TAX LAW
INCOME
HUMBLY SUBMITTED TO KIRAN BALA
SADAF NAYAB
3RD YEAR (S\F)
BALLB (HONS.)
1|Page
Income
The definition of the term ‘income’ in Sec.2(24) is inclusive. It not only includes
those things which are included in Sec.2(24) but also includes such things which
the term signifies according to its general and natural meaning. Following are
some of the broad principles clarifying the concept of ‘Income’ under the Act:
1. Regular and definite source : The term ‘income’ connotes a periodical
monetary return coming in with some sort, of regularity. However, it must
be read with reference to facts of each case.
2. Different forms of income : Income may be received in cash or in kind.
When income is received in kind, its valuation is to be made according to
the rules prescribed in the Income-tax Rules. If, however, there is no
prescribed rule, valuation thereof is made on the basis of market value.
3. Receipt vs. Accrual: Income arises either on receipt basis or on accrual
basis. Income may accrue to a taxpayer without its actual receipt. Tax
incidence arises either on ‘accrual’ or on ‘receipt’ basis.
4. Illegal income: The income-tax law does not make any distinction between
income accrued or arisen from a legal source and income tainted with
illegality.
5. Disputed title : Income-tax assessment cannot be held up or postponed
merely because of existence of a dispute regarding the title of income. The
recipient is, therefore, chargeable to tax, though there may be rival claims
to the source of the income. A mere claim, on the other hand, by a person
against the recipient of income is not sufficient to make income accrue to
the claimant and render him liable for tax.
6. Relief or reimbursement of expenses not treated as income: Mere relief or
reimbursement of expenses is not treated as income.
2|Page
7. Diversion of income by overriding title vs. application of income : There
is a thin dividing line between diversion of income and application of income.
While application of income may be of little consequence, diversion of
income has to be examined carefully.
8. Surplus from mutual activity: A person cannot make a taxable profit out of
a transaction with himself. Income must, therefore, come from outside.
9. Appropriation of payment between capital and interest: Where interest is
due on a capital sum and the creditor gets an open payment from the debtor,
the creditor is at liberty to appropriate the payment towards principal. If,
however, neither the creditor nor the debtor makes any appropriation of
payment as between capital and interest, the Income-tax Department is
entitled to treat the payment as applicable to the outstanding interest and
assess it as income.
10. Temporary and permanent income : For the purpose of income-tax, there
. is no distinction between temporary and permanent income. Even temporary
income is taxable.
11;' Lump sum receipt: Income, whether received in lump sum or in installments,
is liable to tax. For instance, arrears of bonus, received in lump sum, is
income and taxable as salary.
12. Personal gifts : Gifts of a personal nature, e.g. birthday gifts, marriage
gifts, etc., do not constitute income and, therefore, recipient of such gifts is
not liable to income-tax.
13. Tax-free income: If a person receives tax-free income on which tax is paid
by the person making payment on behalf of the recipient, it has to be grossed
up for inclusion in his total income.
14. Receipt on account of Dharmada : Receipt on account of Dharmada,
Gaushala and Pathshala is not income and, therefore, not liable to tax.
3|Page
15. Devaluation of currency : The extra money received on account of
devaluation of currency is taxable.
16. Income includes loss: While income and profits and gains represent ‘plus
income’, losses represent ‘minus income’. Hence, while calculating the ‘total
income’, both negative and positive incomes should be taken into account.
17. Prizes and winnings : Winnings from lotteries, crossword puzzles, races,
card games and other games of any sort or from gambling or better of any
form or nature are taxable under the Act.
18. Same income cannot be taxed twice : It is a fundamental rule of the law of
taxation that, unless otherwise expressly provided, the same income cannot
be taxed twice.
19. Income should be real and not fictional: Income means real income and
not fictional income. In determining the question whether the income is
real or fictional, various factors will have to be taken into account.
20. Mere production does not amount to income : Mere production or receipt
of a commodity which may be converted into money certainly cannot be
construed to be an income in its normal connotation of ‘income’.
21. Source of income need not exist in the assessment year: It is not necessary
that the source of income should exist in the assessment year. If there is an
income during the previous year, it is chargeable to tax in the following
assessment year.
22. Pin money - Pin money received by wife for her dress/personal expenses
and small savings made by a woman out of money received from her husband
for meeting household expenses is not treated as her income.
