Site: 3 Year LLB Notes: Excellency Club, GLCE Students Union 2018-19 at http://llb3.wikidot.

com
Source page: Taxation at http://llb3.wikidot.com/wiki:taxation

Taxation
Taxation Notes - INCOME TAX: A project of EXCELLENCY CLUB, SFI
& STUDENTS UNION 2018-19, GOVT LAW COLLEGE, EKM(KOCHI)

Definitions and Concept of Tax

What is tax?

Tax is the amount of money paid to the government for public services
It is the compulsory extraction of money by a public authority for public purposes enforceable by law
and not for services rendered (Australian High Court definition)
It is the mandatory levy impose on the taxpayer (be it an individual or some other legal entity) to fund
the functioning of the state.

The major characteristics of taxation are:

1. Compulsion: Tax is a compulsory extraction, and never a voluntary or optional payment
2. No quid pro quo: The taxpayer is not entitled to any special service or even proportionate service
for the amount tendered.
3. Common Pool: Tax money is for the general and administrative purposes of the state and for public
purpose. The tax payer can enjoy such benefits with the general populace.

The purpose of taxation is to

1. Run the administrative machinery of the state
2. To stabilize the economy
3. To protect the citizens and the existence of the state
4. To redistribute wealth

In 2015-2016, the gross tax collection of the Central govt of India amounted to Rs 14.60 trillion
(US$200 billion).

Types of Tax
*Direct Tax:* tax paid directly by an individual or other legal entity to the government directly, on the
basis of their income
• Income Tax: Introduced in India in 1860 by James Wilson, who was India’s first finance minister
• Wealth tax

*Indirect Tax:* Taxes where the person depositing the tax with government and the person actually
having been burdened by the tax are different. Indirect taxes are usually included in the prices of the
goods or services which are provided to the people and such taxes are then deposited by the person
collecting the same from their customers. GST is the most (un)popular type of indirect tax.
• Customs Duty
• Central Excise
• Service Tax and Sales Tax (now replaced by GST)
Canons of Taxation
Canons of taxation refer to the qualities which a good tax should possess.

Adam Smith, father of classical economics, lists four canons or maxims of taxation:

1. Canon of equality or equity:

The burden of taxation must be distributed equally or equitably in relation to the ability of the tax
payers. In other words, the real burden of tax should be just and fair. Equity or social justice demands
that the rich people should bear a heavier burden of tax and the poor a lesser burden.
Horizontal equity: equal treatment to people in equal economic circumstances, which means that they
should pay equal amount of taxes.
Vertical equity: unequally placed persons should be treated unequally, thus, economically better
placed people should pay more taxes than others.

2. Canon of certainty:

According to Adam Smith, “the tax which each individual is bound to pay ought to be certain and not
arbitrary. The time of payment, the manner of payment, the amount to be paid ought to be clear and
plain to the contributor and to every other person.” The certainty aspects of taxation covers
(i) Certainty of effective incidence (who shall bear the tax burden)
(i) Certainty of liability (how much shall be the tax amount payable in a particular period)
(iii) Certainty of revenue (certainty of collection of revenue from a given tax levied).

3.Canon of Economy:

The cost of collecting a tax should not be exorbitant but be the minimum. Owing to the complex and
ever-changing nature of taxation laws in India, government has to maintain elaborate tax collection
machinery with a large staff of highly trained personnel involving high administrative costs and
inordinate delay in assessment and collection of tax.

4. Canon of convenience:

Tax should be collected in a convenient manner from the tax payers. For example, it is convenient to
pay a tax when it is deducted at source from the salaried classes at the time of paying salaries.

*Other economists have added additional canons, such as:*

5. Canon of elasticity:
Taxation should be elastic in the sense that more revenue is automatically fetched when income of
the people rises. This means that taxation must have built-in flexibility.

6. Canon of productivity:

A tax must yield sufficient revenue and not adversely affect production in the economy. Tax should be
levied with the consideration that the purpose of a business or occupation is to make money for the
owner or worker and not to pay takes to0 enrich the government or some freeloading leeches and
bureaucrats.

7. Canon of simplicity:

Tax rates and tax systems ought to be simple and comprehensible and not to be complex and beyond
the understanding of the layman. This is unfortunately totally at odds with the Indian taxation system,
which a common layman cannot decipher on his or her own. The ordinary taxpayer having to take
recourse to a CA is a form of exploitation.

8. Canon of diversity:

There should be a multiple tax system of diverse nature rather than having a single tax system. In the
former case, the tax payer will not be burdened with a high incidence of tax in the aggregate.

9. Canon of expediency:

A tax should be determined on the ground of its economic, social and political expediency. For
instance, a tax on agricultural income lacks social, political or administrative expediency in India and
that is why the government of India had to discontinue it.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

Distinction between tax and Fee

Tax Fee
A charge for special service rendered by some
Compulsory extraction of money by state from
government or quasi-government entity –
individuals liable to pay it
optional payment to avail such special service
Imposition made for public purpose, without
reference to any specific service conferred or Levy for any specific service or benefit
any specific benefit rendered to taxpayer – rendered to a person
taxpayer can only partake in common benefits
Paid for special benefit, and the benefit is
Paid and collected for common benefit
proportional to the amount paid
Set apart specifically for the purpose for
Merged with general revenue of the state
which it is collected
There is a correlation between fee collected
and service rendered. SC has established this
No quid-pro-quo between taxpayer and state
in State of Rajasthan v Sajjan Lal (1975) &
Kishen Lal v State of Haryana (1993)

Delhi Municipality v Yasin (1993): The mere fact others who do not pay the fee is also getting
benefited out of the service rendered does not detract the character of the fee
Hotel Owners Association & Ors. vs. Hyderabad Municipal Corporation, Hyderabad (1999): A licence
fee may be either regulatory or compensatory. When a fee is charged for rendering specific services, a
certain element of quit pro quo must be there between the services rendered and the fee charged so
that the licence fee is commensurate with the cost of rendering the service although exact
arithmetical equivalence is not expected. However, this is not the only kind of fee which can be
charged. Licence fee can also be regulatory when the activities for which a licence is given required to
be regulated or controlled. The fee which is charged for regulation for such activity would be validly
classifiable as a fee and not a tax although no service is rendered.

Methods of Taxation
1 Proportional method of taxation Tax is imposed at same rate for everyone, without slabs. Eg: GST,
where everyone regardless of their income has to pay the same 12% or 18% as the case may be.
Likewise income tax for companies is a flat 30%
2 Progressive method of taxation Higher rate of tax for higher income, and lower rate of tax for lower
income. Eg: 10% tax for income between 1 and 10 Lakhs, 20% for income between 10 and 20 Lakhs
3 Regressive method of taxation Opposite to progressive method, where rate of tax falls when income
rises. The justification is that higher income people pay more actual amount despite a lower
percentage. Eg of regressive system is 40% tax for income up to 10 Lakhs and 35% tax for income
between 10 Lakhs and 20 Lakhs
4 Digressive method of taxation Digressive tax is a mix between progressive and proportionate tax.
Here, rate of tax increase with rise in income, but increase in tax rate is not proportional. The higher
income will attract only a marginal increase in tax rates.
Indian Income tax rate for individuals is a good example for digressive tax: 0% tax for up to Rs 2.5
Lakhs, 10% tax for income between 2.5 and 5 Lakhs, 20% tax for income between 5 lakhs and 10
lakhs, and 30% tax for income above 10 Lakhs.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

Constitutional Basis of Taxation

The legislative basis for taxation in India is Article 265 of the Constitution
As per Article 265 of the Constitution of India, no tax can be levied or collected except by authority of
law. No tax can be levied on mere executive order

List Description Entries Examples

82- Income Tax 83-Customs
areas on which only the Duty ; 84- Excise Duty, mostly on
List I
parliament is competent Entries 82 to 92A petro, crude, tobacco
(Central List)
to make laws manufactured in India; 85-
Corporation Tax …
45 – land revenue 46 – tax on
areas on which only the agricultural income; 50 – tax on
List - II (state
state legislature can Entries 46 to 63 mineral rights; 53 – electricity
list)
make laws duty; 59 – toll; 60 – profession
tax; 62 – entertainment tax
 the areas on which both In India, Union
List - III the Parliament and the and the States
(concurrent State Legislature can have no
list) make laws upon concurrent power
concurrently. of taxation

