Sunita Anand 2014 Adv Authority – (Chinese eg) – a case of application of ITA as it is,
thus , it would be considered taxable in India.

Dates pertaining to residential status – objectivity should be there in consideration of residence. There
is limited application of res judicata concept in case of income tax proceedings.

Question – persons who were living in India prior to Partition, and then became residents of Pakistan
post partition. Can India claim residential taxation on this person for the previous financial year, when
he was a residence of India? India has a limited double taxation avoidance agreement with Pakistan. If
for a limited time, the person was a part of India, then he would be taxed for the period he was a part
of India.
Section 6 –

Resident,
S 6(6) - Not-ordinary resident – if out of previous 10 years, he was a resident for 9 years.

6(1A) – Deeming residence provision – 15 lakh rupees of total income not earned from foreign
sources – deeming fiction created. Difference between section 6 and section 9 – section 9 talks about
the income generated under a business connection with India, while section 6 does not talk about
business connection but rather about the resident.

But how to calculate total income of a person not living in India but is visiting India.

In 6(1A) – the threshold has been reduced to 120 days

Section 6(2) – in relation of HUF – the place where the control and management of the HUF is taking
place shall be considered for the purpose of determining residence.

Circular 11 of 2020 was applied only in context of extension of flights. If you extend your stay
voluntarily, then you will have to pay tax. But if the extension is not voluntary (due to the orders of
the government etc.) then you will not be taxed.

Residential status is more of a question of fact.

If you are above 182 days even for 1 hour, it will be considered as a whole day extra.

S 18, 19 of partnership act – how to determine which partner is doing what.

Control and management of the affairs of the HUF

Residence of company
Earlier, there were only brick and mortar companies. But after 2000, the internet became more
accessible and along with goods and services there are digital goods and services.

Section 6(3)(ii) – place of effective management – where the key managerial decisions are taken. One
way of seeing is where the board meetings are taking place.

Example – C company provides helicopter services to A. C has entered into a contract with B to
provide repair services to A. A and B are present in India, but C is not. Can C be subject to paying tax
in India or not? We need to see whether effective management of C is in India.

In India, because of the large informal economy, the recession did not effect it.

Section 9 – talks about any income in context of business connection in India (instead of total income,
particular economic activities can be subject to tax). Applicable only in those countries where India
does not have DTAA (double taxation avoidance agreement). Royalty is an example of source based
taxation.

S 165 of Finance Act 2016 – talks about equalization levy which is a unilateral formula adopted by
India for charging tax on digital presence in India.

Addition in S 9 – ‘significant economic presence in India’. In case of digital businesses, if the

company’s output is two crore or more in the country, then it would be considered that has significant
economic presence in the country. Vodafone judgement, Azadi Bachao Andolan, McDowell
judgement – only legislature (Parliament) is allowed to create legal fiction, courts cannot do so.
‘through’ and ‘from’ – in context of business activities as given under the section.

CIC v Ad2Pro Media Solutions Pvt Ltd 2023 case

CIT v Pelcia Ltd

Section 9 test – there has to be some economic allegiance. Microsoft is based in USA, but when you
pay the licence amount to download it even in India, will Section 9 be attracted?

Helicopter example – there is positive obligation on the company in India to pay the fee, hence the
problem of TDS.

If complete transfer of property, then it would be considered economic allegiance.

EG – Balaji films entered into an agreement with a Singapore studio for lease of movies for 20-25
years for the purpose of uploading. Can this period of lease of 25 years be considered to be economic
allegiance and subject to taxation in India?

EG 2 – Shreya is there with Shreya Comm, and entered into a contract with another company, and
takes for 99 years on assignment agreement (she is free to assign these rights to others also), the same
set of movies. Will this be considered economic allegiance falling under Section 9?

Any permanent acquiring of the product is not royalty, section 9 would not be applicable. If someone
buys for 99 years, then it would be a case of absolute transfer, and would not be considered royalty. In
Balaji case (2013) court held that since it is only for 25 years, transfer was conditional in nature,
hence it would be considered royalty. In 99 years case, it was absolute transfer and not conditional, it
would not be considered royalty, and would be out of the purview of S 9. – Bhagyalakshmi K v DCIT
(2013) – Balaji case was also discussed.

Any case of absolute transfer is not royalty.

