ANANGPURIA LAW SCHOOL

Lecture Notes

On

PRINCIPLES OF TAXATION LAW

UNIT-II

Subject Code No.: 1761

B.A. LL.B.(Hons.) 5 Year Course

7TH Semester

Session: 2024-25
 UNIT-II
Income of other persons included in Assesssee’s Total Income
1. Transfer of income where there is no transfer of assets: Section 60.
2. Revocable transfer of assets: Section 61.
3. Transfer irrevocable for a specified period: Section 62.
4. Transfer and Revocable Transfer defined: Section 63.
5. Income of individual to include income of spouse, minor child: Section 64.
6. Liability of person in respect of income included in the income of another person: Section
65.
Transfer of income where there is no transfer of assets [Section 60]
Where there is a transfer of an income by a person to another person, without the transfer of
the asset from which the income arises, such income shall be included in the total income of
the transferor, whether such transfer is revocable or not and whether this transfer is effected
before or after the commencement of the Income-tax Act, 1961.
For example:
X who owns a house which fetches a rent of Rs.10,000 per month, declares that henceforth
the rent shall belong to his friend Y but the house shall remain the property of X.
In this case, because there is only a transfer of income without the transfer of the asset, the
rental income shall be included in the income of X for purposes of computing his total
income.
Revocable transfer of assets [Section 61]
Where there is a revocable transfer of an asset by a person to another person, any income
arising/ derived from such assets shall be included in the total income of the transferor.
Section 61 not applicable, if the transfers are irrevocable for a specified period [Section 62]:
As per section 62(1), the provisions of revocable transfer, discussed in section 61, shall not
apply in certain circumstances. Such circumstances are—
1. in the case of transfer by way of trust, the transfer is not revocable during the life time
of the beneficiary;
2. in the case of any other transfer, the transfer is not revocable during the life time of
the transferee;
3. in case the transfer is made before 1.4.1961, the transfer is not revocable for a period
exceeding 6 years.
 4. The above exceptions are applicable provided the transferor derives no direct or
indirect benefit from such income.
5. In the above cases, the income shall be taxable in the hands of the transferee.
When a transfer is revocable [Section 63]:
As per section 63, a transfer for the purpose of sections 60, 61 and 62 shall be deemed to be
revocable if:
1. it contains any provision for the re-transfer, directly or indirectly of the whole or any
part of the income or assets to the transferor, during the life time of the beneficiary or
the transferee as the case may be, or
2. it gives the transferor a right to re-assume power directly or indirectly over the whole
or any part of the income or assets during the life time of the beneficiary or the
transferee as the case may be.
Income of an individual to include income of spouse, minor child, etc. [Section 64]
A- Remuneration of spouse from a concern in which the other spouse has substantial interest
[Section 64(1)(ii)]:
1. In computing the total income of an individual, there shall be included all such sums
as arise directly or indirectly to the spouse, of such individual by way of salary,
commission, fees or any other form of remuneration, whether in cash or in kind from
a concern in which such individual has a substantial interest.
2. Therefore, any remuneration derived by a spouse from a concern in which the other
spouse has a substantial interest, shall be clubbed in the hands of the spouse who has a
substantial interest in that concern.
3. Any other income, not specified above, is outside the scope of this section and will
not the clubbed even if it accrues to the spouse from a concern in which the individual
has a substantial interest.
4. Where both husband and wife have substantial interest and both are getting
remuneration from the concern:
5. If the husband and wife both have substantial interest in the concern and both are in
receipt of remuneration from the concern, then the remuneration of both shall be
clubbed in the hands of that spouse whose total income, before including such
remuneration, is greater.
Income from assets transferred to the spouse [Section 64(1)(iv)]:
In computing the total income of an individual, all such income as arises directly or
indirectly, subject to the provisions of section 27(i) (i.e. deemed owner), to the spouse of such
individual from assets (other than house property) transferred directly or indirectly to the
spouse of such individual otherwise than for adequate consideration or in connection with an
agreement to live apart shall be included.
As per this provision, if an individual transfers any asset other than house property to his/her
spouse, the income from such an asset shall be included in the total income of the transferor.
This provision is not applicable to house property because in that case the transferor is