The legislature has abolished multiple taxes with passage of time and imposed new ones.
Few taxes abolished include inheritance tax, interest tax, gift tax, wealth tax, etc.
Value Added Tax (VAT) was introduced in 2003 and repelled in 2018 for GST

Restrictions on power of state to impose tax

Apart from the division between union and state list, the states cannot impose any tax on
1. the property of the union government, situated in the state. Likewise the union government cannot
tax the property belong to any state
2. sale or consumption of electricity by the Government of India
3. sale and purchase of goods taking place outside the state
4. sale and purchase of goods taking place in course of export / import, even if such sale takes place
within the state (exporters are entitled to sales tax (GST) exemption / refund)

Principles of taxation in India

1. Tax law should not violate the fundamental rights or specific limitations imposed by the provisions
of the constitutions. Taxation should not violate Article 14 (Equality and equal protection of the law.
2. Only the legislature has the power to impose taxes. An executive order, executive instruction or
custom cannot be the basis to justify imposition of tax.
3. The legislature cannot validate an illegal assessment of tax made by the executive without proper
legislative sanction
4. Tax law should not suffer from the vice of excessive legislation.
5. Legislature is competent to levy taxes retrospectively or prospectively. Retrospective operation can
however be challenged in court if it alters the nature and characteristic of the respective legislation.
Also, legislature cannot give retrospective operation to a tax in respect of an area over with it had no
territorial jurisdiction during the period of retrospective operation.

Western India Theater v Cantonment Board (1859): The cantonment board charging higher tax on big
cinemas and lesser tax on small cinemas held as not violative of Article 14.
Indian Express Newspapers v Union of India (1985): Classification of newspapers into small, medium
and big on basis of circulation and imposing differential tax rates on such basis is not violative of
article 14.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

INCOME TAX ACT 1961

The Income Tax act obliges every resident in India to pay a proportion of his/her income as tax,
provided the income fits the definition of “income” contained in the act and exceeds the laid down
thresholds.
Basis of Income Tax

• Income tax is levied by the Central Board of Direct Tax. The legislative and executive basis on which
the tax is administered include
• Income Tax Act 1961 and the Income Tax Rules 1962 offer the basis and procedure for collecting
Income tax
• The Finance Act passed every year along with the Union Budget fixes the income tax rates and many
associated provisions related to Income Tax. The government implements its tax policies through the
finance act
• The circulars, notifications and orders of Central Board of Direct Taxes lend clarity to various
provisions of the act.
• Executive instructions of the Income Tax department render clarity on procedural aspects
• Judgements rendered by Income Tax appellate tribunals High Court and Supreme Court act as
precedent

What is Income?
Income is defined in Sn 2 (24)

Income as defined by the Income Tax comes under the following sources
- Salary
- House
- Business or profession
- Capital Gains
- Other sources

Commissioner of Income v Shaw Wallace: The Privy Council held income is defined as "periodical
monetary return coming in sort of regularly or expected regular from a regular source. Such income
may be in cash or kind
Thus income had to be
- periodical
- from a definite source

Subsequently, this narrow definition was widened in Gopal Narain Singh v Commissioner of Income
Tax. It was held that anything which can be properly described as income is taxable, unless
specifically exempted. Thus all receipt is income unless exempted.
Kamakshyan Narain Singh v Commissioner of Income Tax: Word "income" is of wider connotation.
Income need not necessarily be a recurrent return from a definite source even though it is generally of
that category.
Syed Jalal v Commissioner of Income Tax: Even a casual or non-recurrent receipt may be partially
exempted under the income tax act.
Amrit Kunwar v Commissioner of income Tax: The court reiterated Gopal Narain Singh, and said
anything which can be properly described as income is taxable under the act, unless expressly
exempted.

Basic Rules of Income Tax

1. Liability to pay tax: Liability to pay income tax does not depend on nationality or domicile but on
residential status. The residential status of the assesse is determined with reference to the
previous year and not with reference to the assessment year.
2. Taxable income: Both capital receipts and revenue receipts constitute income, but only revenue
receipts are taxable under Income tax.
Only if the revenue receipts come under the five heads of income it is taxable. The five heads are
(a) Income from Salary
(b) Income from house property
(c) Capital Gains
(d) Business profits
(e) Income from other sources

3. Form of income: Income may be in cash or in kind. Both are liable to tax.

4. Income tainted with illegality (illegal income, black money) is also liable to tax.

5. Income may be in lump sum or periodical, and it may be either temporary receipt or permanent
receipt. eg: salary arrears is lump sum. All such income are liable to be taxed
6. The right to receive income incurs liability to pay income tax. If an assesse has earned income he
will be liable to pay tax though he may not have actually received the amount

7. Disputed title: Income will be taxable in the hands of the recipient even if his title to the income is in
dispute.

8. A person is taxed for what he earns and not what he saves

9. The nature of the receipt is fixed when it is received and thereafter the nature cannot be changed. If
the amount is not a revenue receipt when received, it is not taxable.

Who is an assesse?

Assesse is a person who is liable to any tax. It includes every person in respect of whom any
proceedings or act has taken place, in r/8espect of his own income or of any other income; or with
respect to refund due to him. It also includes persons in representative capacity.

The following persons are liable to pay income tax as per the IT Act 1961
• Individuals
• Hindu Undivided family (HUDGF)
• Companies and Firms
• Associations (whether incorporated or not)
• Local authorities
• Artificial Judicial Persons

What is assessment year (AY) and previous year (PY)

Previous year - Year in which income is earned
Assessment year - Year in which income is assessed, which is normally the next year after the income
is earned.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

Capital and Revenue

 Capital receipt Revenue (Income) Receipt
Amount received on account of circulating
Amount received as fixed capital for fixed assets floating assets. Circulating assets are assets
which circulate in the business:
Examples of fixed assets: Plant, machinery, land, eg: sale of finished products, compensation
amount received by company on issue of shares, received by employer for termination of
deposits received by bank from customers service

Whether any income is capital receipt or revenue receipt depends on the nature of the receipt ion the
hands of the recipient
Payment in lump sum or instalment is immaterial to determine whether it is capital or revenue receipt
The following have been decided as capital receipts, through various decided cases
1. Compensation received by one partner from another partner for relinquishing rights of partnership
2. Compensation received for suspension of expert license
3. Compensation of land acquisition, closure of business
4. Forfeited advance amount and EMD (Travancore Rubber & Tea Ltd v CIT, 2000)
5. Compensation of surrender of rights (such s vacating building before expiry of lease)

The following have been decided as revenue receipt, through various case laws
1. Compensation received by employee for employer for termination of service, or one month’s alary
in lieu of notice
Amount received under agreement for loss of future profits

Capital Expenditure v Revenue Expenditure

Capital Expenditure is an expenditure to

Increase the earning capacity of the business

free the person from capital liability is capital expenditure
Expenditures to maintain the fixed assets in good condition

Examples of capital expenditure as laid down in decided cases

• Expenditure on study tour abroad
• Expenditure to shift machinery on relocation of plant
• Examples of revenue expenditure as laid down in decided cases
• Cost of advertisements
• Amount spend to shift railway yard, to continue mining operations in leased land is revenue
expenditure (Bikaner Gypsum v CIT)
• Bringing foreign technicians as consultants

Revenue Expenditure is expenditure to free from revenue liability is revenue expenditure

Eg: Capital acquisition and installation such as purchase of machinery Eg: purchase of goods for
resale ||

Residential status of an Individual

The taxability of an individual in India depends upon his residential status in India for any particular
financial year.
For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)

Resident

A person who has never gone out of India is always a resident and ordinarily resident in India.
If a person has gone out of India, he/she is considered to be a resident in India if he/she satisfies
ATLEAST ONE of the following conditions-
(i) he is in India for a period of 182 days or more in the previous year
(ii) he is in India for a period of 60 days or more during the previous year and 365 days or more during
the four years immediately preceding the previous year.

