Nea EDITION TAXATION LAWS - KAILASH RAI ALLAHABAD LAW AGENCYCHAPTER | INTRODUCTION 1. 1860 to 2021—Legislative Journey of Income Tax Income tax—as we understand and apply today, was introduced in India in the year 1860. However, the legislative growth of the subject has seen many different approaches aimed at providing a simple and certain tax regime which is also functional. The first Income Tax Act was enacted in 1866. A more elaborate and complex act was brought in 1918 to tackle the increasing issues (and importance) of taxation. In 1921, an all-India Committee was formed to reconsider the existing law relating to income-tax and to make suggestion for its improvement. The 1922 Income Tax Act was the result of the Committee’s recommendations. This Act was amended multiple times, leading to a complicated regime. Post-independence, it was referred to the Law Commission for simplification.’ The Central Government also appointed a committee to suggest measures to prevent tax evasion and to minimise the inconvenience to the assessee.? The present law on income-tax—the Income Tax Act, 1961 (Act No 43 of 1961), is a product of the recommendations made by the Law Commission and the Committee. 2. Extent and Commencement The Income Tax Act, 1961 (hereinafter, the Act or the 1961 Act) contains the present law of income-tax. It consolidates and amends the law relating to income-tax and super-tax. It came into force on Ist April 1962 and extends to the whole of India.* There is a component of territorial connection in taxation. There has to be a ‘real’ connection and nexus with something in India is essential to impose tax thereon.‘ It may be the residence of the individual or even the location of the asset (Immovable property or otherwise) from which the income is derived.* Many eminent authors have opined that there are some 1, 1956. See Recommendations in 12th Report of Law Commission of India (1958). 2, The Direct Taxes Administration Enquiry Committee, Report (1959). 3. India, as defined under Section 2(25A) post substitution by the Finance Act, 2007 (22 of 2007), s. 3( (w.r.e.f. 25-8-1976), refers to the “territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 (80 of 1976), and the air ‘space above its territory and territorial waters" 4, Electronics Corp v. C.LT., 183 1.T.R. 43 (S.C). (1)‘cited maiiareim ee sii: 2) TAXATION LAWS—LAW OF INCOME tay unconstitutional provisions in the Act in the nature of extra-territorig legislation (p 61) 3. What is Tax? Why is it levied? Tax is best understood when it is viewed in relation to a government or concerned sovereign authority. Tax is a charge or levy (usually monetary in character) that must be paid to the government so that it may finance jj, mandate—development and maintenance of the country as well as attain certain objectives—social or economic. Thus, we can say that taxes are ay important part of government's revenue stream, and are essential for the government to perform its essential functions.’ In Commissioner, Hindu Religious Endowments, Madras Lakshmindra Thirtha Swamiar of Sri Shirur Mutt.’ a 7-Judge Bench referred to a definition of tax given in a judgement of the Australian High Court (the Apex body in Australian judicial hierarchy), i.e. it "is q compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered," before providing the essential characteristics of a tax include : (a) Its essence is compulsion, meaning that it is imposed under statutory power without the taxpayer’s consent and the payment is enforced by law; (b) It is an imposition made for public purpose without reference to any special benefit to be conferred on the taxpayer or any particular individual. Thus, there is no element of quid pro quo between the taxpayer and the public authority; (©) It is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay. (Please note that the distinction made. between tax and fee under this decision has since then been overruled, however, the discussion with regard to attributes of tax is still relevant. See Section 6 of this Chapter for more details.) 4, Constitutional Perspective ‘Art, 256 clearly provides that "No tax shall be levied or collected except by authority of law". ‘The legislature's power to levy or recover taxes—stemming from Arts. 245, 246, 246A and 248 read with Schedule VII lists, is a constitutional power and accordingly, subject to constitutional limitations. Further, the authority of law is impacted by the legislative division and competence between the Centre and States. Thus, taxation requires legislative action; it needs the support of legislative sanction by exercise of executive power of State under Art. 73 by the Union or Art. 162 by the State.‘ Further, the laws must be valid. It may also be noted that the Indian Constitution does not define Wadia v. C.LT., 17 1.7.8. 63 (FC); Caltex v. C.LT., 21 LTR. 278. See Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., (2000) 5 S.C.C. 694 ALR 1954 S.C. 282, para 45. Matthews v. Chicory Marketing Board, (60 C.L.R. 263). CLT. v. McDowell and Co. Lid., (2009) 10 S.C.C. 755. PeyraINTRODUCTION (3 taxation but instead provides that it includes "the imposition of any tax or impost, whether general or local or special, and ‘tax’ shall be construed accordingly". 5. Interpretation Guidelines for Income Tax Laws and Regulations 5.1 Interpretation Principles Ih is a well-known fact that law-makers cannot cater for all possible situations and even consequences in a particular field when législating. It falls on courts to analyze whether a particular situation has been catered for or if the case falls within the principles and parameters of the concerned law. In interpreting or understanding tax legislations, courts employ the rule of strict interpretation.’ This means the plain meaning of the provisions has to be followed, without any leanings or equitable construction of words in the absence of words showcasing intent to burden a subject with tax. Also, the strict construction is applicable to charging provisions, machinery provisions (those which concern the machinery for quantifying, levying and collecting the tax imposed under the charging section) are not interpreted with such rigorous or stringent construction.* At the same time, though fiscal statutes require adherence to the strict letter of law, it still has to be construed reasonably and where there is a reasonable doubt, it ought to be construed as favourable towards the subject. For example, courts lean towards an interpretation whereby double taxation is avoided unless there is an express provision of law for the same.‘ Other exceptions to the strict interpretation of taxation laws or fiscal statutes include situations where literal construction leads to patently unreasonable and absurd consequences. 5.2 Tax Avoidance and Tax Evasion vs. Tax Planning It is the duty of all citizens to pay their taxes, if levied upon them. Taxes are an important source of revenue for the government and accordingly, important for the overall public good and the State too. This brings us to the topic of tax avoidance and tax evasion Initially, courts were more concerned with whether a provision ought to be interpreted liberally or a particular transaction prohibited in express terms. In due course, courts began to focus whether a transaction is device to avoid payment of taxes or part of a bigger scheme towards the same end.° While the matter is still controversial, the majority judgment in McDowell and Company Limited vy. Commercial Tax Officer,’ provides that "tax planning may be legitimate provided it is within the framework of law" but "colorable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honorable to avoid payment of tax by resorting to dubious methods". 1. Art. 366(28). 2. CLT. v. Shahzada Nand & Sons, (1966) 3 S.C.R. 379. Associated Cement Co. Ltd. v. C.T.O., (1981) 4 S.C.C. 578. Municipal Corporation, Kota v. Dethi Cloth, 249 1.T.R. 560 (S.C.), TISCO v. Union of India, 75 1.T.R. 676. McDowell and Company Ltd. v. C.T.O., (1985) 3 S.C.C. 230. 6. (1985) 3 S.C.C. 230. eo 2a 4) TAXATION LAWS—LAW OF INCOME Tax The basis of which follows from the ‘Westminster principle’ that provides "given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance”.' A subsequent English case added context to the same by stating that the ‘device’ which was colorable in nature had to be ignored as fiscal nullity. Thus, it also emphasized the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws. It might also be relevant to refer here to the case of South Indian Bank Ltd. y. C.LT.,4 where the Supreme Court observed that it was the government's responsibility to provide a simple and convenient tax regime in the following words : "..in taxation regime, be taken to be implied. The tax there is no room for presumption and nothing can ‘an individual or a corporate is required to pay, is a matter of planning for a taxpayer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue..." (Edited) 6. Types of Taxes 6.1 General When we speak broadly, we divide taxes into direct and indirect. The former refers to when the burden of taxes does not transfer to another, while the latter refers to when the tax burden or its incidence is passed on to another and not borne by the one on whom it was levied. It is common to | refer to income-tax as a direct tax and VAT, excise tax, service tax etc as indirect taxes. But the Constitution does not provide for such a distinction; it is more concerned with the competency based division under Schedule 8 with its three lists.® 1. The Commissioners of Inland Revenue v. His Grace the Duke of Westminster, 1935 All E.R. 259. | 2. See Vodafone International Holdings B.V. v. Union of India and Ors., (2012) 6 S.C.C. 613; [2012] 204 TAXMAN 408 (S.C.). The case also cites Ensign Tankers (Leasing) Ltd. v. Stokes, (1992) 1 AC 655, touching upon the idea of ‘unacceptable tax avoldance’ and stales— “.aunacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would never have existed.” The clarity of this concept will help students of tax laws identity the differences between tax planning and tax avoidance. ea atari oreraeeins #(2961) 2 All ER 4. LL 2021 S.C. 435. 