4|Page
23. Award received by a sportsman : Award money received by a professional
sportsman is taxable, but the award money received by a non-professional/
amateur sportsman is not liable to tax.
24. Entries in books of accounts are not conclusive of income : The way in
which entries are made by the assessee in his books of account is not
determinative of the question whether the assessee has earned any profit or
suffered any loss.
25. Income of a State is not liable for Union Taxation : By virtue of Article
289(1) of the Constitution, the property or income of a State is not liable
for Union taxation.
26. Revenue receipt vs. Capital receipt: A revenue receipt is taxable as income,
unless it is expressly exempt under the Act. But a capital receipt is generally
exempt from tax, unless it is expressly taxable under Sec.45.
Gross Total Income
As per Sec. 14 of the Act, the income of a person is calculated under the following
five-heads:
(i) Salaries,
(ii) Income from house property,
(iii) Profits and gains of business or profession,
(iv) Capital gains,
(v) Income from other sources.
The aggregate income under these heads is termed as ‘gross total income’.
The several heads into which income is divided do not make different kinds of
taxes. Taxis always one but it may arise under different heads to which different
rules of computation have to be applied. These heads are in a sense exclusive to
one another and income which falls within one head cannot be assigned to or
taxed under another head. Income has to be brought under one of the heads
under Sec. 14 and can be chaiged to tax only if it is chargeable under the computing
5|Page
section corresponding to that head. The method of book keeping followed by an
assessee cannot decide under which head a particular income should go.
Total Income and Tax Liability
According to Sec.2(45), total income of an assessee is gross total income as
reduced by the amount deductible under Secs.80CCC to 80U.
The Income-tax Act contains the provisions for computing taxable income,
but the rate of tax is given by the Finance Act passed by the Parliament along
with the Union Budget every year.
Agricultural Income
By virtue of Sec.2(l A), the expression ‘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 agricultural operations including
processing of the agricultural produce, raised or received as rent-in-kind
so as to render it fit for the market or sale of such produce;
(c) income attributable to farm house subject to the conditions that the building
is situated on or in the immediate vicinity of the land and is used as a dwelling
house, store house or other outbuilding and the land is assessed to land
revenue or a local rate or, alternatively, the building is situated on or in the
immediate vicinity of land which (though not assessed to land revenue or
local rate) is situated outside the urban areas, i.e. any area which comprised
within the jurisdiction of a municipality or cantonment board having a
population of10000 or more in any area within such notified distance (upto
8 kilometres) from the local limits of such municipality or cantonment board.
Sec. 10(1) exempts agricultural income from tax. The reason of exemption
of agricultural income from central taxation is that the Constitution gives exclusive
power to make laws with respect to taxes on agricultural income to the State
Legislature. However, in some cases, agricultural income is taken into
consideration to determine tax on non-agricultural income.
6|Page
Casual Income
Vide provisions of Sec. 10, casual incomes and receipts are exempt from tax.
Casual income means a receipt which is casual and nonrecurring in nature. Since
the expression is not defined by the Act, its meaning must be construed in its
plain and ordinary sense. Casual receipts which are of casual and nonrecurring
nature are exempt from tax.
The exemption is available only if the following conditions are satisfied:
(a) the receipt should be casual in nature;
(b) it should be ‘nonrecurring’,
(c) it should not be taxable as capital gains under Sec.45;
(d) it should not arise from business or the exercise of a profession or
occupation;
(e) the receipt is not by way of addition to the remuneration of an employee.
V.K.Singhania and Kapil Singhania list atleast 57 types of casual income
and receipts.
Assessment
Under See.2(8), the word ‘assessment’ is defined to include reassessment. In
general context, the word ‘assessment’ means computation of tax and procedure
for imposing tax liability. Under the Act, there are seven kinds of assessments -
self-assessment, provisional assessment, regular assessment, best judgment
assessment, reassessment, jeopardy assessment under Secs. 172 and 174 to 176
and precautionary assessment.
An assessment is said to be complete when both the assessment order is
made and the tax payable by the assessee is determined. Assessments have to be
made for every year and cannot be held up until the final result of a legal
proceeding, which may pass through several courts, is announced. Assessment
includes imposition of penalty. On the whole, the Act is rather ambivalent on the
issue of ‘assessment’ and hence, even the minute details of the procedure have
been fought right up to the Supreme Court. As a result, now there is abundance
7|Page
of case-law on the matter.