The 60 days clause in (ii) is extended to 182 days in case of

an Indian citizen who leaves India for the purpose of employment outside India or
an Indian citizen who leaves India as a member of the crew of an Indian ship.
A person of Indian origin comes to a visit in India. A person is deemed to be of Indian origin if he, or
either of his parents or any of his grand parents, was born in undivided India.

Non Resident

If a person doesn’t satisfies any of the above two basic conditions then he is non-resident.

*Resident Ordinary Resident / Resident Not Ordinary Resident*

Residents are further classified into Ordinary Residents and Not Ordinary Residents
A resident individual is treated as Resident and ordinarily resident in India if
1. He/she satisfies condition of resident as stated above AND
2. Satisfies BOTH of the following conditions
(i) he has been resident in India in at least 2 out of 10 years immediately preceding the relevant year
(ii) he has been in India for a period of 730 days or more during 7 years immediately preceding the
relevant year.
Thus an resident and ordinary resident satisfies either one of the basic conditions and both of the
additional conditions
If an individual satisfied either one of the basic conditions but does not satisfy BOTH the additional
conditions, he is a Resident but NOT ORDINARY resident

Clarifications
1. Stay on board a ship within territorial waters of India is considered as residence in India
2. The stay need not be continuous
3. A total of 24 hours of stay spread over a number of days is counted as stay of one day
4. The place of stay is immaterial as long as it is within the territory of India
5. Residential status is determined for each previous year and a person can alternate from resident to
non-resident and back over the years.
Wallace & brothers v CIT (1948): The residential status considered is of the previous year, and not of
the assessment year

Residential Status of HUF

A HUF is considered as resident if control and management of affairs is wholly / partially in India. It is
considered as non-resident if the control and management is wholly outside India. Generally the seat
of the Kartha (whether the Kartha is a resident) is taken as the determining factor.
Resident HUF will be treated as Resident and Ordinary Resident if the Kartha satisfied the conditions
for Resident ordinary Resident.

Residential Status of Company

A company registered in India is always a resident

For companies registered outside India, the deciding factor is the place where the meeting of board of
directors are held.
If the meeting is held wholly in India during the previous year, it is a resident company
If the meeting is held wholly or partially outside India the company I a non-resident

The 2016-2017 Finance Act has amended this provision, and now instead of the meeting of board of
directors, “place of effective management” is taken into account. Place of Effective Management is
the location where key decisions regarding conduct of th business is made. It may be the same as the
place where board meetings are held, but not always so.
Tax Liability of Individuals
A resident will be charged to tax in India on his global income i.e. income earned in India as well as
income earned outside India.

For RNOR and Non-residents, the tax liability in India is restricted to the income earned in India. They
need not pay any tax in India on their foreign income.
In a case of double taxation of income where the same income is getting taxed in India as well as
abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India has entered
into with the other country in order to eliminate the possibility of paying taxes twice.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

COMPUTATION OF INCOME UNDER THE HEAD “SALARIES”

Salary income of an employee is to be computed in accordance with the provisions laid down in
sections 15, 16 and 17
Income which comes under the head Salaries (Sn 15)

Salary
All income due from any present or previous employer during the previous year and for which income
tax has not already been paid, (regardless of whether such income has actually been received or not)
is taxable under the head alary.

Conditions

• The essential condition for including income under the head salary is “employer-employee
relationship.” If such a relationship is not there, the income cannot be included in “salary” but will have
to be included in “income from other sources.”
• Salary paid to partner of a partnership firm comes under the head “profits and gains of business.”

What is included and what is excluded

Salary includes
1. Basic Salary, Bonus, Commission. Arrears of Salary, Advance salary, salary in lieu of notice period
2. Dearness Allowance, City Compensatory Allowance
3. Any allowance such as food allowance, servant allowance etc
4. Fixed Medical allowance
5. Remuneration for extra duties and overtime
6. Perquisites
7. Profits in lieu of salary
8. Leave encashment
9. Gratuity
10. Annuity from employer
11. Provident fund contribution by the employer which exceeds 12%
12. Voluntary retirement benefit above Rs 5 Lakhs
13. Retrenchment compensation above 5 Lakhs or amount in excess of calculation as per Sn 25 of ID
Act
14. Pension

Exemptions

From the gross salary, the income Tax act allows certain deductions. The Allowable deductions (Sn
16) are:
1. In 2019 budget, Standard Deduction of Rs. 50,000 for all salaried taxpayers. Tax exemptrion on
medical Allowance and Transport Allowances allowed earlier has been discontinued.
2. Tax on salary, such as profession tax
3. House rent allowance
4. Special allowance such as travelling allowance, transfer allowance, conveyance allowance, uniform
allowance
5. Entertainment allowance upto Rs 5000/- or 20 of salary or actual expenses, whichever is lesser (for
government employees only)
6. Voluntary retirement benefit upto 5 Lakhs
7. Retrenchment compensation upto Rs 5 Lakhs or amount calculated as per Sn 25F of ID Act
8. Foreign allowance (amount paid by Govt to a citizen for services rendered outside Insdia)
9. Sumptuary allowance given tyo judges of Supreme Court and High Court
10. Salary received from UNO
The net amount derived is income under the head salary.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

House Rent Allowance (HRA)

Salaried individuals receive house rent allowance (HRA) from their employer. An exemption against
HRA under Chapter 10 of Income Tax Act is possible if the employee is living in a rented
accommodation and pays rent to the owner.

Typically HRA is the amount paid by the employer for rental expenses incurred by the employee for
his accommodation. As per Section 10(13A) of the Income Tax Act, the employee can claim
exemption on the HRA received to the extent of whichever is least among the following:
1. Actual HRA received
2. Rent paid less 10% of basic salary (inclusive of DA)
3. 50% of the basic salary in case of metros (i.e. Delhi, Mumbai, Chennai and Kolkata) and 40% of the
basic salary in case of non-metro cities
Example, if an employee has a basic salary of Rs.1,00,000, DA of Rs. 20,000 and HRA received is Rs.
40,000 and rent paid is 40,000

Leave Travel Assistance - LTA tax exemption

Leave travel assistance (LTA) received from the employer towards cost of domestic travel to
hometown or for vacation once in two years by rail or by air for self and family members can be
claimed as exempt income.
This deduction can only be claimed by a person from the employer directly. LTA is allowed to claim
twice in the block of four years. The current block is 2014-2018. However, employees are now allowed
to carry one unclaimed LTA to next year as well

Perquisites

Perquisites (also known as fringe benefits) refer to any casual emolument or benefit attached to an
office or position, enjoyed by an employee in addition to alary or wages.

Sn 17(2) of IT Act defines perquisites and lists the following as coming under the head perquisites.
These fringe benefits or perquisites can be taxable or non-taxable depending upon their nature.

Taxable Perquisites:
Some of the perquisites that are taxable in nature include
• rent-free accommodation
• supply of gas, water and electricity
• reimbursement of medical expense
• salary of servant employed by employee.
• gifts exceeding Rs.5000
• value of club and gym facilities

Exempted Perquisites:
Non-taxable fringe benefits include
• travel allowance
• computer or laptop provided by the company for official use
• refreshment provided by employer during office hours
• provision of medical aid
• use of health club, sports club
• telephone lines
• interest free salary loan provided by employer to employees
• contribution to provident fund by employers

Perquisites taxable only by employees:

This type of perquisites include car owned by company but used by employee, education facility for
children, service of domestic servant etc.