5. See Union of India and Ors. v. Bengal Shrachi Housing Development Limited and Ors., A.LR. 2017 S.C. 5228, (2018) 1 S.C.C. 311 wherein it was noted that— "It is thus clear that the judgments of this Court which referred to service tax being an indirect tax have reference only to service tax being an indirect tax in economic theory and not constitutional law. The fact that service tax may nol, in given circumstances, be passed on by the service provider to the recipient of : the service would not, therefore, make such tax any the less a service tax. >»INTRODUCTION (5 6.2 Cess and Surcharge Cess usually refers to a revenue-raising tax where the revenue has to be utilized for a particular purpose. Hidayatullah, J. noted that it "means a tax and is generally used when the levy is for some special administrative expense which the name (health cess, education cess, road cess, etc.) indicates...".' With the shift in what falls within the term ‘tax’ (See the following section), we can say that a cess "is also a tax, but is a special kind of a tax"? A cess may also be a fee and the distinction has to be made of the basis of the primary objective for which it is imposed as well as the objective is seeks to achieve, Surcharge essentially refers to an increase in taxes or duties. Reference may be had to Art. 271 which reads as follows : "Surcharge on certain duties and taxes for purposes of the Union, 271. Notwithstanding anything in Articles 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India." The difference between surcharge and others is a matter of distribution of the revenue collected from its imposition—where the Centre has imposed a surcharge, all the proceeds from the same are meant exclusively for the Centre and similar exclusivity lies with State(s) that impose a particular surcharge. 6.3 Difference between Tax and Fee 6.3.1 Initial View—Distinct The Apex Court in Commissioner, Hindu Religious Endowments, Madrasy. Lakshmindra Thirtha Swamiar of Sri Shirur Mutt.,° opined that : (a) a ‘fee’ is generally defined to be a charge for a special service rendered to individuals by some governmental agency; (b) the amount of fee was to be based on expenses incurred in providing such services, (c) ordinarily, fees were to be uniform and unaffected by the varying abilities of different recipients to pay. The view expounded in this case—which held sway till late 1990s, was that the Constitution—for legislative purposes, had made a distinction between a tax and a fee with the entries in different lists implying that the latter have special reference to governmental action undertaken with regard to subject matter of the entries. For instance in Southern Pharmaceuticals and Chemicals, Trichur v. State of Kerala,‘ the Supreme Court noted that : "25. "Fees" are the amounts paid for a privilege, and are not an 1 Pee Judgement in Guruswamy and Co. v. State of Mysore, {1967) 1 S.C.R. 3. VWayalashmi Rice Mill and Ors. v. The Commercial Tax Officers, Palakol and Ors., ALR. 2006 S.C. 2897, (2006) 6 S.C.C. 763. Also see Art. 270(1). 3. ALR. 1954 S.C. 282. 4. . (1981) 4 S.C.C. 391, para 25.i 8) IIAKATIONAWE=LAW OF INCOME ty obligation, but the payment is voluntary. Fees are distinguished from taxes in that the chief purpose of a tax is to raise funds for the Support of the Government or for a public purpose, while a fee may be chargoq for the privilege or benefit conferred, or service rendered or to mect th, expenses connected therewith. Thus, fees are nothing but payment for some special privilege granted on service rendered. Taxes and taxation are, therefore, distinguishable from various other contribution. charges, or burdens paid or imposed for particular purposes and undo, particular powers or functions of the Government." 6.3.2 Present Perspective Soon the understanding of attributes of a fee started to shift, unti) , clear and consistent view appeared that there is "no generic difference between a tax and a fee which are both compulsory exaction of money by public authorities". For instance, in C.I.T. v. McDowell and Co. Ltd.,? it was held that ‘tay’, ‘duty’, ‘cess’ or ‘fee’ indicate different kinds of imposts by which government, can raise revenue as long as there is a law authorising levy and collection of tax as required under Art. 265. The Apex Court clarified that the settled characteristic of ‘tax’ in its wider sense includes all imposts (compulsory levys).* In the same case, the following characteristics of imposts were discussed ; (a) The power to tax is an incident of sovereignty; (b) ‘Law’ referred to under Art. 265 means an act of legislature, not an executive order or rule without express statutory authority; (c) A joint reading of Arts. 265 and 366(28) shows that tax includes imposts of every kind viz. tax, duty, cess or fees; and (d) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a "tax" in its technical sense as an impost, general, local or special,’ The above statement of law found approval with a 9-judge Constitution Bench in the case of Jindal Stainless Ltd. v. State of Haryana.‘ Accordingly, the expression ‘fee’ is also comprehended in the expression ‘tax’ for the purpose of Art. 265 and authority of law is essential for collection of fees. Qu 1, State of Himachal Pradesh and Ors. v. Shivalik Agro Poly Products and Ors., ALR. 2004 S.C, 4393, (2004) 8 S.C.C, 556, 2. (2009) 10 S.C.C. 755, 8. Art, 366(28), 4. ALR. 2016 S.C. 5617 : (2017) 12 S.C.CHAPTER II ESSENTIAL CONCEPTS AND DEFINITIONS 2.1 Introduction ‘Interpretation Clauses’ or ‘Definition Clauses’ are a common feature of legislations—a practice borrowed from British Parliament. They play a dual role : (a) avoidance of frequent repetitions "in describing all the subject matter to which the work or expression so defined is intended to apply"! and (b) allow contextual and proper understanding of the purpose and scheme of the concerned law. Definitions gather special importance in matters of taxation where the legislation has to the certain as well as be read and interpreted strictly. 2.2 Important Definitions 2.2.1 Income [S. 2 (24)] The nomenclature makes it clear that income-tax is to be levied on ‘income’. In usual parlance, the term refers to the "money or other form of payment that one receives, usually periodically, from employment; business, investments, royalties, gifts, and the like".? The Act provides an inclusive definition of different sources of income, instead of the term ‘income’ itself. As per S, 2(24), the following fall within the ambit of income : "(@) profits and gains; (ii) dividend; (ia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust. Explanation.—For the purposes of this sub-clause, "trust" includes 1, Also, Nahalchand Laloochand Private Lid. v. Pancholi Co-operative Housing Society Ld., (2010) 9 S.C.C. 536. 2. Black's Dictionary (8th Edn.) 2230. U3)ieee CN 8) TAXATION LAWS—LAW OF INCOME any other legal obligation; (iii) the value of any pe under clauses (2) and (3) of section 17; (iia) any special allowance or benefit, other than perquisit, included under sub-clause (iii), specifically granted to the assessee 1, meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit; Giib) any allowance granted to the assessee either to meet hig personal expenses at the place where the duties of his office o; Employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living; (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a ‘substantial interest in the company, or by a * aPtive of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, vould have been payable by the director or other person aforesaid; (iva) the value of any benefit or perquisite, whether convertible ‘ined by any representative assessee mentioned into money or not, obti 5 in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the "beneficiary") and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary; (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59; (va) any sum chargeable to income-tax under clause (iiia) of section 28; (vb) any sum chargeable to income-tax under clause (iiib) of section 28; (ve) any sum chargeable to income-tax under clause Giiie) of section 28; (vd) the value of any benefit or perquisite taxable under clause (iy) of section 28; (ve) any sum chargeable to income-tax under clause (v) of section rquisite or profit in lieu of salary taxab), 28; (vi) any capital gains chargeable under section 45; (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule; (viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members; (viii) [Omitted by the Finance Act, 1988, w.e,f, 1-4-1988. Origine! adESSENTIAL CONCEPTS AND DEFINITIONS [9 sub-clause (viii) was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;] __, x) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. Explanation.—For the purposes of this sub-clause— (i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called; (ii) “card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game; (x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees; (xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.