Business
In view of See.2(13), business includes any (a) trade, (b) commerce, (c)
manufacture, or (d) any adventure or concern in the nature of trade, commerce
of manufacture. Under Sec. 28, the following eight types of incomes are chargeable
to tax under the head ‘profits and gains of business or profession’ :
(1) profits and gains, of any business or profession;
(2) any compensation or other payments due to or received by any person
specified in section;
(3) income derived by a trade, professional or similar association from specific
services performed for its members;
(4) profit on sale of import entitlement licences, incentive by way of cash
compensatory support and drawback of duty;
(5) the value of any benefit or perquisite, whether convertible into money or
not, arising from business or the exercise of a profession;
(6) any interest, salary, bonus, commission or remuneration received by a partner
of firm from such firm;
(7) any sum received under a key man insurance policy;
(8) income from speculative transactions.
On the whole, taxation of business income is another complex matter.
Capital Asset
According to Sec.45.(l), any profit or gain arising from the transfer of a capital
asset is chargeable to tax under the head ‘Capital gains’ in the previous year in
which the transfer took place, if it is not eligible ft»r exemption under. Secs.54,
54B, 54D, 54EC and 54G. The expression ‘capital asset’ means property of any
kind held fry an assessee, whether or not connected with his business or profession.
However, the following assets are excluded from the definition of ‘capital asset’:
(1) My stock-in-trade, consumable stores or raw materials held for the purposes
of business or profession;
(2) personal effects of the assessee, that is, movable property including wearing
8|Page
apparel and furniture held for his personal use or for the use of any member
of his family dependent upon him (jeweller is treated as a capital asset,
even though it is mean for personal use).
(3) Agricultural land in India, provided it is not situated - (i) in any area within
the jurisdiction of a municipality or a cantonment board having a population
of 10,000 or more; or (ii) in any areas specified by the Government;
(4) 6.1/2 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or
National Defence Gold Bonds, 1980, issued by the Central Government;
(5) Special Bearer Bonds, 1991; and
(6) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.
Transfer, in relation to a capital asset, includes sale, exchange or
relinquishment of the asset or the extinguishment of any rights therein or the
compulsory acquisition thereof under any law.
Computation of capital gain depends upon the nature of capital asset
transferred, viz. short-term capital asset or long-term capital asset. Capital gain
arising on transfer of a short-term capital asset is short-term capital gain, whereas
transfer of long-term capital asset generates long-term capital gain. The tax
incidence is generally higher in the case of short-term capital gain as compared
to the long-term capital gain.
Fair market value, in relation to a capital asset, means the price that the
capital asset would ordinarily fetch on sale in the open market on the relevant
date. Where, however, such price is not ascertainable, it may be determined in
accordance with the prescribed rules.
Capital receipts vs. Revenue receipts
Receipts are of two types, viz. capital receipts and revenue receipts. The distinction
between the two is vital because capital receipts are exempt from tax unless they
are expressly taxable (for instance, capital gains are taxable under Sec.45, even if
they are capital receipts), whereas revenue receipts are taxable unless they are
expressly exempt from tax (for instance, incomes except under Secs. 10 to 13 A).
As the Act does not define the terms ‘capital receipts’ and ‘revenue receipts’,
9|Page
one has to depend upon the natural meaning of the concepts as well as the decided
cases. The essential difference between capital and revenue is that capital is a
fund; revenue is a flow.
Capital expenditure vs. Capital receipts
The distinction between these two is vital because capital expenditure, even if
incurred for the purpose of earning income, is not deductible while computing
taxable income, unless the law expressly so provides. Revenue expenditure, on
the other hand, is deductible while computing taxable income unless the provides
specific rules to disallow such expenditures wholly or partly. As the Act does not
define the terms ‘capital expenditure’ and ‘revenue expenditure, one has. to depend
upon their natural meaning as well as decided cases.
Method of Accounting
In accordance with the provisions of Sec. 145, income chargeable under the head
‘profits and gains of business or profession’ or ‘income from other sources’ is to
be computed as per the method of accounting regularly employed by the assessee.