deemed to be the owner of the house property and the annual value of the property is taxed in
the hands of the transferor as per section 27.
Income from assets transferred to son's wife [Section 64(1)(vi)]:
Any income which arises from assets transferred directly or indirectly by an individual to his
son's wife after 1.6.1973, otherwise than for adequate consideration, shall be included in the
income of the transferor. For example, R transfers 1,000 10% bonds of Rs.100 each of IDBI
to his son's wife without any consideration. IDBI declares Rs.10,000 as interest. Although the
sum of Rs.10,000 as interest is received by his son's wife, this amount shall be included in the
income of R under the head 'Income from Other Sources' for the purpose of computing his
total income.
Income from assets transferred to any person for the benefit of the spouse of the
transferor [Section 64(1)(vii)]:
Where an individual transfers any assets to any person or association of persons, otherwise
than for adequate consideration, the income from such assets shall be included in the income
of the transferor to the extent to which the income is for the immediate or deferred benefit of
his or her spouse. In other words, where an asset is transferred to some other person, without
adequate consideration for the benefit of the spouse of the individual as well as for some
other persons, income on such an asset to the extent of benefit which accrues to the spouse,
shall be included in the total income of the individual.
For example:
X transfers a house to his friend Y with a direction that 50% of the rental income is to be used
for the benefit of his wife Mrs. X and 50% for others, then the rental income to the extent of
50% shall be included in the total income of X.
Income from assets transferred to any person for the benefit of son's wife [Section
64(1)(viii)]:
Where an individual transfers any assets, after 1st June, 1973 to any person or association of
persons, otherwise than for adequate consideration the income from such assets shall be
included in the income of the transferor to the extent to which the income is for the
immediate or deferred benefit of his or her son's wife.
Clubbing of income of a minor child [Section 64(1A)]
1. In computing the total income of an individual, there shall be included all such
income as arises or accrues to his minor child. Therefore, the income of a minor child
is to be clubbed in the hands of either of his parents.
2. The income shall be clubbed in the hands of that parent whose total income
(excluding the income of the minor) is greater. If the marriage of his parents does not
subsist, the income shall be clubbed in the hands of that parent who maintains the
minor child in the previous year.
3. Where any income is once included in the total income of either parent, any such
income arising in any succeeding year shall not be included in the total income of the
other parent, unless the Assessing Officer is satisfied, after giving that parent an
opportunity of being heard, that it is necessary so to do.
4. Where the income of a minor child has been included in the total income of a parent,
such parent shall be entitled to an exemption to the extent of such income or Rs.1,500
whichever is less, in respect of each minor child whose income is so included.
Income from self-acquired property converted to joint family property [Section 64(2)]
1. Where an individual, who is a member of the Hindu Undivided Family,—
2. converts, his separate property as the property of the HUF, or
3. throws the property into the common stock of the family, or
4. otherwise transfers his individual property to the family,
5. Otherwise than for adequate consideration, then the income from such property shall
continue to be included in the total income of the individual.
6. In other words, if self-acquired property of an individual is treated/converted into
joint family property without adequate consideration, the income derived by the joint
family on account of such property shall be included in the total income of the
individual who was the owner of such self-acquired property.
For example:
X owns a house property from which he derives an income of Rs.6,00,000 per annum. If, he
converts this property as the property of an HUF of which he is a member. Although the
income shall henceforth be received by the HUF but it shall be deemed to be the individual
income of X and shall be included in computation of his total income under the head 'Income
from House Property'.
 Set out and Carry Forward of Losses
If the losses could not be set off under the same head or under different heads in the same
assessment year, such losses are allowed to be carried forward to be claimed as set off from
the income of the subsequent assessment years. All losses are not allowed to be carried
forward. The following losses are only allowed to be carried forward and set off in the
subsequent assessment years:
1. House property loss;
2. Business loss;
3. Speculation loss;
4. Loss on account of owning and maintaining race horses.
5. Capital loss;
6. Loss from a specified business referred to in section 35AD.