Centralized services are provided from US based company to a hotel in India (marketing services
etc.). Will this come under S 9. This company is providing centralized registration services and
charging fees for both these things. Will this be considered royalty? No, and this would be a case of
non-application of S 9. But if there was any personnel and a small office in India, it would have been
a case for S 9.

Fees for technical services – you have to see if it is for exclusive use or majority of use by that
particular company, then it would be considered to be falling under S 9. But if the company is
providing services to three different companies, then it would not be covered under S 9.

Automatic equipment cannot be considered fees for technical services – only if there is an actual
person who is operating (there is human intervention) then it would be considered fees for technical
services.

Section 9 is a deeming fiction and you do not have to do purposive interpretation.

Section 10 – all revenue receipts which are specifically exempted

Section 80 – application clause
Section 11 – exemption for charitable trust. If the objective of the trust is providing relief to the poor,
education, yoga, medical relief, preservation of monuments, environment and artistic work – it would
be considered a charitable trust.

There is a trust formed for the objective of conducting marriages for the poor. But preferences is to be
given to persons from the trustee’s family. Can the nature of this trust be considered charitable? This
cannot be termed as public utility services, as in the first instance itself, the charge is created over
members of the family.

Or similar services, but here the primary objective is to give services to the poor along with the family
members who are poor. – if incidental benefits go to the family members – the objective of the trust
has to be looked at first.

The objective of the trust should be as per section 11, and even if not, it should be functioning for
general public utility.

ACIT (Exemptions) v Ahmedabad

The benefits taken by the trust – whether the claim demanded by the trust is valid or not

Health club has been created which has been providing midday meal services. But this has not been
provided in the objects of the club

26.4.23

Section 17
Can compensation given by former employer be termed as salary? After amendment, certain entries
were made including under Section 56(2)(9) – income from other sources – when the income you
receive is not qualifying under any other head.

Termination and modification of employment – modification means change in terms of employment,

can be both qualitative and quantitative (in terms of salary).

Subsection 2 and 3 of 17

Rent free accommodation

There is an employment agreement which says that X is supposed to join the company from 1 st June
2023 as CEO. A further letter is issued to X, in which ex gratia amount is given to X for not joining
the company. Can this be considered profit in lieu of salary. The payment is made towards
cancellation of the employment agreement.

INCOME FROM HOUSE PROPERTY

S 22 – talks about annual value. Annual value is not defined, it is a notional value. Thus, tax is
charged on hypothetical income, as there is a presumption that if there is a house then someone would
be living. After 1975, amendment was done and annual value will be considered the rental income
that was generated. Stock in trade is now subject to tax on house property. If a particular building is
not given for rent, then the owner will have to pay tax on the building on the going market rate even if
the house is not actually given on rent. So tax is charged on hypothetical income.

Who is the owner, what is the activity being done, how the building is being used and deemed
ownership.

What would be considered building/land? Can a temporary hut be considered a case of house
property?
A 100 yards land is there, only 10 yard is used for the purpose of rent. Can the remaining 90 percent
also be considered for rent purpose?

What is the house is not in an inhabitable state? Can it be subject to hypothetical income.
Example - The lessor had made a plan to give a piece of land to a lessee. Earlier there were three huts
on the building. The lessee created a super structure over the existing buildings, and creates a revenue
from it. Will this fall under the category of rental income in the form of annual value simply by virtue
of the lease deed? Or will it be income from other sources (because it is not a business activity either).
Before the expiration of the lease, the lessee will hand over the building plus the land to the lessor as
per the lease agreement. Yes, it will be income from house property. The difference of period of lease
will also make a difference. If the period is less, like only 5 years, it may be read as a camouflage to
avoid capital gains. Thus, they might enter into an agreement for such a lease. But if it is for a longer
period like 30 years, then it would be considered legitimate as then the purpose of the lease would be
presumed to only generate income from rent. It is also important to see the ration between the
building and the land.
If the assessee is using the property as a source of income from house property or as a business
income (like if he is using it as a hotel) – how do we determine this? If it is mere rental income in the
sense that the assessee only wants to generate rent out of the property then it will be a case of income
from rent. but if the assessee wants to do business out of the property (providing a number of
facilities), then it would be considered income from business and not rental income.