Mainly, there are two types of accounting methods - mercantile system and
cash system. Under the mercantile system, income and expenditure are recorded
at the time of their Occurrence during the previous year. For instance, income
accrued during the "previous year is recorded whether it is received during the
previous year or during a year preceding or following the previous year. Similarly,
expenditure is recorded if it becomes due during the previous year, irrespective
of the fact whether it is paid dining the previous year or not. The profit calculated
under the mercantile system is profit actually earned during the previous year,
though not necessarily realized in cash. In other words, whether accounts are
kept on mercantile basis, the profits or gains are credited, though they are not
actually realized and entries, thus, made really show nothing more than an accrual
or arising of the said profits at the material time. .
Under the cash system of accounting, revenue and expenses are recorded
only when received or paid. For instance, income received during the previous
year is included in taxable income whether it is earned during the previous year
10 | P a g e
or it is earned during a year preceding or following the previous year. Similarly,
expenditure is deductible from the taxable income only if it is paid during the
previous year, irrespective of the fact whether it relates to the previous year or
not. Income under cash system of accounting is, therefore, excess of receipts
over disbursements during the previous year.
The assessee may select cash or mercantile system of accounting in respect
of income chargeable under the heads ‘profits and gains of business or profession’
and ‘income from other sources’. The choice of the method of accounting lies
with the assessee but the assessee must show that he has regularly followed the
method of accounting chosen by him. In other words, once a particular method
of accounting is followed by the assessee, he must follow it on a consistent basis.
Rules of Interpretation
Interpretation implies interpreting the provisions of the fiscal statute. The task of
interpretation is not a mechanical task. It is more than a mere reading of
mathematical formula. It is possible that the same word used in indifferent parts
of state may sound differently. It is through the task of interpretation that the
whole enactment is given a harmonious reasoning.
Need for Interpretation
English literature would have been much poorer if English language could
have been such that statutes could be drafted with divine precision. However,
judiciary cannot simply fold hands and blame the draftsman. Judiciary must set to
work on the interpretational activity of bringing out the true legislative intent.
Interpretation vs. Construction
While interpretation is interpreting the provisions of the statue and bringing
out of the basic legislative intent behind the enactment, construction of statute
stands on a different footing. When provisions of the statute are drafted in such
a way that plain interpretation of statutory provision produces manifestly absurd
11 | P a g e
and unjust result or provisions are contradicting one-another so that they cannot
be harmonized, Court may modify the language used by the Legislature or even
do some violence to it, so as to achieve the obvious intension of the Legislature
and produce a rational construction.
Rules of Interpretation
Literal rule - Primarily, statute should be interpreted according to the
expressions used in it. If the language of the statute is clear and unambiguous
and if two interpretations are not reasonably possible, it would be wrong to discard
the plain meaning pf the words used in order to meet a possible injustice. One of
the pillars of statutory interpretation, viz. literal rule, demands that if the meaning
of the statutory interpretation is plain, the court must apply the same regardless
of the result. So long as the provision is free from ambiguity, the words used
therein should be given their plain meaning without importing into it any foreign
words and without subtracting any words therefrom.
Golden rule - If strict literal interpretation leads to an absurd result and
object sought to be accomplished would be defeated by such interpretation, then
a construction that would avoid such absurdity shall be thought of. The words
are modified so as to avoid the absurdity and inconsistency. Under such
circumstances, a construction would results in equity rather than injustice shall
be preferred although it is often said that equity and taxation are strangers. Golden
rule is, thus, also known as ‘rule of reasonable construction’.
Mischief rule - When a statute is amended or previous enactment is repealed
to meet some specific purposes, in such a case, regard shall be had to the mischief
which was earlier prevailing in the law and now stood rectified. In this respect,
the following long established principles need to be borne in mind: “that for the
sure and true interpretation of all statutes in general (be they penal or beneficial,
restrictive or enlarging of the common law), four things are to be discerned and
considered:
(i) what was the common law before the making of the Act;
(ii) what was the mischief and defect for which the common law did not provide;
12 | P a g e
(iii) What remedy Parliament has resolved and appointed to cure the disease of the
commonwealth; and
(iv) the true reason of the remedy. And then, the office of all the judge is always to make
such construction as shall suppress the mischief and advance the remedy, and to
suppress subtle inventions and evasions for the continuance of the mischief and to
add force and life to the cure and remedy according to the true intent of the makers of
the Act.”