Different Salary receipts Tax treatment

Basic salary Taxable.
Dearness allowance/pay Taxable.
Advance salary Taxable in the year of receipt.
Arrears of salary Taxable in the year of receipt, if not taxed on due basis earlier.
Leave encashment while in
Taxable
service
 Leave encashment at the time
Exempt in the hands of a Government employee In the case of a
of retirement or at the time of
non- Government employee’, it is exempt in some cases
leaving job.
Salary in lieu of notice Taxable
Not chargeable under the head “Salaries? but taxable under the
Salary to partner
head ‘Profits and gains of business or profession.
Fees and commission Taxable.
Bonus Taxable on receipt basis if not taxed earlier on due basis.
Exempt in the hands of a Government employee’. In the case of
Gratuity
a non- Government employee’, it is exempt in some cases
Monthly pension (i.e.,
Taxable
uncommuted pension)
Lump sum payment of pension Exempt in the hands of a Government employee’. In the case of
(i.e., commuted pension) a non- Government employee’, it is exempt in some cases
Pension under National
At the time of receipt of pension it is chargeable to tax.
Pension Scheme (NPS)
Annuity from employer Taxable as salary.
Annual accretion to the credit 1 Excess of employer’s contribution over 12% of salary is
balance in recognized taxable. 2. Excess of interest over notified interest is taxable
provident fund (notified rate of interest is 9.5 %).
Exempt from tax to the extent of least of the following: a.
Amount calculated” under section 25F(b) of the industrial
Retrenchment compensation
Disputes Act; or b. An amount specified by the Government (i.e,
Rs. 5,00,000).
Remuneration for extra duties Fully taxable.
Compensation received under
voluntary retirement scheme Exempt in some cases
(VRS)
Profits in lieu of salary Taxable
Salary from UNO Not chargeable to tax.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

COMPUTATION UNDER THE HEAD INCOME FROM HOUSE PROPERTY

'Income from House Property' is the income earned by the assesse from a property. Income from
House Property covers the rent earned from the House property which is chargeable to tax.
Sometimes, the owner may have to pay tax on 'deemed rent in case the property is not let out.
Income from House Property Becomes Taxable If the Following Conditions Are Met:
• The house property comprises of the building and/or any land attached to it
• The taxpayer is the owner of the property. Ownership includes freehold, leasehold rights and also
includes deemed ownership.
• The taxpayer is not using the house property to run any business or profession

Section 27 of the IT Act defines deemed ownership of the house property for the purpose of levying
tax as:
1. Transfer of ownership to a spouse or minor child
2. Holder of impartible estate. Impartible estate refers to the property which is not legally divisible
such as dividing a single storey house with say 3 rooms among 7 heirs.
3. Property held by member of a co-operative society
4. Any person who has acquired a property under Power of Attorney transaction.

Annual Value

Tax on income from house property is based on the annual value of the property.
Annual value is the actual rent received or to be received (deemed to be received) by the property
owner on renting out the house.

If the house that the assesse is staying in is the only property he or she owns, the annual value will be
nil. However, if the individual has multiple properties, all with the purpose of self-occupation, he or she
can only specify one of the property’s annual value as nil. The annual value of the remaining
properties will be assessed according to the expected rent if the property was let out.

The Annual Value of a property is determined after taking 4 factors into consideration. These are: (i)
Actual rent received or receivable (ii) Municipal Value (iii) Fair Rent (iv) Standard rent.

• Municipal value: This is the value on house property as calculated by the municipal authorities for
imposing municipal taxes.
• Fair rent: Fair rental value is the rent which a similar property with similar features in the same
locality would fetch.
• Standard rent: The standard rent is determined under the Rent Control Act. If the standard rent has
been fixed for any property under the Rent Control Act, the property owner cannot charge a rent higher
than the standard fixed rent.

Gross Annual Value

Gross Annual Value of a property is the value at which the property might reasonably be expected to
be let from year to year. It is the notional rent which one could have earned in case property had been
let out. Even if the property is not let out, the taxpayer is liable to pay rent based on the notional rent
or deemed rent.
Gross Annual Value (GAV) is the highest of
• Actual Rent received
• Fair value
• Municipal value
In case the Rent Control Act applies, Gross Annual Value will be the highest of:
• Standard Rent
• Rent Received

Net Annual value

Net Annual Value is calculated as gross annual value less municipal taxes paid.

Deductions
Deductions: To ascertain the actual taxable income, the taxpayer can claim the following deductions
under Section 24 of the Income Tax Act, 1961.
1. Standard Deduction: The assesse can claim 30% of the Net Annual Value as a deduction towards
rent collection, repairs etc., irrespective of what the actual expense incurred is. This deduction will not
be permitted in case the gross Annual Value is nil.
2. Interest on home loan: Deduction can be claimed for interest on home loan under Section 24 of the
Income Tax Act. The limit under this section is Rs 2 lakh. The loan can be for purchase or repairs, as
long as the purchase / repairs is completed within 3 years of availing the loan.

Calculation of Income from House Property:

1. Determine the gross annual value. This is the highest of
a. Actual gross rent received
b. Municipal value
c. Fair rent
2. Calculate the Net Annual Value (Gross Annual Value Less Municipal Taxes)
3. Deduct the allowable deductions (under Sn 24) from Net Annual Value
a. Standard Deduction @ 30%
b. Interest paid on Borrowed Loan (XXX)
The amount derived in income from house property.

Points To Be Considered While Computing Income From House Property

• Tax on the house is calculated on the property's annual Value

• The word “House property” is only indicative. Even properties let out commercially are included in
this head
• If the taxpayer’s house is vacant for a certain period of time and later let out, the computation of
Income from House Property should be done only for the rent received - not for the entire year.
• If the taxpayer’s house is vacant for the whole year and the individual is living in another city due to
his or her employment, but is still paying municipal taxes, then this can be set off against income
from other sources during the same year.
• If an individual owns multiple house properties, only one of these will be regarded as self-occupied.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

INCOME FROM HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION

“Profit and gains of business or profession” is the amount or profit and gain the taxpayer’s business
or profession has received during the previous year.
Business income is any income or compensation any person receives for managing the whole or
substantially the whole of the affairs of any business
Profession is the service a person provides services using their intellectual skills, knowledge, or even
manual skills. Eg: CA, Doctor, lawyer etc.

List of Incomes Chargeable to Profits and Gains of Business or Profession

The main conditions/ requirements for including income under Profits and Gains of Business or
Profession are (Sn 28)
• There should be a business or profession.
• The business or profession should have been carried on by the assessee.
• The business or profession should be carried on for sometime during the previous year.
• The charge is in respect of the profits and gains of the previous year of the business or profession.
• The charge extends to any business or profession carried on.

The following are the most common classifications of business / professional income
This includes
1. Income derived by any trade or profession
2. Any compensation or other payment received for managing or termination/modification of
agreement to manage a business
3. Any perquisite or benefit arising from business or profession, whether convertible into money or
not.
4. Any Interest income,Commission,Salary or bonus due or received by any partner from that
Company.
5. Income received from any speculative transaction.
6. Export incentives which include profits on sales of import licenses, cash assistance received
against export, duty drawbacks of Customs and Central Excise duties, profit on the transfer of the
Duty Entitlement Pass Book Scheme etc
7. Any profit received on sale of a license granted under the Imports (Control) Order, 1955, made
under the Imports and Exports (Control) Act, 1947
8. Any interest, salary, bonus, commission or remuneration due to or received by a Partner of a Firm
9. Any sum received or receivable in cash or in kind under an agreement for
o Not carrying out activity in relation to any business or profession.
o Not sharing any know-how, patent, copyright, trademark, license, franchise or any other business or
commercial right of similar nature
10. Sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on
such policy.
11. Sum received for any capital asset being demolished, destroyed, discarded or transferred

The following incomes must be classified under Profits and Gains of Business, even if a business was
not carried on by the assessee during the previous year.
• Recovery against any loss, expenditure or trading liability earlier allowed as a deduction.
• Balancing charge in case of electricity companies.
• Sale of capital asset used for scientific research.
• Recovery against bad debts.
• Amount withdrawn from Special Reserve.
• Receipt of discontinued business under cash system of accounting.

Profit and Loss Statements

Business Profit should be calculated through profit & Loss Account.