Cases –
Chennai properties and investments ltd (2015 SC) – differentiated with east India housing case (1961.
SC) – in the latter case the property was settled for case of rental income (brought land, developed
small shop structures and gave it on rent), nothing extra was provided. [like in a mall, places are
provided for the visitors of the mall to sit, etc. and also there is no alienation of the property, and only
is given on rent]

[Benami transactions
S 27 – (deemed ownership) if without adequate consideration transferred by wife without consent of
the husband, then it would be considered a valid transfer]
Whenever there is a sub-lease in a property, the income for the person who has sub-leased, it will be
income from other sources, but for the owner, it will be income from house property.

Disputes of ownership
In case of transfer of ownership – 53A of TPA – in case property has been transferred, but the transfer
has not been complete (part performance of contract), then who will be considered the owner enjoying
the fruit? Despite the fact that contract has not been registered (not complete), to whom the property
has been transferred will be considered the deemed owner.

If the agreement is for 11 years, subject to renewal clause for 10 year, can we read this as 21 years? It
will not fall under s 69(u)(a) – lease has to be min 12 years for this to apply.

Park Hotel case – lease for 33 years, subject to renewal clause for 23 years. The lessee created a
superstructure, and when the lease period ended, then it would transfer to the lessor.

Swaika Oil Products v CIT 1993 201 ITR – rent controller dispute
Ganesh properties v CIT 1962

If you have a property on yearly basis, or if there are repair or loans, then it would be considered
deductions under S 23.

Departing with a land for 12 years will make the lessee an owner for the purpose of section 22.
Applicable in case of adverse possession cases also. For instance, the owner has given the house to his
brother for living, but he is not paying the rent and paying other bills like water bill etc. Can he claim
adverse possession? Yes s 22 is applicable in case of adverse possession also.

S 27 – deemed ownership – presumption is created – cases where property has been transferred in
name of child (not married daughter), the owner will be the person who transferred the property.
In case of impartible property, the owner will be the common pool.
Cooperative society – to whomsoever the property will be divided will be the owner.

Income from business and profession (s 28-35)

Various types of deductions are provided to those who have taken the risk of running a business.
Deductions are applicable right from the beginning. In case you take lease or lend, deductions will
apply. Same for insurance amount. Income from specific types of business is also exempted – like
cold storage etc. upkeep of machinery, change in tech is also subject to deduction. Other types of
deductions are also given.
V Shantha, Jacob Mathew case – to identify what is profession. Both business and profession are
different, therefore different sections are applicable to them. Partnership is also part of business.

Section 36(1)(vii) read with S 36(2)

Section 37 – residuary head
These two read together are essential to invoke bad debt

Bad Debt
A debt which cannot be recovered or if interest is not returned along with the principle amount lent is
considered bad debt. Or in case of partnership, a partner siphoned off amount and runs away. Or if
you have paid amount for a product, but do not receive the product, can this be considered bad debt.
Can this be considered trading loss.

A is a financier. A enters into contract with B to finance a movie produced by B. After 6 months at X
date, she would return the total amount if the movie is released in 3 months. Subsequently, A’s terms
are that he would finance the movie that the movie is released on certain terms, and he would have
share in the movie if the movie is not released within 3 months. Further, every 15 days, the accounts
would be given to A and he would check the same. By this agreement, he gives 20 lakhs, and after 1
month he would give 30 lakhs. So total 50. Further, 10 percent interest annually would be charged on
the principal amount. A movie was released which was a flop after 5 months. By that time, 10 lakh rs
had been returned. Can A claim the remaining 40 lakh rs as bad debt in the past year for deduction?

Conditions to determine -

1. Is it bad debt – should be a part of the primary business of the assessee. What was the primary
objective of giving the loan.
2. Is it irrecoverable (by diligence and not negligence) in the previous year
3. It has been written off in the accounts book.

Primary objective – how to identify – anything towards the objective of the company will make a case
of 36(2). A company which deals in pharma, and another one which deals in pharma, a third deals in
shoes. Three of them are friends. After a passage of 4 years, pharma co. A lent 1 crore rs to shoes
company. The shoe company guy runs away. Can this 1 crore be termed as bad debt? If the loan is not
in consonance with the objective of the business, then it is not considered bad debt. so in this case,
this will not be considered bad debt.
Or consider that A is an estb. player, while B pharma co. is new to the business. A lends money to B.
B also runs away taking the money. Can this be considered a case of bad debt?

X is running a bar. He starts giving loan to the customers. So that when they come to return the
interest, they purchase items from the pub as well. Customer can be a potential customer also. Hence,
many of the customers are in bad debt.