—For the purposes of this clause*, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to clause (10D) of section 10; (xii) any sum referred to in clause (va) of section 28; (xia) the fair market value of inventory referred to in clause (via) of section 28; (xiii) any sum referred to in clause (v) of sub-section (2) of section 56; (xiv) any sum referred to in clause (vi) of sub-section (2) of section 56; (xv) any sum of money or value of property referred to in clause (vii) or clause (viia) of sub-section (2) of section 56; (xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in clause (viib) of sub-section (2) of section 56; (xvii) any sum of money referred to in clause (ix) of sub-section (2) of section 56; (xviia) any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56; (xviib) any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56; (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than— (a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset initi nrummE SS 10} TAXATION LAWS—LAW OF INCOME Tay eee accordance with the provisions of Explanation 10 to clause (1) of section 43; or (b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by th. Central Government or a State Government, as the case may be" The above definition of the term ‘income’ is inclusive and no exhaustive. Thus, the scope of the term ‘income’ is not limited only to those categories of income which have been specified under Section 2(24). It also includes such things as the word signifies according to its natural import! Tis natural meaning embraces any Kind of profits or gains actually receive by the assessee? Thus, the term ‘income’ includes the categories of income specified under Section 2 (24) and also those which may be included within the commonly understood import of the term. If an employer who is under contractual obligation to pay income-tax of the employee, pays the income-tax on behalf of the employee, the amount of tax so paid will be included in the total income of the employee as income from other sources.’ To constitute income, it is not necessary that the receipt should be of recurring nature.‘ In a given circumstance, even a single receipt may constitute income. The allotment of shares to a promoter as a remuneration for his services done for promoting the company has been held to be the income of the promoter.” Where a portion of share income was assigned to a trust by the assessee-partner, the portion of the income so assigned was taken as income of the assessee-partner and not as income of the trust by virtue of overriding title. It was taken as application of income by the assessee partner. Under the law of partnership, only a partner is entitled to the profits and a stranger even if he is an assignee, cannot have any direct claim to the f a share income was taken to have profits. In the instant case, the portion of been received by the partner and thereafter the same was passed on to the trust and therefore it was a case of application of income by the assessee-partner and not of diversion of income by overriding title.’ The Court has observed that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership. Whereas in the former case, in view of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership except to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm, but in the latter case, the sub-partnership acquires a special interest in the main partnership. The Court has further observed that the case on hand cannot be treated as one of sub-partnership. The trust, as an assignee, was entitled to receive the assigned share in the profits from the firm and it was not entitled to receive the same as sub-partner because no sub-partnership was 1. Raja Raghwendra Singh v. State of Punjab, (1976) 102 1.T-R. 401 2, Navinchandra Mofatlal v. C.LT., ALR. 1952 S.C. 58. 3. Emil Webber v. C.LT., 1978 Tax L.R. 1115 (Bom). 4, See CLT. v. Ram Prasad, 1978 Tax. L.R. 717 (Del). 5. Ibid. 6. CLT. v. Sunil J. Kinariwala, A..R. 2003, S.C. 668. 7. Ibid.ESSENTIAL CONCEPTS AND DI INITIONS (1 created. Since the trust was entitled to receive the share of the income of the assigned partner as an assignee and not as a sub-partner, it was mere application of income by assessee-partner and therefore the share of the income of the assessee assigned in favour of the trust was included in the total income of the assessee and not in the total income of the trust. In simpler terms we can say that the definition under the Act includes the following particular categories : {@) Voluntary Contributions received by Charity. But the charitable contributions not covered under this sub-clause will not be treated as taxable income; (b) Special Allowance for Expenses, which arise wholly and necessarily for work/employment as the case may be; (©) Benefit or Perquisite obtained from a Company; (d) Cash Assistance Received from the Government; (e) Capital Gains that are chargeable as per S. 45 of the Act; (f) Winnings from lotteries, crosswords, card games, etc. (g) Fees towards non-compete clauses and for exclusive rights, whether in kind or case; (h) Fair market value of Inventory. The definition also includes income from other sources and even subsidies and cash incentives. Certain points about the nature and characteristics—Stemming from various judicial pronouncements are as given below : 1. Income may be realised in the form of money or money’s worth. 2. For the purpose of taxation, the taint of illegality associated with income is immaterial. 3. Income will be taxable in the hands of the recipient even if his title to income is in dispute.—The income will be taxed in the hands of the recipient notwithstanding the pendency of another’s claim to income.? 4. Mere relief from expense is not income.—Its reason is that a person is taxed for what he earns and not for what he saves. For example, in Re John,’ certain persons held the debentures of a company. On their suit the assets of the company were sold but the sum realised on the sale was below the sum owing by the company on the debentures. The commission of the auctioneer at the court-sale would have been 5 per cent but the court allowed one of the debenture-holders to act as auctioneer and thereby the court relieved the debenture-holders from the payment of the commission. The court held that relief from the auctioneer’s commission could not be treated as income of the debenture-holder who acted as auctioneer. 5. The nature of receipt is fixed when it is received and thereafter its nature cannot be changed.—In other words, once a receipt is called income, a subsequent attempt to call it other than income is not 1. CLT. v. K. Thanganoani, 309 L-T:R. 15. 2. See Franklin v. LR, 15'T.C. 464. 3. 6 LTR. 434.fe 12] TAXATION LAWS—LAW OF IN ICOME 1, tenable.’ ¥ 6. Failure to include income of the assessee in the books op account does not entitle him to claim that the income should not },, computed as income for the purpose of income-tax. Income earned by the assessee becomes a part of his total income whether the income has been included in the books of account or not.” 7, Book-keeping entry of a hypothetical income does not make the assessee liable on that income.—Income tax is levy on income and therefore if no income is received by the assessee, no tax can be levied on him, even though in book-keeping an entry is made about a hypothetical which does not materialise.’ 8. As a general rule income must be from outside agency because a person cannot make income out of himself. Thus, where a branch officer sends goods to the head office at a profit, the profit cannot be treated fas income of the head office. However, there are certain exceptions to this general rule. When a person occupies his own house for residential purposes, the residence by him (i.e., the owner) is treated as producing some income to him.‘ 9. Casual and non-recurring receipts are not included in the taxable income of the assessee provided the conditions laid down under Section 10 (3) are satisfied. 10. Application of income—The transfer of income by a person without transfer of source of income is merely application of income and remains the income of the person who has so transferred, even if the transfer has been made by him under a legal obligation to apply the income in that way. For example, where a husband by trust-deed transfers the income from certain shares held by him in a company to his wife, the income so transferred will remain the income of the husband because he has transferred the income from the shares but not the shares themselves,’ i.e., he has transferred the income but not the source of income (i.e., the shares). However, where the source of income is alienated or assigned, the income forms the source after its alienation or assignment cannot be treated as income of the transferor except in cases which fall under Sections 61 to 64. The purpose of application of income is immaterial. The contention of the assessee that he has applied the money for a charitable object and thereafter the money so applied should not be treated as income is immaterial.® It is to be also noted that voluntary foregoing by an employee of the salary due to him is also treated as merely application of money. Besides, the salary due to an employee is treated as his income, although he may not have right to apply it as he likes.” Compulsory deductions from the remuneration of salary are also mere application of money and the amount of compulsory deduction will be treated as income of the employee. 1. Kishin Chand Chellaram & Others v. CLT, 46 1.T.R. 3, 2. Sree Minakshi Mills Lid. v. CLT, LTR. 31 (28). 8. For example, see CLT. v. Shoorji Vallabhdas & Co., (1962) 46 LT.R, 144 (S.C). 4, As to this aspect of law, see Chapter Vil 5. Probhat Kumar Milter v. C.LT., (1961) 41 LTR. 624 (S. 6. For example, See C.LT. v. Thakur Das Bhargava, 40 1 7. 8. 301 . Smyth y. Stretion 5 T.C, 36. . See Bell y, Gribble, (1903) 4 Tax Cas, 522.* ESSENTIAL CONCEPTS AND DEFINITIONS [13 Diversion of Income.