Set-off of losses, as the name suggests, can be understood as adjusting the losses incurred by
a person against his profit or income in a particular assessment year. If it so happens that it is
not possible to set-off the losses in the same assessment year, either because the assessee has
not gained required profit or because the income generated is also less than the amount is
carried forward to the next year. The process of setting off of losses and their subsequent
carry-forward maybe are covered under the following steps-
1. An inter-source adjustment under the same source of income.
2. Inter-head adjustment in the same assessment in the same year. (This is applied only
if a loss cannot be set-off under step-1)
3. Carry-forward of a loss. (This is applicable only when 1 and 2 are not)
Set-off of losses
As mentioned earlier set-off can either be inter-source or intra-head. The adjustment of losses
against income or profit in a particular year is called set off. Losses not set off against income
can be carried forward to subsequent years and used against income. You can set off against
income in either an intra-head or inter-head way. Set off of losses means making adjust in
losses which shall be against the profit of the same financial year. If it is not possible to set
off the losses against profit in the same year then it will be carry forward to next year. A set
off can be of two types which is intra-head set off and an inter-head set off. INTRA-HEAD
SET OFF: The losses from one source of income that can be adjusted against income from
other source which shall be under the same head of income.
Inter-source adjustment – Sec. 70
The general rule under the provision of Section 70 states that- if the net result for any
assessment year, in respect of any source under any head of income, has incurred a loss, the
assessee is entitled to have the amount of such loss set-off against his income from any other
source under the same head of income for the same assessment year.
Illustration
A has two businesses- business A and B. While the returns from business A is Rs. 5 lakh,
business B has incurred a loss of Rs. 2 lakh. In this case, the loss of Rs. 2 lakh from business
B can be set-off against income of Rs. 5 lakh from business A. It must be noted that A does
not have any option to set-off or to not set-off the loss of business B.
General exceptions
1. Loss from speculation business– The loss incurred in a speculation business can only
be set-off by a profit earned in the speculation business.
2. Loss from a specified business- Any loss computed in respect of any specified
business referred to in Section. 35AD, shall not be set-off against profits and gains, if
any, of any other specified business.
3. Long-term capital loss– Long term capital loss can only be set-off against long term
capital gain.
4. Loss from the activity of owning and maintaining race horses– A loss incurred in the
business of owning and maintaining race horses cannot be set-off against, if any, from
any other source except income from such business.
5. Loss cannot be set-off against winning lotteries, crossword puzzles etc.- It is by virtue
of Section. 58(4), a loss cannot be set-off against winnings from lotteries and other
forms of gambling.
Loss from sale of securities
1. Barring the aforementioned cases, any other loss can be set-off against any other
income within the same head of income. For example-
2. Loss from house property can be set-off against income from any other house
property.
3. Loss from a non-speculation business can be set-off against income from speculation
or non-speculation business.
4. Loss from a non-speculative business can be set-off against income from business
specified under Section 35AD.
5. A short-term capital loss can be set-off against any capital gain (whether short-term or
long-term).
 6. Under the head of ‗other sources‘ loss from an activity can be set-off against income
but other than winning from lotteries, crosswords etc.
If income from a particular source is exempted from tax, e.g. income exempt from tax under
section 10, loss from such source cannot be set-off against income chargeable to tax. If there
is income from one source and loss from another source within the same head of income, one
has to set-off the loss against the income. Barring the cases of exceptions, in all other cases, a
loss has to be first set-off against income within the same head of income. No other option is
available. For example, a long-term capital loss can be set-off against only long-term capital
gains. However, a short-term capital loss can be set-off against any capital gains.
Inter-head adjustment – Sec. 71
The general rule under the provision of Section 71 states that- where the net result of the
computation made for any assessment year in respect of any head of income is a loss, the
same can be set-off against the income from other heads too.
Illustration
A has two speculative businesses B and C. Besides his business, he has income from house
property. The result from the three sources of income is given below-
Business income Property income