Re Brewery case – S 36(1)(vii) – interlinkages between the difference between bad debt and trading
losses

Capital expenditure- one time expenditure which provides one time value to the company.
Businessmen can claim deduction for revenue expenditure.

S 29 onwards, there are different kinds of deductions which have been specified. Such as when
Indians enter into contract with companies from certain countries, they can get up to hundred percent
exemptions.

S 36(1)(vii) read with s 36(2)

36(1)(VII)(a) – bad debt in context of banking industry.

Three elements –
1. Has to be proper debt – debtor-creditor relationship, or can occur in the course of business as
well
2. Debt has become bad in the previous year
3. Debt has to be mentioned as irrecoverably written off in the account books

X has a client Y who is an NRI. They have a long business relationship, and he has paid income tax
on her behalf, thereafter she disappears. Can this be considered a bad debt on his part? He has not
filed a suit so as to not ruin the business relationship. This would be in ordinary course of business.
Therefore, should it be allowed as irrecoverable debt? the business of the company must be seen by
the assessing officer. The reason for not pursuing recovery suits have to be seen – if the reason is to
maintain clients, or to avoid counter suits etc., then it will be considered valid. This will not be
eligible for deduction as the transaction was not a part of the regular course of business of X.

Similar situation – businessman/stockbroker, paid money from his own pocket on behalf of a client of
many years. One time he pays for shares on behalf of the client, but the client does not pay it back.
Can this be considered bad debt? this would be a case of bad debt because it is in the ordinary course
of business.

First, it must be seen whether there is a debtor-creditor relationship or not.

X is a small company, receives an order from the US to produce 10,000 shoes per month. His unit
consists of only potency to develop 1000 shoes per month. Terms of the agreement are that the
moment 10,000 shoes reach US, they will be subject to quality check, and only after this is done, will
the amount be released after 15 days. But if at the time of quality check, there is any problem, and
only the qualifying shoes’ payment will be released and the remaining shoes will be sent back. X then
enters into a contract with 9 companies to fulfil his agreement, 3 of which are estb (have 10 years of
experience), 3 are new companies. In these new companies, X invests 2 cr in each company. The first
assignment consists only of 6000 shoes. Now, US company is suing X for breach of contract. X
further wants to sue these other companies for breach. This is also a case of bad debt.

If an amount is settled in the account books, for a lesser amount, which is also not paid – can this be
considered as bad debt. Eg – there was a debt of 1 lakh, which was written in the account books as
30,000 which is also not paid. When such transactions are trading losses, then it would be not be bad
debt. if there is objectivity in the settlement of the account, like in ordinary business transactions, then
it would be bad debt. ?????? ASK SOMEONE.

If it’s a trading loss, then it would be considered under S 37.

BD Barucha case – the assessee was in moneylending business. Entered into agreement with producer
to produce a movie (B Grade movie). 40,000 was given there and then, and remaining 60,000 were to
be given over the period of three months when the accounts are shown to him on the 15 th of every
month, and only when the movie is released at the end of three months. The movie is not released on
time, and the producer does not pay back the money. Will this be considered a case of bad debt?
First we have to see whether this is a case of moneylending business or not. The loan was given for 6
months, and there was the condition that on non-completion of the movie, the principal and interest
was to be returned. This would be considered moneylending relationship. This would make it a debtor
creditor relationship. Hence 36(2) will not have to be delved into, and it would be case of bad debt.

Example – the assessee is a real estate agent, and has booked a particular commercial plot in his own
name and paid for it also, partly by taking a loan. There is a dispute with the seller of the plot, and the
amount which has been given becomes stuck. The assessee wants to put this amount as bad debt. –
since this is not done in ordinary course of business, because he had not registered in the name of the
real estate company and had done in his own name.
PCIT v Khyati Realtors – 2022 taxmann

In a case there was an agreement to export X goods to the a company. While packaging, the person
packaging realised that he had to provide extra things such as bag, security etc. to transport. Extra
amount was incurred by him, which was not reimbursed by the company. Can this be called bad debt?
– Big Bags Intl v DCI 2021 Ktka HC

CIT v Mehsoon Sugar Co. (SC) – advance payment made in sugarcane business. This was held to be
bad debt as it was done in course of business.

Employer has issued recoverable bonds to the employees. In the future he says that he is not able to
recover the bonds, and it is bad debt. It will not be considered bad debt, because it is recoverable
bond.