There is now the further addition that regard must be had not only to the
existing law but also to prior legislation and to the judicial interpretation thereof.
Rule of ‘ejusdem generis ’ - The maxim “generalia specialibus non derogant”
is regarded as a cardinal principle of interpretation. The literal meaning of the '
expression is that if there is an apparent conflict between two independent
provisions of law, the special provision must prevail. The general provision,
however, controls the cases where the special provision does not apply as the
special provision is applicable to the extent of its scope.
Beneficial to the assessee - It is necessary to remember that when a provision
is made in the context of a law providing the concessional rates of tax for the
purpose of encouraging an industrial activity, a literal construction should be put
upon the language of the statute. When two views are possible, the view that
favours the assessee or is beneficial to him should be followed.
Retrospective legislation - There is a well settled principle against
interference with vested rights by subsequent legislation unless the legislation
has been made retrospective expressly or by necessary implication. If an assessment
has already been made and completed, the assessee cannot be subject to
reassessment unless the statute permits that to be done. Legislative amendment
or enactment is principally concerned with establishment of future rules of conduct.
This presumption must be given effect to in the absence of any expression intention
to operate the law retrospectively.
Use of expressions ‘may ‘shall’, ‘and’, ‘or’-Use of word “may” denotes
13 | P a g e
discretion in complying with the provisions of the statute, while ‘must’ or ‘shall’
denote imperative to comply with statutory provision. Yet, these words may be
interpreted., interchangeably. ‘Shall’ or ‘must’ can be interpreted as ‘may’
depending upon the nature and intention of the Legislature. When obligation to
exercise a power is coupled with a duty cast upon or non-performance of
provisions of statute would make the purpose null and void, then ‘may’ can be
construed as ‘shall’ or ‘must’.
Finance Minister 5s speech - The object clause and the Finance Minister’s
speech are relevant only when the provision itself is not clear and is ambiguous.
The speech made by the mover of a Bill explaining the reason for the introduction
of the Bill can certainly be referred to for the purpose of ascertaining the mischief
sought to be remedied by the legislation and the object and purpose for which the
legislation is enacted. This is in accord with the recent trend in juristic that
interpretation of a statute being an exercise in the ascertainment of meaning,
everything which is logically relevant should be admissible.
Marginal notes - It is undoubtedly true that the marginal note to a section
cannot be referred to for the purpose of construing the section, but it can certainly
be relied upon as indicating the drift of the section. It cannot control the
interpretation of the words of a section, particularly when the language is clear
and unambiguous but, being part of the statute, it prima facie furnishes some
clue as to the meaning and purpose of the section.
Executive Instructions - Instructions issued by the Ministry or Department
for. guidance of its officers are of no assistance in interpreting a taxing statute.
Instructions are not binding on Commissioner (Appeals), Income-tax Appellate
Tribunal, High Court and the Supreme Court. Even an assessee is not bound by
the executive instructions issued by the Central Board of Direct Taxes. However,
departmental officers/assessing officers are bound by such instructions and
circulars. The interpretation of the CBDT’s instructions can be considered only
as an aid to understanding the intention of the Parliament in enacting a Section.
Schedules to Act - Schedules to Act cannot override simple and plain
14 | P a g e
provisions of the Act.
Constitutional validity - Any provision of law affecting the rights of
individuals, will have to be read in the context of the Indian Constitution. The
provisions of law should not contravene the Constitutional provisions like the
fundamental rights.
Charging section - Charging section has to be construed strictly. If a person
1ms not been brought within the ambit of the charging section by clear words, he
cannot be taxed at all.
Catch phrase - A catch phrase possibly used as a populist measure to
describe some provisions in the Finance Bill in the explanatory memorandum
while introducing the Bill in Parliament can neither be determinative of. nor can
it camouflage the true object of the legislation.
Re-enactment - It is wry well recognized rule of interpretation of states
that where a provision of an Act is omitted by an Act and the said Act
simultaneously re-enacts a new provision which substantially covers the field
occupied by the repealed provision with certain modification, in that event, such
re-enactment is regarded having force continuously and the modification or
changes are treated as amendment coming into force with effect from the date of
enforcement of re-enacted provision.
15 | P a g e