—Where the income is “diverted by an overriding title" from the assessee who would otherwise have received it, the income cannot be treated as the income of the assessee.' In other words, where the assessee applies his income for a particular purpose, it remains his income but where the income is diverted from the assessee on account of the overriding title of another person to the income, the income so diverted cannot be treated as income of the assessee. For example, in the case of Bejay Singh Dudhuria y. C.1.T.,? the assessee succeeded to the family ancestral estate on the death of his father. Subsequently, a suit was brought by his stepmother for maintenance against the assesee in which a consent decree was made directing the assesee to pay a fixed monthly sum to his stepmother and the maintenance was declared as a charge on the ancestral estate in the hands of the assessee. The Court held that the sums paid by the assessee to his stepmother could not be treated as income of the assessee. Thus, voluntary payment is treated as income of the payer but where a charge is imposed upon the property in the hands of the assessee without or against his will, the sum paid under such a charge cannot be included in the income of the assessee. 2.2.2 Agricultural Income [Section 2 (1-A)}’ Agricultural income is exempted from income-tax under Section 10 (1). The Parliament has no power under the Constitution of India to levy tax on agricultural income because entry 82 of the Union List empowers the Parliament to make law for levying tax on income other than agricultural income. However, it is to be noted that with effect from the assessment year 1974-75, the agricultural income has been taken into account in determining the rate of tax applicable to the non-agricultural income of the assessee. The definition of agricultural income as provided under the Act including the amendments made by Act 17 of 2013 is as follows : "(1A) 1"agricultural income” means— (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (b) any income derived from such land by— (agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause; (c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, . Mulick v. CLT. , 6 LTR. 206 (P.C); CLT. v. Bansidhar, 67 1.T-R. 374: See also CLT. v. Tolly Gunge Club Lid, AIR. 1977 S.C. 1343. . (1933) 1 LT.R. 135 (P.C.). . Renumbered as clause (1-A) by Direct Tax Law (Amendment) Act, 1987 wef 14-89, 2. 3,a TAXATION LAWS—LAW OF INCOME Tay 14) or occupied by the cultivator or the receiver of rent in-kind, of any land with respect to which, or the produce eo pee Heyitroccay Be hed career aha (aikgendacasaerabtianre (5) 1° carrieg on: Provided that— age ge G) the building ia on or in the immediate vicinity of the land, and ig @ building which the receiver of the rent or revenue dant On4 tivator, or the receiver of rent-in-kind, by reason of his or mention with the land, requires as a dwelling house, or as 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 ee of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated— (A) in any area which is comprised within the jurisdiction of a municipality (whether known as a tnunicipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) gra cantonment board and which has a population of not less than ten thousand; or (B) in any area within the distance, measured aerially— () not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or (I) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or (II) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten lakh. Explanation 1.—For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section. Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (ineluding letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income. _ 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.ESSENTIAL CONCEPTS AND DEFINITIONS us Explanation 4.—For the purposes of clause (ii) of the proviso to sub-clause (c), "population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year." _ Since agricultural income is exempted from income-tax, there is an obvious interest in understanding the definition and scope of agricultural inncome. Under Section 2(1), agricultural income refer to : _(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.—Thus, rent or revenue may be agricultural income if : : (a) it is derived from land, (b) the land is situated in India, and (c) the land is used for agricultural purposes. Rent or Revenue.—Rent may be understood as a payment in money or in kind by one person to another in respect of the grant of a right to use land for agricultural purposes.’ Revenue means return, yield or income derived from the land which is the immediate and effective source of the return, yield or income. It is to be noted that the term "revenue" is not used here in the sense of land revenue. Rent or Revenue must be derived from the land.—It indicates that the land must be immediate and effective source of the rent or revenue and not merely secondary or indirect source. For example, where a land owner transfers to another person his agricultural land in consideration of a life annuity payable by that other person (i.e., the transferee) which is secured by a charge on that land, the life annuity cannot be treated as agricultural income because in this condition the source of the life annuity is not the land but covenant.’ Similarly, the interest on the arrears of rent payable in respect of land used for agricultural purposes is not agricultural income because in this condition the land is not the direct source of income (ie., the interest). Income received by the assessee by leasing out his coffee estates is agricultural income because here the land is the direct source of the income. But income received from lease of coconut trees for enjoyment of their fruits was not treated as agricultural income, because land was not the direct source of this income. Dividend income received by the assessee-shareholder is not agricultural income even if the dividend has been paid out of the agricultural income of the company. Its reason is this that dividend is derived from the investment in the shares of the company, and, therefore, land cannot be taken to be the direct source of the dividend.” The land must be situated in India.—For the application of this C.LT v. Kamakhya Narain Singh, (1948) 16 LTR. 325 (P.C). CLT. v. All India Tea & Trading Co, 1977 Tax LR. 1433 (Cal); CLT. v. Kamakahya, 16 L.T.R. 325 (PC). CLT. v. Kamakhaya Narain Singh. supra. Ibid. K. Simrathmull v. C.LT., (1967) 64 LT.R. 166 (Mad.). See also Maharajadhiraj Sir Kameshar Singh y. State of Bihar, (1959) 37 LT.R. 388 (S.C.). CLT. v. KS. Iman Saheb, (1969) 71 1.T.R. 742 (Mad.); Bacha F. Guzdar v. C.LT.. (1955) 27 LT.R. 1. (S.C). 2 9Pe BH0 16) TAXATION LAWS—LAWOF INCOME clause the land must be situated in India. Where the agricultural lang situated in a foreign country and the income from such land is receive ;* India, the whole income received in India will be taxable. n The land must be used for agricultural purpose.—Income to ,, treated as agricultural income is required to be derived from agriculturg) land.' Agricultural land may be understood as a land which has been use for agricultural purposes. Prima facie agricultural land may be said as , land which is either actually used or ordinarily used or meant to be used fo, agricultural purposes.’ A land cannot be treated to have been used fo, agricultural purpose unless there is some measure of cultivation of the lang some expenditure of skill and labour upon the land.* "Agriculture" involves two operations* : (a) Basic operations prior to germination, like tilling of the land, sowing of the seeds and planting, etc. requiring expenditure of human labour and skill; and (b) Subsequent operations (i.e., operations performed after the produce sprouts from the land, required for effective raising the produce from the land) as, for example, weeding, digging, the soil around the grounds, removal of undesirable under growths, cutting, preservation of the plants from insects, pests and other animals, harvesting and rendering the produce marketable. (c) It includes the raising of the commercial crops like tobacco, tea, coffee, cotton ete. in addition to food grains. Basic operations are necessary to constitute agriculture.® In other words, the basic operations may constitute agriculture even without the subsequent operations but subsequent operations independently of the basic operations cannot constitute agriculture. In the case of C.W.T. v. Officer-in-Charge (Courts of Wards) Paigah,’ Supreme Court has held that the land to be treated as an agricultural land must not only be capable of being used for agricultural purposes but it must have been actually used for such purposes at some point of time. Mere potential or possible use of the land for agricultural purposes is not sufficient to treat it as an agricultural land. The land to be called an agricultural land must have some connection with an agricultural user or agricultural purpose and the agricultural user or purpose must involve expenditure of human labour and skill. In short, possible or potential use of the land as an 1. The cases relating to the determination of the meaning of “Agricultural Land” have been well summarized in Maganlal Morarbhai v. C.LT, 1980 Tax. LR. 58 (Gu) ‘Also see, CLT. v. Benoy Kumar Sahas Roy, 32 LT.R. 466 (S.C). 2. See CLT. v. Manilal Sommath, (1977) 106 L.T.R. 917, 1977 Tax LR. (NOC) 96 (Guj).; C.W.T. v. Officer-in-charge (Court of Wards), Paigah, 1976 Tax L.R. 952; (1976) 105 LT.R. 133 (S.C); Smt, Chandravati Atmaram v. C.LT., 1978 Tax LR 416 (Guy). Raja Mustafa Ali Khan v. C.LT., (1948) LT.R. 1. (S.C). ak v. Raj Benoy Kumar Sahas Roy, (1957) 32 1.T.R. 466 (S.C.), ‘Supra followed in Smt, Chandravati Atmaram v. C.LT., 1978 Tax LR. 416 (G¥) CLT. v. Borhat Tea Co., 1982 Tax. L.R. 62 (Cal). eae e adESSENTIAL CONCEPTS AND DEFINITIONS (17 agricultural land or not.’ However, if the land is assessed to State land revenue, it is a strong piece of evidence of its character as agricultural land, but it is not a decisive factor (i.e., it is not a conclusive evidence). It is to be also noted that temporary use of the land for non-agricultural purposes will not alter the character of the land as agricultural land, but a permanent abandonment of user for agricultural purposes will affect and make it a non-agricultural land.” If land has once been proved to be agricultural land, it will be treated as agricultural land until it is proved that the agricultural character of the land has been changed and thus has ceased to be agricultural land.