Business B
(-) 2,90,000
Business C 5,10,000
70,000
Income from house property

(-) 2,20,000 5,10,000

In this case, a business loan of Rs. 2,20,000 can be adjusted against the property income of
Rs. 5,10,000. Consequently, property income is reduced to Rs. 2,90,000. It may be noted that
A does not have any option to set-off the business loss against property income.
Exceptions
1. Loss in a speculative business- it cannot be set-off against any other income.
2. Loss in a business specified under section 35AD- loss, computed in respect of any
specified business referred to in section 35 AD cannot be set off against any other
income.
3. Loss under the head capital gains– loss under this head can only be set-off by under
the head of capital gains.
4. Loss from the activity of owning and maintaining horses- cannot be set off against
any other income head.
 5. Business loss cannot be set-off against salary income.
6. Any house property loss exceeding Rs. 2,00,000- cannot be set-off against income
under other heads of income.
7. Loss cannot be set-off against winnings from lotteries etc- by virtue of Section 58(4) a
loss cannot be set-off against winning from lotteries.
8. Loss from the purchase of securities.
Example
A taxpayer has the following income/loss-
Current year Next year

Business income (-) 1,00,000 8,00,000

Long-term capital 2,30,000 3,00,000
Long term capital gain is taxable at a lower rate. Even then, the assessee cannot avoid set-off
of business loss in the current year under section 71 against the capital gain and carry forward
the business loss to the next year. In other words, the business loss has to be set-off against
capital gain. There is no other alternative option available. After adjusting the business loan
of Rs. 1,00,000 on remaining long-term capital gain of Rs. 1,30,000, he will have to pay tax
during the current year.
Carry-forward of loss
1. In cases where the loss cannot be set-off either under the same head or under any
other head of income, because of absence or inadequacy of income in the same year,
then that loss is carried forward and set off against the income of the subsequent year.
According to the provisions of the Act, the following loses can be carried forward-
2. Loss under the head ‗income from house-property‘ (Sec. 71B)
3. It can be set off against any income in the year the loss is incurred. If the loss could
not be set off in the year loss was incurred it can be carried forward up to 8
Assessment Years and loss will be allowed to set off against income under the head
House Property.
4. In case in any Assessment Year, the assessee has house property loss, then he is
entitled to set off such loss against income under other head upto a limit of Rs. 2 lakh
per annum. The balance, if any, shall be carried forward.
5. It can be simply concluded that in the year the loss is incurred both intra & inter head
adjustments are possible, but in the years of carry forward only intra head adjustments
are possible.
 Loss under the head “profits and gains of business or profession” (Sec. 72)
Where the loss under the head 'profits and gains of business or profession' other than loss
from speculation business and loss from specified business, could not be set off in the same
assessment year because either the assessee had no income under any other head or the
income was less than the loss, such loss which could not be set off in the same assessment
year, can be carried forward to the following assessment years and it shall be set off against
the profit and gains of business or profession subject to the following conditions:
Loss can be Set Off only against Business Income:
The following points should be noted:
(A). Loss Can be set off only against Business Income -
A loss under the head, ―Profits and gains of business or profession‖ can be set off against
profits of any business1 in the subsequent year. For this purpose, business profits would also
include profits derived from a business activity but assessable under a head other than
―Profits and gains of business or profession‖.
(B). Loss Can be set off against any other Business (Not necessarily the same Business) -
It is not necessary that business loss of year 1 should be set off against income from the same
business in year 2. In other words, loss of Business A of year 1 can be set off against profit of
business A or some other business in year 2.
(C). Set Off of Losses from a Specified Business -
Brought forward loss of a business referred to in section 35AD can be set off in a subsequent
year only against income from the business referred to in section 35AD.
Carry Forward and Set off of Speculation Loss (Section 73)
The loss of a speculation business of any assessment year is allowed to be set off only against
the profits and gains of another speculation business in the same assessment year.