Maintaining the books of accounts as per the income tax act is mandatory if any of the below
condition are met in the three immediate preceding years:
a. Income is more the Rs. 1,20,000 (2.5 lakhs for indiviuals and HUF); or
b. Total sales, turnover or gross receipts are more than Rs. 10,00,000 (25 lakhs for individuals and
HUF)

The books of accounts shall be computed in accordance with the method of accounting regularly
followed by the assesses (Sn 145). The two recognized methods are Cash system and Mercantile
system of accounting.
• Cash system: all expenses & income are booked when they receive.
• Mercantile System” All Income & expenses are booked on accrual basis.
All genuine business expenses can be deducted from the gross income from business or profession.
Depreciation is also allowed as per the rules.
Deductions not Admissible:
1. Losses due to illegal trade practices, including fines and penalties.
2. Expenses not related to the business.
3. Rent paid to self
4. Payments made to the partner (in terms of salary, commission or any other way.
5. Expenses for any period other than previous year
6. Expenses or loss related to Capital Assets
7. Loss on sale of shares and other speculative losses.
8. Future Anticipated Losses (provisions for bad debt / depreciation)
9. Advance paid for commencement of new business which is not established
10. Duty and local taxes
11. All Charities & Donations
12. Loss by theft
13. Interest on income tax, TDS etc
14. Rent for residential house of assessee

Presumptive taxation

Sn 44AD of the income tax act allows presumptive taxation for any business with a turnover of less
than Rs 2 crore. Such business can be assessed at profits of 8% for non-digital transactions or 6% for
digital transactions. Such businesses do not have to maintain books of account.

The following businesses are excluded from presumptive taxation:

a. Life insurance agents
b. Commission of any kind
c. Running the business of plying, hiring or leasing goods carriages

Professionals having gross revenue upto Rs 50 lakhs can opt for the presumptive scheme of tax. The
professional can straightaway offer 50% of the gross revenue as his taxable income and pay taxes as
per his slab rates on such income, without maintaining books of account.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

INCOME UNDER THE HEAD CAPITAL GAINS

Any profit or gain arising from transfer of capital asset held as investments are chargeable to tax
under the head capital gains. The gain can be on account of short- and long-term gains.
A capital gain arises only when a capital asset is transferred. Profits or gains arising in the previous
year in which the transfer took place shall be considered as income of the previous year and
chargeable to income tax under the head Capital Gains
If the asset transferred is not a capital asset; it will not be covered under the head capital gains.

Capital Asset is any property held by the income tax assesse such as gold, apartments, land, share,
mutual fund etc. However, the following items/categories are excluded from being capital assets
• Jewellery, drawings and paintings
• Any item held for a person's business or profession (stock, ready goods, raw material) will be taxed
under the head profits and gains of business or profession
• Agricultural land (Land which is not urban and is outside of 8 kilometres of a municipality, where
population is less than 10,000 qualifies to be agricultural land)

Short-term capital asset: asset that is held for not more than 36 months immediately preceding the
date of its transfer
For equity mutual funds and preference shares, the term is 12 months and not 36 months. (Debt
mutual fund is 36 months)
In case of real estate, the term is 24 months and not 12 or 36 months

Long term capital asset: Asset held for more than 36 months, 24 months, or 12 months as the case
may be.

Capital gains is taxed subject to the following conditions:

1. The assessee must have owned a capital asset
2. The assessee must have transferred the capital asset in the previous year.
3. There must have been profit or gains as a result of such transfer

Computing capital gains

Capital gains are taxed as either long term capital gains or short term capital gains.

Short-term capital gain: capital gain arising on transfer of short term capital asset. The amount is
included with assesses taxable income and taxed according to the normal slab rates.

Long-term capital gain: capital gain arising on transfer of long term capital asset. In case of long term
capital gains, the tax liability is the lower of the amount arrived at by the two:
• 20 per cent tax liability arrived at by indexation method
• 10 per cent tax liability arrived at by without using indexation method

Concept of Indexation (applicable for Long Term Capital gains)

The value of a rupee today is not same as will be its value tomorrow because of inflation. Likewise to
be fair when paying capital gain tax, the effect of inflation on the purchase is included. For instance if
you bought a flat in January 2002 for Rs 20 lakh and sold it in January 2017 for Rs 60 lakh; you don't
pay tax on the Rs 40 lakh gain. The tax authorities allow the concept of indexation so that you can
show a higher purchase cost, lowering the overall profit and reducing the tax you pay on the gain.
Using the inflation index, one needs to increase the purchase price of the asset to reflect inflation-
adjusted true price in the year of sale.

Indexed cost of acquisition = (Cost Inflation Index (CII) for year in which asset is transferred or sold)
divided by CII for year in which asset was acquired or bought). So in the above example, the year in
which asset is transferred or sold is 2016-17 and the Cost Inflation Index (CII) for 2011 = 264. The
year in which asset is acquired or bought is 2001-2002 and the Cost Inflation Index (CII) for 2001-02 =
100. So the Cost Inflation Index (CII) = 264/100 = 2.64

The CII is then multiplied with the purchase price to arrive at the indexed cost of acquisition which is
the actual or true cost at the time of tax computation or calculation. The indexed cost of acquisition =
Rs 20,00,000 x 2.64 = Rs 52,80,000 Hence, long term capital gain = full value of sale - indexed cost of
acquisition = Rs 60,00,000 - Rs 52,80,000 = Rs 7,20,000

In the example above, using indexation, the tax liability comes to (20/100) x 7,20,000 = Rs 1,44,000. If
you were to not use indexation: Capital gains = Sale price of asset - Cost of acquisition = 60,00,000 -
20,00,000 = Rs 40,00,000. Capital gains tax on this at 10 per cent = (10/100) x 40,00,000 = Rs
4,00,000. This is the advantage of using indexation as you benefit in saving taxes.
As per Section 10(38) of Income Tax Act, 1961 long-term capital gains on shares or securities or
mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is
payable. Higher capital gains taxes will apply only on those transactions where STT is not paid.
As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented
fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at
@ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one
financial year without the benefit of indexation.

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration
Step 2: Deduct the following:
o Expenditure incurred wholly and exclusively in connection with such transfer
o Cost of acquisition
o Cost of improvement
Step 3: This amount is a short-term capital gain
Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer
Less cost of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration
Step 2: Deduct the following:
o Expenditure incurred wholly and exclusively in connection with such transfer
o Indexed cost of acquisition
o Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and
54B

**Long-term capital gain= Full value consideration **

Less : Expenses incurred exclusively for such transfer
Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Less:expenses that can be deducted from full value for consideration*

Capital Gains Tax Rates

Tax Type Condition Tax applicable

Long-term Except on sale of equity
capital gains shares/ units of equity 20% (with indexation)
tax oriented fund
Long-term
On sale of Equity shares/
capital gains 10% over and above Rs 1 lakh
units of equity oriented fund
tax
Short-term The short-term capital gain is added to the
When securities transaction
capital gains income tax return and the taxpayer is taxed
tax is not applicable
tax according to his income tax slab.
Short-term
When securities transaction
capital gains 15%.
tax is applicable
tax
 Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

INCOME FROM OTHER SOURCES

Income from Other Sources covers income that does not fall under any of the other heads of income.

These include
• Interest income from. Savings Bank Account
• Interest from fixed deposit and recurring deposits
• Family pension
• Taxation of Winnings from Lottery, Game Shows, Puzzles – tax is flat rate of 30% and not according
to slab
• Dividends
• Income from letting out plant, amchienry, furniture
• Income from royalty
• Ground rent
• Agricultural income from outside India
• Insurance commissions
• Salaries an allowances of MP and MLAs

Deductions / Exemptions
• Deduction on Interest Income: Under Section 80TTA: For a residential individual (age of 60 years or
less) or HUF, interest earned upto Rs 10,000 in a financial year is exempt from tax. The deduction is
allowed on interest income earned from savings account with a bank; savings account with a co-
operative society carrying on the business of banking; post office
• Senior citizens are not entitled to benefits under section 80TTA. Senior citizens rather enjoy an
income tax exemption upto Rs 50,000 on the interest income they receive from fixed deposits with
banks, post offices etc under Section 80TTB.
• The PPF and EPF amount withdrawe after maturity is exempt from tax and must be declared as
exempt income from income from other sources.
• Family pension upto Rs 15,000 or one-third of the family pension received (whichever is lower) is
deductible
• The tax-saving FDs come with a lock-in of 5 years. The amount you invest can also be claimed as
deduction under Section 80C subject to a maximum limit of Rs.1,50,000. But like a regular FD, the
interest is fully taxable.