* In short, the following are not agricultural income : (i)_Income from the sale of forest trees, fruits and flowers growing on land naturally, spontaneously and without the intervention of human agency cannot be treated as agricultural income because the basic operations have not been performed. (ii) Income from dairy farming is not agricultural income.’ (iii) Income from fisheries is not agricultural income.® (iv) Income from the harvested crop on purchased land is not agricultural income. For example, where the assessee purchases an agricultural land along with crops which has been harvested prior to the date of purchase, the income derived from the sale of the crops cannot be treated as an agricultural income.’ Similarly, where the assessee purchases a standing crop and sells it immediately after its harvest, the income derived from such sale cannot be treated as an agricultural income because the assessee has not derived the income by cultivating the land. Amount received from Insurance Co. on account of damages caused by hailstorm to growing tea is agricultural income.’ Land situated on business road of city within limits of Municipal Corporation and surrounded by commercial buildings is not agricultural land. Fact that vegetables were being raised at time of sale does not change nature and character of land."® In Union of India v. V.S. Muthyam Reddy," the Court has held that income derived from sale of agricultural land is not agricultural income. Section 2 (14)(iii) need not be read as excluding from capital asset the agricultural land in India. 1. C.W.T. v. Officer-in-Charge (Court of Wards), 1976 Tax L.R. 952 (S.C.) : 1978 Tax LR. 416 (Gu). 2. Shiv Shanker Lal v. C.LT., (1974) 94 LT.R. 433. 3. Combined Industries P. Ltd. v. C.LT., (1978) 115 I.T.R. 358 (Mad.); Maganial Morarbhai v. C.LT., 1980 Tax. L.R. 58 (Gu). 4. Raja Mustafa Ali Khan v. C.LT., (1948) L.T.R. 330 (P.C.) Mahendralal Choudhary v. C.LT., (1949) LT.R. 454. GILT. v. Venkataswamu Naidu, (1956) 29 1-7.R. 529 (S.C.). Emperor vy. Probhat Ch. Barua, (1924) LL.R. 51 Cal. 504; C.LT. v. V.T.S. Sevuga Pandia Thever, (1933) 1.T.R. 78 (Mad). C. Ag. LT. vy. New Ambadi Estates Ltd., (1967) 63 LT.R. 325 (P.C.). CLT. v, Maudi Venkatasubbaya, (1967) 63 L.T.R. 325 (P.C). Camellia Tea Group Lid. v. C.LT.. (1993) 203 LTR. 80 (Cal). CLT. v, Gemini Picture Circuit Put. id. ALR. 1996 S.C. 1522. ALR. 1999 S.C. 3881. or FSeen oaY it eee: 18) TAXATION LAWS—LAW OF INCOME OMe I, Explanation to Section 2 (1-A) makes it clear that revenue derived 4, land shall not include and shall be deemed never to have includeq income arising from the transfer of any land referred to in item (a) oy fits, (b) of sub-clause (iii) of clause (14) of S. 2. [As to See. 2(14), see Chapter y/ (b) Agricultural Income and Income from Agricultura) Produce, i.e., Any income derived from such land by any one of the following :! (i) Agriculture : See the last sub-section. i) The performance by a cultivator (or receiver of rent in kind) 1, render the produce raised or received by him fit to be taken to marhet*—It indicates that any income derived from a land situated j, India and used for agricultural purposes by performance of som, agricultural process to render the produce raised fit to be taken t, market will be considered as agricultural income. The agricultural process may be understood as soon operations (either manual or mechanical) performed by a cultivator to render the produce fit to be taken to market. In short, an income will be agricultural income within the meaning of this clause if : (a) the agricultural process performed on the produce is such as is ordinarily employed by cultivator of that locality to render the produce fit to be taken to market; and (b) the agricultural process has been performed by the cultivator or receiver of rent in kind either by himself or under his authority. It is to be noted the produce must retain its original character in spite of the process unless it is not marketable in that state. Thus, income derived from the sale of tobacco leaves after subjecting them to a scientific process of drying will be an agricultural income because tobacco leaves are ordinarily dried to make them fit for sale. But the green tea leaf is a marketable commodity and, therefore, the process of manufacturing green tea leaf into tea fit for human consumption cannot be said to be a process ordinarily employed to render the tea leaves fit to be taken to the market and consequently the income derived from the tea manufactured cannot be treated as agricultural income.‘ Similarly, sugarcane is marketable in its original state and, therefore, no agricultural process is required to be employed to render it fit to be taken to market. Consequently, if any agricultural process is employed to convert sugarcane into Gur or sugar, the income derived from the sale of such Gur or sugar cannot be treated as agricultural income.’ 1, “Such land” refers to land which is situated in India and used for agricultural purposes. also Sankar Lal Naran Lal v. C.LT, ALR. 1965 Guj. 165 where the Court held that there will be no difference whether the market for the produce ‘5 in India or abroad. 8. CLT. v. K Madhusudan Rap, A..R. 1944 Mad. 248, See also CLT. v. HS. Date. 62 LT.R. 71 (Bom). 4. Killing Valley Tea Co, Lid. v. Secretary of State, ALR. 1921 Cal 40. Brithau Maharashtra Sugar Syndicate Ltd. v. C.LT.. (1946) 14 LTR. 611 (Bom); Jn re Bhikhanpur Sugar Concem, 1 LT.C. 29.ESSENTIAL CONCEPTS AND DEFINITIONS [19 (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 ordinarily employed to render the produce fit for market. In other words, the income derived by the cultivator by selling the produce which he has raised or received and in respect of which he has not performed any process other than a process ordinarily to render the produce fit for market will also be treated as agricultural income. The avove income will be agricultural income only if they are derived from the land situated in India and used for agricultural purposes. (c) Income derived from building.—Income from any building will be treated as agricultural income if—(i) the building is situated on or in the immediate vicinity of the agricultural land; (ii) the building is owned and occupied by the cultivator or by the receiver for rent-in-kind; (iii) the cultivator or the receiver of rent-in-kind needs to occupy it on account of his connection with the agricultural land; (iv) the building is used as dwelling house or as store-house or other outbuilding. For the purpose of this clause, the building must be situated in the immediate vicinity of the agricultural land. Where a building was situated at a distance of 16 miles from agricultural land, the Court held that the building could not be taken to have been situated in the immediate vicinity of the agricultural land.* There is also a strict requirement under this clause that the said land— . (a) is assessed to land revenue in India; or (b) is subject to a local rate assessed and collected by government officers; or (c) if not assessed or subjected as mentioned in (a) and (b) above, is situated beyond certain areas or local limits of certain population limits as prescribed within the section. Income from above-mentioned lands due to non-agricultural use covered under this section will not be treated as agricultural income as clarified by an explanation added by the 2001 Amendment Act. Further, Act 18 of 2008 clarified that income derived from saplings or seedlings grown in a nursey will fall under agricultural income. 2.2.3 Assessee [Section 2 (7)]° According to Section 2(7), "assessee" means a person by whom any tax or any other sum of money (e.g. penalty or interest) 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 : (i) of his income; or (ii) assessment of fringe benefits; or 1. For the explanation of this clause, see C.LT. v. Raja S.N. Bhanja Deo, (1978) 111 LTR. 178 (Orissa). 2. Nawab Nawazish Ali Khan y. C.LT., (1946) 14 LT-R. 356 (Oudh). 3. As amended by the Finance Act, 2005 w.e.f. 1-4-200620] eS EHANO WoO, (ili)_of the income of any other person in respect of wi. he is assessable; or : (iv) of the loss sustained by him; or F (v) of the amount of refund due to him. : As per Section 2(23B), ‘fringe benefits’ means any fringe benes, referred to in Section 115 WB." ft 2 ‘son who is deemed to be under an, svistal Ga Caines Under Section 160 the legal representative of). deceased person shall be deemed to be an assessee in respect of the tax payable by the deceased.” Besides, agent of a non-resident, guardian o, manager of a minor, trustee and administrator are also deemed to assessee in respect of income or loss of another person. In other words an agent is deemed to be an assessee in respect of the tax payable by a non-resident. Likewise, guardian or manager of an infant or lunatic shall be deemed to be an assessee in respect of the tax payable by the infant or lunatic; (©) every person who is deemed to be an assessee in default under any provision of this Act. For example, under Section 201, a person who is bound to deduct tax at source but does not deduct or after deducting fails to pay the tax will be deemed to be assessee in default, Thus, every person who is liable to pay income-tax in respect of his own income or income of any other person will be treated as assessee.® Thus, following two categories of persons have been covered within the meaning of this term "assessee" : ) persons by whom any tax, penalty or interest is payable under this Act, or refundable to him whether any proceeding under this Act has actually been taken against them or not; and ie ) Persons against whom any proceeding under this Act has been cen for : (a) the assessment of their income; or {b) ‘the assessment of the income of any other person in respect of which they are assessable; or (©) the assessment of the loss sustained by them; or (d) the assessment of the refund due to them, whether or Aut they are liable to pay any tax, penalty or interest under this Classification of Assessees.