But, if a speculation loss could not be set off from the income of another speculation business
in the same assessment year, it is allowed to be carried forward to be claimed as a set off in
the subsequent year, but only against the income of any speculation business. Such loss is
allowed to be carried forward for 4 assessment years immediately succeeding the assessment
year for which the loss was first computed. It may be observed that it is not necessary that the
same speculation business must continue in the assessment year in which the loss is set off.
As already discussed, filing of return before the due date is necessary for carry forward of
such loss.
1. (Explanation to Section 73): Companies carrying on Business of Buying and Selling
Shares -
This provision is applicable if the following conditions are satisfied—
Taxpayer is a company.
It is not a company whose gross total income consists mainly of income which is chargeable
under the heads ―Interest on securities‖, ―Income from house property‖, ―Capital gains‖ and
―Income from other sources‖. Alternatively, it is a company whose principal business is other
than that of trading in shares or banking or the granting of loans and advances.
The business of the company consists of the purchase and sale of shares of other companies.
If the above conditions are satisfied, such company shall be deemed to be carrying on a
speculation business to the extent to which the business consists of purchase/sale of such
shares. This rule is applicable even if there is no avoidance of tax by the assessee.
This Explanation shall not apply to the following companies:
Investment companies i.e. a company whose gross total income consists mainly of income
chargeable under the heads 'Income from House Property', 'Capital Gains' and 'Income from
Other Sources'.
1. A company whose principal business is of banking or granting of loans/advances.
2. A company the principal business of which is the business of trading in shares.
3. It may be noted that the above Explanation applies only to a company. It does not
apply to an individual, HUF, Firm, AOP, etc. Further, this Explanation only covers
transaction of sale and purchase of shares. Debentures, units of Unit Trust of India or
units of Mutual Funds are not covered by this Explanation.
Thus Explanation to section 73 is not applicable if—
1. shares are purchased by the company as investment and not as stock-in-trade; or
2. a company the principal business of which is the business of trading in shares.
2. Speculative Loss can be Set Off only against Speculative Income (Section 73)
Loss in a speculation business can be carried forward to the subsequent year and set off only
against the profits of a speculation business carried on in that year.
3. Speculative Loss can be carried forward for 4 years.
Such loss can be carried forward for 4 assessment years, immediately succeeding the
assessment year for which the loss was first computed.
4. Continuity of Business Not necessary for Carry forward and Set Off of Speculation Loss
It is not necessary that the speculation business in which the loss was incurred should
continue to be carried on in the subsequent year in which the assessee wants to set off of the
loss but the assessee should be the same.
Carry Forward and Set-Off of Capital Loss under the head 'Capital Gains' (Section 74)
1. If the net result of the computation under the head ―Capital gains‖ is a loss, the whole
of the loss shall be carried forward to the following assessment year as follows—
2. Long-term capital loss can be set off only against long-term capital gains.
3. Short-term capital loss can be set off against short-term or long-term capital gains.
4. Such loss can be carried forward for 8 (eight) assessment years immediately
succeeding the assessment year in which the loss was first computed.
5. Such loss cannot be carried forward unless return is filed within the time limit of
section 139(1)
6. Forward and Set-Off of Loss from activity of Owning and Maintaining Race Horses
(Section 74A)
7. Loss from the activity of owning and maintaining race horses in any assessment year
shall be set off against the income from the activity of owning and maintaining race
horses in the same assessment year.
But, if any loss from the activity of owning and maintaining race horses, could not be set off
in the same assessment year, it shall be carried forward and set off only against the income
from the activity of owning and maintaining race horses in the subsequent assessment years.
Such set off is, however, permitted only if the activity of owning and maintaining race horses
is carried on by the assessee in the previous year relevant to the assessment year in which the
loss is sought to be adjusted.