A entered into a contract with Turkey-based company, and amount due to him is 1.26 cr. Turkey is
experiencing commercial hardship. Indian embassy informs him that because of the financial crisis, A
will not get back his amount. Meanwhile, he had adjusted 60 lakhs in the profit and loss account, and
26 lakh in the suspense and doubtful account in his books. Remaining 40 lakhs – can they be claimed
as bad debt? He cannot claim this rs. 40 lakh as bad debt, as he has to show proper debt. Due to
fudging made in the entries, it cannot be treated as proper debt. once you have treated a certain
amount in differently, you cannot expect authorities to treat it as bad debt.

Capital expenditure is always subject to tax, revenue expenditure is subject to exemption. Revenue
expenditure is that which is recurring in nature. If a lawyer buys commentaries, it is a capital
expenditure. E-database, which is paid for monthly, is a revenue expenditure. Normally, every stock
in trade entry is revenue expenditure. It is revenue expenditure if it is a recurring expense necessary to
run the business.

Section 37
CSR expenses will not be covered under S 37. You cannot spend on CSR activities and claim
exemption. Any expenses by a political party on brochure, pamphlet, etc. will not be exempted under
S 37.

There is are three govt. companies which is in mess. X creates a company to take over these
companies. Whatever product is being produced, will be purchased by the govt. on the condition
that X will pay 20% of annual profits, maximum of Rs.40,000, to the govt. X is showing this amount
as revenue expenditure at the time of filing of taxes. Authorities claim that this is capital expenditure.
We have to see whether this expenditure falls under the category of long and enduring benefit or not.
Can the payment of this 20% be said to be a case of long and enduring benefit or not. Since the
amount is not for a fixed period, it is a case of revenue expenditure. If the amount was for a fixed
period, say for 10 or 15 years, it would be a capital expenditure. We have to see whether the company
is running on the basis of this contract or not. We have to see whether the agreement is independent,
or is attached to the primary agreement of sale and purchase. In this case, because the agreement is
attached to the primary agreement, and without this expenditure the company cannot run, it will be
considered a revenue expenditure. Any expenditure which is necessary for running the business will
be considered revenue expenditure. - CIT v Travencore Sugar and Chemical Ltd 1973 Kerala HC –
estb long and enduring benefit test.

Slight changes can be a case of revenue expenditure, but major changes will be capital expenditure.

Now, consider that there was a railway track standing in the way of the running of the business.

Initial outlay – other than employees’ salaries, we presume that it is capital expenditure. Thereafter,
whatever income incurs, we have to determine whether it is revenue or capital expenditure. Example
of purchase of computer by lawyer vs purchase by someone who deals in buying and selling of
computers – in former case, it will just be a one-time capital expenditure. But in case of latter, in the
initial outlay it will be a one-time capital expend, while later on it will take the form of revenue
expenditure.

For invoking S 37, it should be revenue expenditure, and should not be personal expenditure, only
towards business expenses. Perquisites are not included in s 37. CSR activities are excluded.

Example – to determine whether expenditure is revenue or capital –

X hospital provides ventilator in a room, and so does Y college. In case of X, this would be a capital
expenditure because it is providing long and enduring benefit to their business. For Y this will be a
revenue expenditure as medical room is not their main business and is not open to outsiders, their
main business is education. Long and enduring benefit – fixed nature.

Test of fixed and circulating capital - Long and enduring benefit – fixed and circulating capital test –
cases where certain hospitals are meant for certain purposes – like for example, if a hospital is built
for charitable purposes.

Jute example - From 1939 onwards, the demand of jute was very weak. To improve this market, jute
sellers entered themselves into contract that a company can only run for 72 hours a week and not
beyond that, and if it wants to work beyond that, it would need permission of other companies, and for
minimum 6 months, such company will have to pay the amount. This would cap the production and
distribute income among other companies. Is buying off of these loom hours a long and enduring
benefit (capital benefit)? Once the loom hours are bought, the electricity which is provided to the
looms at cheaper rates will also be used by them. – empire jute mill case

Company entered into small contracts (in brick business) for lease agreement, where the other parties
were allowed to dig small chunks of the soil for making bricks. Contract is for 40 months or 10 years.
– In Re Benarsi Das Jagganath Lahore HC – what is essential part of brick business? Soil which is the
raw material. Short contract for 6 months etc. – we have to see whether the raw material is coming in
a continuous flow. If the expenditure is occurring for expansion of business, initial outlay, and
substantial repairs, it will be on capital expenditure. If at the initial outlay itself, any agreement is
occurring which is providing long and enduring benefit, it will be capital expenditure. However, in
case of small leases, where you cannot reach into the depth of the soil, it would be a case of revenue
expenditure.