—Assessees may be categorised :— Re aia basis of their legal status, the assessee may be (a) an individual; (b) a Hindu undivided family; (c) a company; (d) a partnership firm; re i inserted by the Finance Act, 2005 soe Wel, 1-4-2006, 2 peer Srimal v. Tax QGicer, (1969) 72 1T.R. 623 (S.C.). TE, Alfred, (1962) 44 UR, 442 (S.C). =e —— iiESSENTIAL CONCEPTS AND DEFINITIONS [21 (e) an association of persons or a body of individuals, whether incorporated or not: (f) a local authority; and (g) every artificial juridical person not falling under any of the preceding categories. (2) On the basis of their residential status, the assessee may be classified as : (a) Resident and ordinarily resident; (b) Resident but not ordinarily resident; and (c) Non-resident. 2.2.4 Company [Section 2 (17) and Section 2 (26)] While in common terms, a company may be defined as an "A corporation—or, less commonly, an association, partnership, or union—that carries on a commercial or industrial enterprise",’ in legal terms, a company is a juristic person that is capable of holding, enjoying and disposing of property in its own name—an entity distinct from its shareholders. Section 2(17) of the Act provides that company means : (i) any Indian Company; or (ii) any body corporate incorporated by or under the laws of a country outside India; or (iii) any institution, association or body which is or was assessable or was assessed as company for any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before April 1, 1970; or (iv) any institution, association or body, and whether incorporated or not whether Indian or non-Indian which is declared by general or special order of the Board to be a company but such institution, association or body is deemed to be a company only for such assessment year or assessment years as may be specified in the declaration. It is obvious that for the purpose of Income Tax Act, the word ‘company’ has been given a very wide connotation. Even an unincorporated association may be declared by the Board to be a company for the purposes ‘of the Income Tax Act and may be assessed as a company. The Act also defines various particular companies such as ‘Indian Company’, ‘Infrastructure Capital Company’, ‘company in which the public are substantially interested’ among others. For instance, Section 2(26) provides that an ‘Indian Company" means a company formed and registered under the Companies Act, 1956" (1 of 1956), and includes— "G@) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union Territories specified in sub-clause (iii) of this clause); (ia) a corporation established by or under a Central, State or Provincial Act; 1. Black's Dictionary, (8th Edn, 2004) 846. 2. Now Companies Act, 2013.ama 22) TAXATION LAWS—LAW OF INCOME Tay, (ib) any institution, association or body which is declared by th, Board to be a company under clause (17); . ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State; (iii) in the case of any of the Union Territories of Dadra anq Nagar Haveli, Goa, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union Territory : : Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in al] cases is in India". ‘ A ‘Thus, a company will be treated as Indian company if : (a) it was formed and registered under any law relating to companies in any part of India and (b) its registered or principal office is in India. 2.2.5 Dividend [Section 2 (22)]' In ordinary usage, the term ‘dividend’ means a share of profit of a company to which a shareholder is entitled. But under Section 2 (22) of this Act, the meaning of the term ‘dividend’ has been expanded and consequently the term ‘dividend’, to this section, includes the following distributions or payments over and above the normal meaning of the term under the Companies ‘Act.* (a) Any distribution by a company of accumulated profits (whether capitalised or not), if such distribution entails the release by the company to its shareholders of all or any of its assets; (b) Any distribution to its shareholders by a company of debentures, debenture-stock and deposit certificates in any form and distribution to its preference shareholders or shares by way of bonus to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) Any distribution made to the shareholders of a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) Any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st April, 1933, whether such accumulated profits have been capitalised or not. ___ _ However, the term ‘dividend’ does not include a distribution made in accordance with clause (c) or (d) (stated above) in respect of any share if issued for full each consideration and where the holder is not entitled in the event of liquidation to participate in the surplus assets 1. As amended by the Finance Act, 1999 (w.e.f., 1-4-2000). 2. CLT. v. Nalin Behar! Lall Singha, (1969) 74 1:T.R. 849; S.C. Kanti Lal Mani Lal v. CLT,, (1961) 1 1.7.R. 257 (S.C).en ESSENTIAL CONCEPTS AND DEFINITIONS. (23 Besides, the term ‘dividend’ does not include distribution made in accordance with clause (c) or (d) (stated above) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st March, 1964, and before 1st April, 1965. (ec)! Any payment by a company not being a company in which public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31-5-1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than 10% of the voting power or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or any payment by any such company on behalf or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. The advance paid by a company to the shareholders is been treated as deemed dividend.* The Court, in the instant case, said that it would be treated as coming out of accumulated profits’ and it would go to reduce accumulated profits of a company, whether capitalised or not. The section also provides 06 express circumstances wherein certain distributions, advances/loans and payments do not fall within the meaning of dividend under this section. For example, ‘dividend’ does not include any advance or loan made to a shareholder or said concern by a company in the ordinary course of its business’ where the lending of money is a substantial part of the business of the company. It does not include any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as dividend under this clause to the extent to which it is so set off. It also does not include any payment made by a company on purchase of its own shares from a shareholder in accordance with S. 77A of the Companies Act, 1956. It does not include any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company, whether or not, there is reduction of capital in the demerged company. However, the above definition is inclusive and not exhaustive.* The Supreme Court has held that any amount arising from the transfer of an agricultural land which is declared to be not treated as a part of capital asset, cannot be taken as capital gain and, therefore, not taxable as such.® If the amount so carried is distributed on the liquidation of the companies, it would not partake the character of dividend. Explanations appended to the section clarify that : (a) though ‘accumulated profits’ mentioned in sub-clauses (a), (b), (d) and (e) of the section include "all profits of the company up to the |. As Amended by the Finance Act, 1987 w.e.f. 1-4-88. - CLT. y. G. Narsimhan, AIR. 1999 S.C. 408. Navnit Lal Savery v. KK. Sen, (1965) 56 LT.R. 198 (S.C). Kantilal Manilal v. C.LT., (1961) 41 1.T.R. 275 (S. Tea Estate India Lid. v. C.LT., ALR. 1976 S.C. gr ene : (1976) 113 LTR 785.24] TAXATION LAWS—LAW OF INCOME», date of distribution or payment referred to” therein, but in sub-clay, (c), the term includes "all profits of the company up to the date .: liquidation", but where liquidation is consequent to compuls,.” acquisition by the government or State-controlled/owned corporation, > will include only company profits of up to three successive preyiy,. years immediately preceding the previous year in which sy, acquisition took place. (b) further, ‘accumulated profits’ are not to include capital gain. arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956 7 Aggregate of development rebate allowed to the assessee constitutes accumulated profits.’ In short, the expression "accumulated profits" means profits which have been gathered or heaped up or stored up to the end of the previous year. It does not take in the current profits of the year during which the distribution of payment has been made.? (c) ‘concern’ for the purposes of this clause means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company. (d) a person is deemed to have a substantial interest in a concern—other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern. The Finance Act, 2006 inserted S. 2(26-A) to the Act, defining ‘Infrastructure Capital Company’ means such company which makes investments by way of acquiring shares or providing long-term finance to any enterprise or undertaking wholly engaged in the business referred to in Section 80-IA(4) or Section 80-IAB(1) or an undertaking developing and building a housing project referred to in Section 80-IB(10) or a project for constructing a hotel of not less than three-star category as classified by the Central Government or a project for constructing a hospital with at least one hundred beds for patients; 2.2.6 Amalgamation [Section 2 (1B)]’ ‘Amalgamation’, in relation to companies, means the merger of one oF more companies with another company or the merger of two or more companies to form one company. The company or companies which so merge are called amalgamating company and the company with which they merge is called the amalgamated company. Under Section 2 the merger should be in such a manner that : (i) all the property of the amalgamating company or companies immediately before the amalgamation the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or compamle> immediately before the amalgamation become the liabilities of the amalgamated company, by virtue of the amalgamation; and 1. PK. Badiant y. C.LT., 1977 Tax L.R. 86 (NOC) Mad. 2. CLT. v. Sankaran, 1977 Tax L.R. 86 (NOC) Mad. 3. As amended by the Finance Act, 1999 (w.e.f. 1-4-2000).ESSENTIAL CONCEPTS AND DEFINITIONS [25 (iii) shareholders holding not less than three-fourth the value of share in the amalgamating company or companies become the | shareholders of the amalgamated company by virtue of the amalgamation. But in computing 90% of the value of the shares, the shares already held therein immediately before the amalgamation by or by a nominee for the amalgamated company or its subsidiary are to be excluded. This definition of amalgamation is effective only from 1st April, 1967." 