SET OFF, CARRY FORWARD AND SET OFF

Set off of losses means adjusting the losses against the profit/income of that particular year. Losses
that are not set off against income in the same year, can be carried forward to the subsequent years
for set off against income of those years. A set-off could be :
a. An intra-head set-off
b. An inter-head set-off

Intra-head Set Off

The losses from one source of income can be set off against income from another source under the
same head of income.
For eg: Loss from Business A can be set off against profit from Business B where Business A is one
source and Business B is another source and the common head of income is “Business”.

Exceptions to an intra-head set off:

1. Losses from a Speculative business will only be set off against the profit of the speculative
business. One cannot adjust the losses of speculative business with the income from any other
business or profession.
2. Loss from an activity of owning and maintaining race-horses will be set off only against the profit
from an activity of owning and maintaining race-horses.
3. Long-term capital loss will only be adjusted towards long-term capital gains. Interestingly, a short-
term capital loss can be set off against long-term capital gain or short-term capital gain.
4. Losses from a specified business will be set off only against profit of specified businesses. But the
losses from any other businesses or profession can be set off against profits from the specified
businesses.

Inter-head Set Off

After the intra-head adjustments, the taxpayers can set off remaining losses against income from
other heads.
Eg. Loss from house property can be set off against salary income
Given below are few more such instances of an inter-head set off of losses:
1. Loss from House property can be set off against income under any head
2. Business loss other than speculative business can be set off against any head of income except
income from salary.

One needs to also note that the following losses can’t be set off against any other head of income:
a. Speculative Business loss
b. Specified business loss
c. Capital Losses
d. Losses from an activity of owning and maintaining race-horses

Carry forward of losses

After making the appropriate and permissible intra-head and inter-head adjustments, there could still
be unadjusted losses. These unadjusted losses can be carried forward to future years for
adjustments against income of these years.

Losses from House Property :

• Can be carry forward up to next 8 assessment years from the assessment year in which the loss
was incurred
• Can be adjusted only against Income from house property
• Can be carried forward even if the return of income for the loss year is belatedly filed.

Losses from Non-speculative Business (regular business) loss :

• Can be carry forward up to next 8 assessment years from the assessment year in which the loss
was incurred
• Can be adjusted only against Income from business or profession
• Not necessary to continue the business at the time of set off in future years
• Cannot be carried forward if the return is not filed within the original due date.

Speculative Business Loss :

• Can be carry forward up to next 4 assessment years from the assessment year in which the loss
was incurred
• Can be adjusted only against Income from speculative business
• Cannot be carried forward if the return is not filed within the original due date.
• Not necessary to continue the business at the time of set off in future years

Specified Business Loss under 35AD :

• No time limit to carry forward the losses from the specified business under 35AD
• Not necessary to continue the business at the time of set off in future years
• Cannot be carried forward if the return is not filed within the original due date
• Can be adjusted only against Income from specified business under 35AD

Capital Losses :
• Can be carry forward up to next 8 assessment years from the assessment year in which the loss
was incurred
• Long-term capital losses can be adjusted only against long-term capital gains.
• Short-term capital losses can be set off against long-term capital gains as well as short-term capital
gains
• Cannot be carried forward if the return is not filed within the original due date

Losses from owning and maintaining race-horses :

• Can be carry forward up to next 4 assessment years from the assessment year in which the loss
was incurred
• Cannot be carried forward if the return is not filed within the original due date
• Can only be set off against income from owning and maintaining race-horses only

Points to note:
1. A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax, cannot
set off these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries,
races, card games, betting etc.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

CLUBBING OF INCOME

Clubbing of income means Income of other person included in assessee’s total income, for example:
Income of husband which is shown to be the income of his wife is clubbed in the income of Husband
and is taxable in the hands of the husband. Under the Income Tax Act a person has to pay taxes on
his income.

A person cannot transfer his income or an asset which is his one of source of his income to some
other person or in other words we can say that a person cannot divert his income to any other person
and says that it is not his income. If he do so the income shown to be earned by any other person is
included in the assessee’s total income and the assessee has to pay tax on it.

Transfer of Income without transfer of

Sn 60 Transferor who transfers the income
Assets
Sn 61 Revocable transfer of assets. Transfer held Transferor who transfers the Assets.
as revocable - 1. If there is provision to re-
transfer directly or indirectly whole/part of
 income/asset to transferor; 2. If there is a
right to reassume power, directly or
indirectly, the transfer is held revocable and
actual exercise is not necessary
Salary, Commission, Fees or remuneration
paid to spouse from a concern in which an
individual has a substantial interest.
Clubbing not applicable if: Spouse
The relationship of husband and wife
Sn 64 possesses technical or professional
must subsist at the time of accrual of
(1) (ii) qualification and remuneration is solely
the income.
attributable to application of that
knowledge/ qualification Spouse whose
total income (excluding income to be
clubbed) is greater
Parent / person who maintains the
Income of a minor child. Clubbing not
minor child. Income out of property
applicable for:— 1. Income of a minor child
transferred for no consideration to a
suffering any disability specified u/s. 80U. 2.
Sn 64 minor married daughter, shall not be
Income on account of manual work done by
(1A) clubbed in the parents’ hands. The
the minor child. 3. Income on account of any
parent in whose hands the minor’s
activity involving application of skills, talent
income is clubbed is entitled to an
or specialized knowledge and experience.
exemption up to Rs. 1,500 per child.
Section Transfer of assets by an individual to a
- The transfer should be without
64(1) person for immediate or deferred benefit
adequate consideration.
(vii),(viii) Individual transferring the Asset
Income is included in the hands of
individual & not in the hands of HUF.
Clubbing applicable even if: The
Income of HUF from property converted by converted property is subsequently
Sn 64(2)
the individual into HUF property. partitioned; income derived by the
spouse from such converted property
will be taxable in the hands of
individual.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

PERMISSIBLE DEDUCTIONS FROM GROSS INCOME

Tax deduction is a reduction in tax obligation from gross taxable income.

Type of investment,
Section Permissible limit Eligible claimants
expense or income
PPF, EPF, Bank FD's,
Maximum Rs. 1,50,000 (aggregate of 80C,
80C NSC, LIC premium, Individuals, HUFs
80CCC and 80CCD)
tuition fees
 Maximum Rs. 1,50,000 (aggregate of 80C,
80CCC Pension funds Individuals
80CCC and 80CCD)
Pension fund
Maximum Rs. 1,50,000 (aggregate of 80C,
80CCD initiated by central Individuals
80CCC and 80CCD)
government
Interest on bank Individuals and
80TTA Up to Rs. 10,000 per year
savings account HUFs
50% of amount invested subject Equity saving
80CCG Individuals
maximum of Rs. 25,000 schemes
Long term Individuals and
80CCF Up to Rs. 20, 000
infrastructure bonds HUFs
For individual taxpayers- Premium up to
Rs. 25,000 in case of individuals and up to
Medical insurance
Rs. 30,000 for senior citizens. For HUFs- Individuals and
80D premium and Health
Premium up to Rs. 25,000 and up to Rs. HUFs
check up
30,000 in case the member insured is a
senior citizen or super senior citizen
Interest on
80E No limit defined repayment of Individuals
Education loan
Interest on loan
payable for
80EE Maximum Rs. 50,000 acquiring a Individuals
residential house
property
General donations
Individuals, HUF's,
80G Differs with the amount of donation of any recognized
Companies, Firms
society
Donations to Those who do not
Scientific Research have income from
80GGA Depends on quantum of donation
or Rural business or
development profession
Donations to
80GGB Depends on quantum of donation Indian companies
political parties
Rs. 5000 per month or 25% of total Rent paid if HRA is Individuals not
80GG
income whichever is less not received receiving HRA