Case – X is company which is sole selling agency, was with A for 2 years. Now has been given by A
to J, now by way on assignment deed, was transferred to E, who is the assessee. E was not in
existence when the agreement was formed. Therefore, the sole selling agency was formed at the time
of origin of the company by E. at this time, 1.5 years was left of the agreement. If the time period is
fixed, then it would be a case of capital expenditure. Application of jagganath case - ????

CIT v Jalan Trading Co. (1980) 155 ITR 536 SC – discussed benarshi das and assam chemicals case -

A company deals in granite (lime) business, comes into a contract with lime quarry for lease. Will this
be considered long and enduring benefit – assam cement company case -
Maruti example???? ASK – revenue expenditure on lawsuit (lawyers) on effective prosecution. Can
this be read as revenue expenditure

If any expenditure is essential for running of the business, then it will be counted towards revenue
side.

Mohan Cooperative example

There is a shopping complex with different plots for shops being built. They are also building roads in
between the shops for connectivity between shops. They are also building a dam nearby for electricity
generation. There are also roads being built outside the complex, inside the complex as well as within
different units as well. Which of these falls within capital and revenue expenditure.
If it is a fixed asset and providing long and enduring benefit, then it will be a capital expenditure.
Section 37 has to be read w s 36(2) – the building of the dam would not fall under the category of
either capital or revenue expenditure, it will be a personal expense of the CEO of the company. If at
all, it would fall under revenue expenditure.

Building of roads – will it be revenue or capital? When we look at the expenditure, we also need to
look at the business of the company. Control and disposable test.

LB sugar factory and oil mills case 1980

Commercial Expediency
can taking your client out to lunch in a hotel be considered amounting to commercial expediency.

A is a commission agent. Instead of receiving the total amount, but rather receives 1-2% from the
clients, and rest of the amount, he settles on purpose. Varying this cost, will it amount to revenue
expenditure?

Removal of obstacles - A maharaja enters into contract with X for 20 years for mining of gypsum. He
also provides a factory to the client, which consists of a railway track and platform. He considers this
railway line to move goods from one place to another. But after a passage of 2-3 months, he realised
that the railway track is useless. govt. is ready to shift it for a price. If the railway platform is shifted
immediately within one month, then it will be a part of initial outlay, and be capital expenditure. But
if it is done after three months, it would not be revenue expenditure. The fact of the situation should
also be known to you, like in this case X knew that there was a railway platform before he entered
into a contract with the maharaja. If there is no prior knowledge, then it will be a case of revenue
expenditure – Bikaner Gypsum Case

If someone is paying expenses for business expediency, which he is not obligated to pay, but has to,
which category would they fall in? these would fall under revenue, but would have to be justified.

Amount paid for purpose of eliminating the competition – nothing is adding to the company but only
the competition is eliminated.

Section 45
Capital gains – transfer of capital asset and income generation from this transfer. This income will be
said to be income from capital gains. S2(14) – talks about capital asset, and s 2 (47) talks about
transfer.

Every asset is said to be capital asset, apart from the exemptions given. If any person is having an
asset, and this asset is transferred, it will be a case of capital gains. S2(14) provides various
exemptions also, need to look at S 46 as well. Capital asset has two values – acquiring value and
transfer value.
One of the exemptions is –
There should not be any capital value in terms of goodwill. Goodwill does not have any saleable
value, as it does not have any acquiring value. Hence there will be no capital gains.

There is a company, upon liquidation, some of the assets come to one of the shareholders. It would be
exempted from capital gains tax.

Personal affects - Can jewellery be exempted from capital gains? Hand bangles, necklace etc. is
counted as jewellery. Gold combs etc. are also counted as personal affects are exempted from capital
gains tax. But jewellery otherwise would be capital gains.

Jewellery is not taxable unless its modified.

S 64(1) - Technical qualification, knowledge and experience –

Batta Kalyani Case – a wife was running a plumbing business, and employed her husband. Whether
the income of both can be clubbed?
J.N. Mokashi