2.2.7 Company in which the public are substantially interested [Section 2 (18)]* A company is said to be a company in which the public are substantially interested : (1) if it is a company owned by the Government or the Reserve Bank of India or in which not less than 40% of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank. Here, the term "Government" means Central or State Government but it does not include foreign government, or (2) if it is a company which is registered under Section 25 of the Companies Act, 1956; or (3) if it is a company having no share capital and if, having regard to its objects, nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested. Here, such company is deemed to be a company in which public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st April, 1971 or on or after that date) as may be specified in the declaration; or (4) if it is a mutual benefit company, that is to say, a company which carried on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under Section 620A of the Companies Act, 1956 to be a Nidhi or Mutual Benefit Society. () if it is a company, wherein shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profit) carrying not less than 50% of the voting power have been allotted unconditionally to, or acquired unconditionally by and were throughout the relevant previous year beneficially held by one or more co-operative societies;* (6) if it is a company which is not a private company as defined in the Companies Act, 1956, and meets the conditions in either of the following : (A) the shares in this company (not being shares entitled to a fixed rate of dividend whether with or without a further right to Modi Sugar Mills Ltd. v. Union of India, 1978 Tax. LR. 673 1") 2. As amended by the Finance Act, 1987 w.e.f. 1-4-88. VTU LIBRARY 3. Central Exchange Bank Lid. v. C.LT., (1955) 57 LT.R. 167. 4. Inserted by the Finance Act, 1952 wel 1-493, HUA 110473SS TAXATION LAWS—LAW OF INCOME 26) as on the last day of the rele, ised stock exchange in Indi," n ities Contracts (Regulation) Act, 195g ao d participate in profits) were, previous year, listed in a recogni accordance with Secui any rules made thereunder; or (BXi) shares in the company (not being shares entitled ¢, fixed rate of dividend whether with or without a further right ,; participate in profit) carrying not less than 50% of the voti,. power have been allotted conditionally to or acquires tneonditionally by and were throughout the relevant preview year beneficially held by— (a) the Government; or (b) a corporation established by a Central or State o Provincial Act; or (c) any company subsidiary of such com) of such subsidiary company has bee: company or by its nominees throughout the previous year It is to be noted that in the case of an Indian whose business consists ‘n the construction of ships or in the manufacture or processing of generation or distribution of electricity or any ) sKall have effect as if the words "not less than per cent" had been substituted to which this clause applies or g pany if the whole of the share capital n held by the parent mainly i goods or in mining or in thi other form of power, item (B fifty per cent", the words "not less than forty as per the explanation to the given definition. 2.2.8 Demerger [S. 2(19AA)], Demerged Company [S. 2(19AAA)]— Section 2. 19(AA), after the amendments by Act 23 of 2019 and Act 13 of 2021 takes ‘demerger’—in relation to companies, to mean the transfer pursuant to a scheme of arrangement under Sections 391 to 304 of the Companies Act, 1956 (1 of 1956) ‘of one or more undertakings of a demerged company by such a company to a resulting company, in such a manner that— being transferred by the “() all the property of the undertaking, becomes the demerged company, immediately before the demerger, property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, beiné transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking undertakings being transferred by the demerged company 3° transferred at values appearing in its books of account immediately before the demerger : Provided that the provisions of this sub-clause shall not apply where the resulting company records the value of the property and the liabilities of the undertaking or undertakings at a value different from the value appearing in the books of account of the demerged company immediately before the demerger, in compliance to the Indian Accounting Standards specified in Annexure to the Companies (india? Accounting Standards) Rules, 2015;ESSENTIAL CONCEPTS AND DEFINITIONS [27 (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of Section 72A by the Central Government in this behalf. Explanation 1.—For the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2.—For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall include— (a) the liabilities which arise out of the activities or operations of the undertaking; (b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and (c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation 3.—For determining the value of the property referred to in sub-clause (iii), any change in the value of assets consequent to their revaluation shall be ignored. Explanation 4.—For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils such conditions as may be notified in the Official Gazette, by the Central Government, Explanation 5.—For the purposes of this clause, the reconstruction or splitting up of a company, which ceased to be a public sector company as a result of transfer of its shares by the CentralTAXATION LAWS—LAW OF INCOME ee Ty 28] s, shall be deemed to be Government, into separate companie: demerger, if such reconstruction or splitting uP has been made to giy, effect to any condition attached to the said transfer of shares and alc, fulfils such other conditions as may be notified by the Centra Government in the Official Gazette. Explanation 6.—For the purposes of this clause, the reconstructiy, or splitting up of a public sector company into separate companies shal} be deemed to be a demerger, if such reconstruction or splitting up has been made to transfer any asset of the demerged company to the resulting company and the resulting compaby” (i) is a public sector company 0m the appointed day indicated in such scheme, as may be approved by the Central Government or any other body authorised ‘under the provisions of the Companies Act, 2013 (18 of 2013) or any other law for the time being in force governing such public sector companies in this behalf; and (i) fulfils such other conditions as may be notified by the Central Government in the Official Gazette in this behalf," ‘ms ‘demerged company’ and ‘resulting company’ under ‘and 2,(41A) respectively, the former refers to the ‘company whose undertaking is transferred to a resulting company, pursuant to a demerger’, while the latter refers to “one or more companies f) to which the undertaking of (including a wholly owned subsidiary thereo! (neMemerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares fe the chavebolders of the demerged company and includes any authority ot body or local authority or public sector company or a company es constituted or formed as a result of demerger". As to the ter Sections. 2.(19AAA) tablished, 2.2.9 Slump sale [S. 2(42-C)] After the amendments made by Act 13 of 2021, the definition of slump sale under Section 2(42C) reads as follows : hing, bY "slump sale" means the transfer of one or more undertai any means, for a lump sum consideration without values being assign” to the individual assets and liabilities in such sales. Explanation 1.—For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2. that the determination of the value of an asset or liability purpose of payment of stamp duty, registration fees or other s! taxes or fees shall not be regarded as assignment of values individual assets or liabilities.) Explanation 3.—For the purposes of this clause, "transfer" shal! have the meaning assigned to it in clause (47). 2.2.10 Person who has a substantial interest in the Compan’ [Section 2 (32)] "Person who has a substantial interest in the company" in relation '° » 4 For the removal of doubts, it is hereby declare? for the sole imilarESSENTIAL CONCEPTS AND DEFINITIONS [29 a company means a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits) carrying not less than 20% of the voting power. Thus, a person is said to have "substantial interest in the company", if he is a beneficial owner of equity shares carrying not less than 20% of the voting power. Therefore, the test is beneficial ownership and not legal ownership. 2.2.11 Business [Section 2 (13)]—See Chapter........ VIII 2.2.12 Charitable Purpose [Section 2 (15)]—See Chapter. XIV 2.2.13 Capital Asset, Fair Market Value & Transfer—See Chapter.......X 2.2.14 Person [Section 2 (31)] Given the liability to pay income-tax falls on a person, it is important to examine the definition provided under Section 2(31). The definition—inclusive in nature states that the follwing are included within the term ‘person’ @_ an individual; (i) a Hindu undivided family; (ii) a company; (iv) a firm; (vy) 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 above categories. Explanation inserted by the Finance Act, 2002 w.e-f. 1-4-2002 provides that for the purposes of this clause, an association of persons or body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains. Individual.—Here the term ‘individual’ means a natural or a human being. It also includes a minor or a person of unsound mind.' However, an unborn person is not included within the meaning of the term ‘individual’. In the case of minors or lunatics the assessment is made on the guardians. Hindu Undivided Family—A Hindu. undivided family may be understood as a Hindu joint family consisting of all persons lineally descended from a common ancestor and also includes their wives and unmarried daughters. However, the word "Hindu" preceding the words “undivided family" indicates that the ‘undivided family’ for this purpose should consist of those who profess Hindu religion and to whom Hindu law applies. Consequently, the family of Christian convert cannot be treated as a Hindu undivided family.? Family consisting of a Hindu husband, a 2. Sridhar Udai Narain v. C.LT., (1962) 45 LTR. 577. » Addl. CLT. v. G. Venkataraman, 1977 Tax L.R. 1103 (Mad) : (1977) 109 LTR 247 (Mad,).- 20] TXATONLANS LAW OF ye, Christian wife and a Christian daughter is not a Hindu undivideq femiy ° Tt is not necessary that a Hindu joint family must consist of at leas," @ single male member, his win’ % male members. It may consist of a daughter or it may consist of a single male member and widow or daygii™t of a deceased male member.’ However, there cannot be a Hindu undivig®? family consisting of merely females.* i On this topie, one may refer to the concise but well-explained deci, in C.LT,, Bihar-H, Ranchi v. Sandhya Rani Dutta,‘ wherein it was explain, that on the death of the sole male member of an Hindu undivided fami)” the ladies who were members thereof could continue with that status, 2! indicated by the following decisions : (a) CLT. v. Sarwan Kumar,’ where it was held that "It follo,, that on the disappearance of the last male member, the other membe,, of the family, though not coparceners, continue to be members of , undivided Hindu family". (b) CLT, Madras v. Veoroppa Chottiar,® where it was held thay so long as. the property which was originally of a joint Hindu family remained in the hands of the widows of the members of the family anj was not divided among them, the joint family continued. ‘Thus, at least one male member is necessary to constitute a Hindy undivided family.’ It is to be noted that a single member (whether male or female) cannot constitute a Hindu undivided family. For the purpose of income-tax, a Hindu undivided family is regarded as a separate entity’ and it is liable to pay tax on income derived by the family For this purpose the family is represented by its Karta (i.e., Head of the family). It is to be noted that any change in the kartaship does not affect the legal continuity of the family,” is to be noted that if the Karta of the Hindu joint family is a partner in a firm and he dies and after his death his minor sons admitted to the partnership, the income earned by them from the partnership ordinarily, would not be regarded the income of the family but it would be regarded their income, but if on the facts of the case it appears that the income received by them has been earned with the aid and assistance of the family fund and has been directly related to the utilization of such funds by the firm and the family has suffered detriment in the process of realisation of such income inasmuch as the capital amount lying to the credit of deceased has been utilized by the firm free of interest, the income received by the minor sons will be treated as a return made to the family because of the investment of family funds in the business and thus it will be assessed in the hands of the family as its income." To be assessed 1, Ibid. Bajrang Lal y. C.LT., (1977) 108 LT.R. 245 (All). . See Savitri Devi v. C.LT., (1976) 104 LT.R. 385. ALR. 2001 S.C. 1155, (2001) 3 S.C.C. 420. 5. [1945] 13 1.T.R. 361 (Al). 6, [1970] 76 LT.R. 467 (S.C). v. Sridharan, (1976) 104 1.T.R. 436 (S.C). 8. C. Krishna Prasad v. C.LT., (1975) 97 LT.R. 493 (S.C). Gowli Buddana v. C.LT., (1966) 69 LT.R. 293 (S.C). 10. G.K. Naidu y. C.LT., (1973) 89 I.T.R. 203 (Mad.). 11. See Y.L. Agarwalla v. C.LT., 1978 Tax L.R. 995 (S.C.).ESSENTIAL CONCEPTS AND DEFINITIONS [31 as a separate entity, the Hindu undivided family must satisfy the following conditions (a) The family must possess common property. The common property may consist of ancestral property (i.e., the property which has been inherited by a man from a male ancestor directly), any property which has been acquired with the aid of ancestral property and any property which has been acquired by an individual member in his independent capacity, but has been treated by him as the property of the family as a whole. (b) The family must consist of coparceners and/or other members. Thus, a Hindu undivided family may consist of one coparcener and female members.’ However, it is to be noted that one member by -himself cannot constitute a joint family, i.e., to constitute a joint family, there must be more than one member. It is important to note that a female is as good a member of the HUF as a male, though she cannot become the karta of the family except under certain limited situations. However, these limitations do not prevent her from acting in the capacity of a member of the family and enter into a contract of partnership with the permission of the family, for the family.” Company.—See ante under this Chapter. Firm.—It has the same meaning assigned to it under the Indian Partnership Act. Association of persons or body of individuals, whether incorporated or not—An association of persons, here, means an association in which two or more persons join in a common purpose or common action and which object is to produce income, profits or gains. Thus, to constitute association of persons, the following conditions must exist :— (a) two or more persons must join in the common purpose and common action; and (b) the objects of the association must be to produce income.* ‘Thus, co-owner, co-heirs or co-legatees cannot be regarded to have constituted an association of persons merely because of the jural relationship but if they unite themselves with the object to earn income, they may be regarded to have constituted an association of persons.‘ A partnership which is illegal may be treated as an association and may be assessed as such. Local authority.—The term "local authority" includes a Municipal Committee, District Board, body of Port Commissioners or other authority, legally entitled to the control or management of a Municipal or local fund or which is entrusted by the Government with the control or management of a Municipal or local fund.> 1. See CLT. v. Bewa Arjan Singh. (1969) 73 LT.R. 576 (Delhi); Smit. Sitabai v. Ramchandra, A1.R. 1970 S.C. 343; C.W.T. v. Harshadlal Manilal,, (1974) 97 1.T.R. 86 (Gu). : 2. CLT. v. Banaik Industries,[1979) 119 I-T.R. 282 (Patna). 3. CLT. v. Govindaram Sugar Mills, (1965) 67 LT.R. 510 (S.C); CLT. v. Indira Balkrishna, (1960) 39 LT.R. 546 (S.C); Deccan Wire & General Stores v. C.LT., (1977) 106 LTR. 111 (AP). 4. Ibid. 5. See Calcutta State Transport Corporation v. C.LT., (1977) 108 1.T.R. 922.PN eine cece 32] TAXATION LAW LAW OF Woy, —e Artificial juridical person.—This category covers every , Peron! uo filmy under the other Heeds (stated above), corporation, deities and idols fall under this category: 2.2.15 Total Income [Section 2 (45)] f Total Income means the total amount of income referred to in a 5 computed in the manner laid down in this Act. 2.2.16 Domestic Company & Foreign Company [Section 2(22,4) fe Section 2(23-A)] i ‘Amendments ushered in by Act 4 of 1988 inserted the terms ‘do, company’ and ‘foreign company’ under Sections 2.(22A) and 2234) 7. former refers to an "Indian company, or any other company which, in resp. of its income liable to tax under this Act, has made the presen, arrangements for the declaration and payment, within India, of x, dividends (including dividends on preference shares) payable out of sy. income", And a company which is not a domestic company if known as, foreign company. 2.2.17 Maximum Marginal Rate [Section 2 (29-C)] ‘Maximum marginal rate’ means the rate of income-tax (includgy surcharge on income-tax, (if any) applicable in relation to the highest slab: income in the case of an individual association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year 2.2.18 Assessee, Assessment, Assessing Officer, Assessment Year ani Previous Year [Ss. 2(7), 2(7A), 2(8), 2(9) and S. 3] ‘As per S. 2(7), ‘assessee’ means a person by whom any tax or any other sum of money is payable under this Act. This includes— (a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits 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 an) provision of this Act; (c) every person who is deemed to be an assessee in default under any provision of this Act. S. 2(7A) goes on to enumerate income-tax officials with jurisdiction under the Act to perform the functions and exercise the powers of a assessing officer under the Act. Under the Act, ‘assessment’ includes reassessment and the ‘assessmen! year’ refers to a "period of twelve months commencing on the Ist day April every year". This 12-month period staring on first day of April and ending on the last day of March in the next year is popularly known * financial year’ or ‘income-tax year’. For what constitutes the previous ye2" we have to refer to Section 3 that reads as follows : For the purposes of this Act, ‘previous year’ means the financi*! if "atu, See Official Trustee v. C.LT., (1974) 93 LT.R. 348 (S.C). meee ee ,