Special Exemptions for Senior Citizens

• Tax deduction under Section 80 D for Health Insurance expenditure has been increased to Rs.
50,000 from Rs. 30,000 earlier.
• Expense of up to Rs. 1 lakh incurred on critical illness has been exempted from tax under Section 80
DDB. Earlier the exemption was Rs. 60,000 for senior citizens and Rs. 80,000 for very senior citizens.
• Tax exempted interest income on deposits with banks has been increased from Rs. 10,000 to Rs.
50,000. Further, TDS will not be required to be deducted under section 194A and it has been extended
to all FD and RD schemes.
 Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

INCOME TAX RATES for FY 2018-19

For individual tax payers below 60 years and HUF

Income Tax Slabs Tax Rate Health and Education Cess
Up to 2,50,000 for men or Rs 3,00,000/- for women Nil Nil
2,50,001 / 3,00,000/- to 5,00,000 5% of total income exceeding 2,50,000 4%
5,00,001 to ₹10,00,000 12,500 + 20% of total income exceeding 5,00,000 4%
Above 10,00,000 1,12,500 + 30% of total income exceeding 10,00,000 4%

for Senior Citizens (60 Years Old Or More but Less than 80 Years Old) for FY 2018-19
Income Tax Slabs Tax Rate Health and Education Cess
Income up to Rs 3,00,000* No tax
Income from Rs 3,00,000 – Rs 5,00,000 5% 4% of Income Tax
Income from Rs 5,00,000 – 10,00,000 20% 4% of Income Tax
Income more than Rs 10,00,000 30% 4% of Income Tax

Income Tax Slabs for Super Senior Citizens(80 Years Old Or More) for FY 2018-19 – Part III
Income Tax Slabs Tax Rate Health and Education Cess
Income up to Rs 5,00,000* No tax
Income from Rs 5,00,000 – 10,00,000 20% 4% of Income Tax
Income more than Rs 10,00,000 30% 4% of Income Tax

Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1 crore.
Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.

Income Tax Slabs for Domestic Companies for FY 2018-19 – Part IV

Turnover Particulars Tax Rate
Gross turnover upto 250 Cr. in the previous year 25%
Gross turnover exceeding 250 Cr. in the previous year 30%
In addition cess and surcharge is levied as follows: Cess: 4% of corporate tax
Surcharge: Taxable income is more than 1Cr. but less than 10Cr.: 7%
Taxable income is more than 10Cr. :12%

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

INCOME TAX AUTHORITIES

The Income Tax Act, 1961 provides for the administrative and judicial authorities for administration of
this Act. The implementation of the Act lies in the hands of these authorities.
The Direct Tax Laws Act, 1987 has brought far-reaching changes in the organizational structure.

1. The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of
1963),
2. Directors-General of Income-tax or Chief Commissioners of Income-tax,
3. Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax
(Appeals),
4. Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional
Commissioners of Income-tax (Appeals),
5. Joint Directors of Income-tax or Joint Commissioners of Income-tax.
6. Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners
of Income-tax (Appeals),
7. Assistant Directors of Income-tax or Assistant Commissioners of Income-tax (Assessing Officer)
8. Income-tax Officers
9. Tax Recovery Officers
10. Inspectors of Income-tax

The central government has the power to appoint authorities upto and above rank of an Assistant
Commissioner of Income-Tax [ Sec. 117 (1) ]
the Central Government may authorize the Board, or a Director-General, a Chief Commissioner or a
Director or a Commissioner to appoint income-tax authorities below the rank of an Assistant
Commissioner or Deputy Commissioner. [ Sec. 117 (2) ]
An income-tax authority authorized in this behalf by the Board may appoint such executive or
ministerial staff as may be necessary to assist it in the execution of its functions.

Central Board of Direct Taxes (CBDT)

The Central Board of Direct Taxes is the supreme body in the direct tax set-up. It has to preform
several statutory functions under the various acts and it is responsible for the formulation and
implementation of different policies relating to direct taxes administration. The Board consists of a
Chairman and six members.
The board
• Makes rules for carrying out the purposes of IT Act
• Issues orders, instructions and circulators clarifying various provisions and regarding administrative
s-up
• The board has the powers to
• Declare any organization as a company
• Entertain objection with regards to search and seizure
• Direct income from property held under trust to form or not form part of total income of recipient

However, the Board cannot issue instructions to Commissioner of Income Tax or any Income Tax
officer to dispose a case in any particular manner.

Director General of Income Tax and Chief Commissioner of Income tax

These officers can
• Give instructions to income tax officers
• Give directions to search and seizure
• Conduct surveys or inquiry
• Request for books of account

Chief Commissioner of Income tax

He is responsible for
• Registration of charitable trusts and institutions
• Conducting search anmd seizure
• Direct income tax authorities to appear before appellate tribunals
Commissioner / Additional Commissioner of Income tax (Appals)
• Power to hear appeals made by the assess against orders passed by assessing officer
• Power to call for information
• Power to take evidence
• Power to impose penalty

Assessing Officer [ Sec. 2(7A)]

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant

Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by Sn
120 (1) or (2).
The assessing officer is the primary authority who initiates the proceedings for non-filing of return and
imposition of penalties. He has the power to pass orders on this regards. Only the Commissioner of
Income Tax department can revise his orders and only if it is proved that there are prejudicial to the
revenue

General Powers
1) Power relating to Discovery, Production of evidence, etc: The Assessing Officer, The Joint
Commissioner, The Chief Commissioner or the Commissioner has the powers as are provided in a
court under the code of Civil Procedure, 1908, when trying to suit for the following matters:
(a) discovery and inspection;
(b) to enforce any person for attendance, and examining him on oath;
(c) issuing commissions; and
(d) compelling the production of books of account and other document.

2) Power of Search and Seizure, to catch black money and prevent tax evasion:
3) Requisition of Books of account, etc:
4) Power to Call for Information: The Commissioner, The Assessing Officer or the Joint Commissioner
may for the purpose of this Act can call any firm / HUF / trusts to provide him with a return of the
addresses and names of partners / members of the firm / family and their shares. They can also call
upon stock brokers to furnish information about clients and transactions.

5) Power of Survey, to
discover new assesses;
collect useful information for the purpose of assessment;
verify that the assesse who claims not to maintain any books of accounts is in-fact maintaining the
books;
check whether the books are maintained, reflect the correct state of affairs.

Collection of Information useful for any purpose

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

SEARCH AND SEIZURE (INCOME TAX RAIDS) – Sn 132

Search and Seizure was included in the income Tax act in 1956, and the provisions were overhauled in
1964 and 1976 based on the recommendations of had made certain recommendations of the Raja
Chellaiah Committee and the Kelkar Committee.
The main objective of search and seizure is to confiscate black money, or funds earned illegally on
which income and other taxes have not been paid.
A raid gets triggered under any of the following circumstances:
• Credible information of tax evasion; for instance, any evasion coming out of reports received from
the Intelligence Wing of the Income tax department
• Information coming from government departments
• Information procured from assessment records of taxpayers
• Information received with regard to spending being disproportionate to income of the taxpayer i.e.
an instance of lavish spending without corresponding income to match the same
• Manipulation of books of accounts, vouchers, invoices etc.
• Illegal investment in real estate
• Unexplained cash credits, share transactions etc.

According to Section 132(1) of the Income Tax Act, the

• Principal Director General or Director-General or
• Principal Director or Director or
• Principal Chief Commissioner or Chief Commissioner or
• Principal Commissioner or Commissioner
Who has reasons to believe a taxpayer has failed to comply with any summons or notices sent to him
by the Department or has in his possession money that is wholly or partly income or property which
has not been disclosed.
may authorize an
• Additional Director or
• Additional Commissioner or
• Joint Director or
• Joint Commissioner or
• Assistant Director or
• Deputy Director or
• Assistant Commissioner or
• Deputy Commissioner or
• Income-tax Officer
to conduct a tax raid.

It has been held by various courts that the taxpayer being searched does not have the right to get
access to information based on which the search has been initiated by the department considering
that this would hamper the department’s investigation process.

Powers of tax authorities during a raid

1. The officer authorized to carry out the raid can:
2. Enter and search any building, place, etc. where he has a reason to suspect that the books of
account, other documents, money, bullion, jewellery or other valuable article or thing representing
undisclosed income is kept
3. Break open the locks, where the keys are unavailable
4. Carry out personal search of a person who is suspected to have secreted some item
5. Seize the items
6. Place marks of identification and take extracts or copies of the books of account and other
documents
7. Make a note or inventory of the valuables found during the search

Assets that can be seized

• The authorized officials can seize the following types of assets:
• Undeclared cash, jewellery
• Books of accounts, challan, diaries, etc.
• Computer chips and other data storage devices
• Documents relating to property, deed of conveyances, etc.
Assets that cannot be seized
The authorized officials cannot seize the following types of assets:
• Stock-in-trade (except cash) of a business
• Assets or cash which are disclosed before the Income Tax and Wealth Tax Department
• Assets declared in books of account
• Cash which are duly explained
• Jewellery provided in wealth tax return
• Gold up to 500 gm for each married lady and 250 gm for each unmarried woman and 100gm per
male member

Rights of a person during a tax raid

• To insist on personal search of ladies being taken only by a lady, with strict regard to decency
• To have at least two respectable and independent residents of the locality as witnesses
• A lady occupying an apartment being searched has a right to withdraw before the search party
enters, if, according to custom, she does not appear in public
• To call a medical practitioner in case of emergency
• To allow the children to go to school, after checking their bags
• To have the facility of having meals, etc. at the normal time
• To inspect the seals placed on various receptacles, sealed in course of search and subsequently at
the time of reopening of the seals
• To have a copy of the panchanama together with all the annexures
• To have a copy of any statement that is used against him by the Department
• To have inspection of the seized books of account, etc., or to take extracts therefrom in the presence
of any of the authorised officers or any other person empowered by him

Rights of a person after a tax raid

1. The person from whose custody any books of account or other documents are seized may make
copies thereof or take extracts therefrom in the presence of any of the authorized officers or any other
person empowered by him. An aggrieved person can file a writ petition before the High Court
challenging the raid, if he feels that the action of the department was unfair. He can also challenge
the assessment and file an appeal before the Commissioner of Income Tax (Appeal).

2. Duties of a person during a raid

3. To allow free and unhindered ingress into the premises

4. To identify all receptacles in which assets or books of account and documents are kept and to
hand over keys to such receptacles to the authorised officer

5. To identify and explain the ownership of the assets, books of account and documents found in the
premises

6. To identify every individual in the premises and to explain their relationship to the person being
searched. He should not mislead by impersonation. If he cheats by pretending to be some other
person or knowingly substitutes one person for another, it is an offence punishable under section 416
of the Indian Penal Code.

7. Not to allow or encourage the entry of any unauthorised person into the premises.
8. Not to remove any article from its place without notice or knowledge of the authorised officer. If he
destroys any document with the intention of preventing the same from being produced or used as
evidence before the court or public servant, he shall be punishable with imprisonment or fine or both,
in accordance with section 204 of the Indian Penal Code.

9. To answer all queries truthfully and to the best of his knowledge. He should not allow any third
party to either interfere or prompt, while his statement is being recorded by the authorised officer. viii.
Being legally bound by an oath or affirmation to state the truth. If he makes a false statement, he shall
be punishable with imprisonment or fine or both under section 181 of the Indian Penal Code.

10. Similarly, if he provides evidence which is false and which he knows or believes to be false, he is
liable to be punished under section 191 of the Indian Penal Code.

11. To affix his signature on the recorded statement, inventories and the panchanama.

12. To ensure that peace is maintained throughout the search process, and to cooperate with the
search party in all respects so that the search action is concluded at the earliest and in a peaceful
manner.

13. Similar co-operation should be extended even after the search action is over, so as to enable the
authorised officer to complete necessary follow-up investigations at the earliest.

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)

AGRICULTURAL INCOME
What is Agricultural Income?
In India, agricultural income refers to income earned or revenue derived from sources that include
farming land, buildings on or identified with an agricultural land and commercial produce from a
horticultural land.
Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961. Here 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 operations including processing of agricultural
produce so as to render it fit for the market or sale of such produce.
(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in
this regard in section 2(1A).
(d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be
agricultural income.

The essential conditions for qualifying any income as agricultural income is

1. Income musty be derived from the land
2. Land should be situated in India
3. Land must be used for agricultural purposes

CIT v Raja Benoy (1975): SC laid down two essential conditions for treating income as agricultural
income
1. Basic operations such as tilling, watering, sowing seeds, planting is essential prior to germination
of seeds
2. Subsequent operations such as weeding, pruning, cutting and harvesting, and rendering produce fit
for market alone will not constitute agriculture.

CIT v JK Chaudhry (157): SC held that products that grow wild on land, or which grow spontaneously
without expenditure of human skill or energy are not agricultural products and income from such
products are not agricultural income.

Chelliath Pillai v CIT (1948): When agricultural land is let out or leased, the rent received by the
landlord is treated as ag5riucltural income,

Bacha Guzdar v CIT (1955): Dividend received by member of a company engaged in agricultural
operations is not agricultural income in the hands of the member.

CIT v Raja Bahadur Kahmkaya Nairain Singh (1948): Interest on arrears of rent payable ion respect of
land used for agricultural purpose is not agricultural income.

Examples of Agricultural Income

The following are some of the examples of agricultural income:
• Income derived from sale of replanted trees.
• Income from sale of seeds.
• Rent received for agricultural land.
• Income from growing flowers and creepers.
• Profits received from a partner from a firm engaged in agricultural produce or activities.
• Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

Examples of Non-Agricultural Income

The following are some of the examples of non-agricultural income:
• Income from poultry farming.
• Income from bee hiving.
• Any dividend that an organization pays from its agriculture income.
• Income from the sale of spontaneously grown trees.
• Income from dairy farming.
• Income from salt produced after the land has flooded with sea water.
• Purchase of standing crop.
• Royalty income from mines.
• Income from butter and cheese making.
• Receipts from TV serial shooting in farm house.

Is Agricultural Income Taxable?

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The
central government cannot levy tax on the agricultural income received. However, agricultural income
is considered for rate purposes while assessing the income tax liability if the following two conditions
are met:
• Net agricultural income is greater than Rs. 5,000/- for previous year.
• Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs. 2,50,000
for individuals below 60 years of age and Rs. 3,00,000 for individuals above 60 years of age).
If these two conditions are met, tax liability shall be computed in the following manner:
Step 1: Let us regard agricultural income as X and other income as Y Tax computed on X+Y is B1
Step 2: Let us regard basic exemption slab for income tax payment as A Tax computed on A+X is B2
Step 3: The actual income tax liability shall be B1-B2
Note: If the individual’s aggregate agricultural income is up to Rs. 5,000, the individual will have to
disclose the agricultural income in the income tax return (ITR). In case the agricultural income
crosses Rs. 5,000, the individual will have to disclose the agricultural income in ITR 2.

Section 54B of the Income Tax Act, 1961

Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their agricultural land
and use the sale proceeds to acquire another agricultural land. To claim tax benefit under Section 54B
of the Income Tax Act, the following conditions will have to be satisfied:
• This benefit can only be claimed by an individual or a HUF
• The agricultural land should be used by the individual or his or her parents for agricultural purpose
for at least two years immediately preceding the date on which the exchange of land occurred. In
case of HUF, the land should be used by any member of HUF.
• The taxpayer should purchase another agricultural land within two years from the date of selling the
old land. In case it is an incident of compulsory acquisition, the period of acquiring new agricultural
land will be assessed from the date of receipt of compensation. It must be noted that under Section
10(37), capital gain shall not be chargeable to tax if agricultural land is compulsorily acquired under
any law

Taxation Notes: A project of EXCELLENCY CLUB, SFI & STUDENTS UNION 2018-19, GOVT LAW
COLLEGE, EKM(KOCHI)
page revision: 13, last edited: 16 Sep 2019, 00:49 (1858 days ago)

Unless stated otherwise Content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License