The loss can be carried forward for a maximum of 4 assessment years, immediately
succeeding the assessment year for which the loss was first computed.
The following points one should keep in view —
Such loss can be carried forward only if the activity of owning and maintaining race horses is
carried on by the assessee in the previous year in which the brought forward loss is sought to
be set off.
Loss can be carried forward for four assessment years immediately succeeding the
assessment year in which the loss was first computed.
Such loss cannot be carried forward unless return is filed within the time limit of section
139(1).
Restrictions
The right of carry-forward and set off of loss arising in a business is subject to the following
restrictions-
 1. Loss can be set-off only against business income.
2. Loss can be carried forward by the person who incurred the loss.
3. Loss can be carried forward for 8-years.
4. Return of loss should be submitted in time.
5. Continuity of business is not necessary.
Assessment
Assessment under Section 2(8) is a process of assessing the validity of the assessee‘s claimed
income and computing the amount of tax payable by him, followed by the practise of
imposing that tax responsibility on that individual.
The process of examination of ITR by the Income Tax Department is called ―Assessment‖.
The assessment also includes re-assessment and best judgment assessment under section 147
and 144 respectively and the different type of income tax assessment.
Types of Income Tax Assessment:
1. Self-Assessment –u/s 140A
2. Summary assessment –u/s 143(1)
3. Scrutiny assessment –u/s 143(3)
4. Best Judgment Assessment –u/s 144
5. Protective assessment
6. Re-assessment or Income escaping assessment –u/s 147
7. Assessment in case of search –u/s 153A
Self-Assessment u/s 140A
This type of Income Tax Assessment is the one in which the assessee calculate the tax by
himself, usually to accompany his calculation with payment of the amount he regards as due.
Tax payable is required to be furnished under section 139 or section 142 or section 148 or
section 153A, after taking TDS and deducting Advance tax paid.
Time limit:
There are no specific dates to pay Self-Assessment Tax. Payment of Self-Assessment Tax
and non-filing of the returns should be paid within 31st July of every year.
Procedure
Direct Mode of Payment
Self-Assessment Tax can be paid by filling a tax payment challan, ITNS 280. Challans are
available in the designated branches of banks associated with the Income Tax Department.
Online Mode of Payment
Assessee can pay tax online through different websites.
 Summary assessment u/s 143(1)
Assessment under section 143(1) is like initial checking of the return of income. Under this
section, Income tax department sent intimation u/s 143(1) to the taxpayer. A Comparative
Income Tax computation is sent by the Department. In income tax assessment, total income
or loss incurred is computed.
Time Limit:
Assessment u/s 143(1) can be made within a period of one year from the end of financial year
in which the return is filed.
Scrutiny Assessment u/s 143(3)
Scrutiny assessment is the assessment of the return filed by the assessee by giving an
opportunity to the assessee to substantiate the declared income and expenses and the claims
of deductions, losses, exemptions, etc. in the return with the help of evidence. It is managed
by the Committee through a single work plan. Specific work is undertaken through the
committee and by establishing informal panels (for in-depth activities) or working groups.
The assessing officer gets the opportunity to conduct an inquiry and aims at ascertaining
whether the income in the return is correctly shown by the assessee or not. The claims for
deductions, exemptions etc. are legally and factually.
If there is any omission, discrepancies, inaccuracies, etc. Then the assessing officer makes an
own assessment for the assessee by taking all facts in mind.
Type of cases
1. Manual scrutiny cases.
2. Compulsory Scrutiny cases.
3. Manual scrutiny cases as follows:
4. Not filing Income Tax Return.
5. State lesser income or more tax as compared to earlier year.
6. Mismatch in TDS credit between claim and 26AS.
7. Non-declaration of exempted income.
8. Claiming for large refunds in return of Income.
9. Taking double benefit due to the Job change.
Compulsory Scrutiny cases as follows:
Case 1: relating addition in the earlier assessment year of Rs. 10 lakhs/Rs. 10 crore excess on
a substantial and recurring question of law or fact which is confirmed in appeal or is pending
before an appellate authority may come under compulsory scrutiny.
Case 2: CASS (Computer Added Scrutiny Selection) cases are also selected under
compulsory cases. All such cases are separately intimated by DGIT (system) to the
jurisdictional concerned.
Case 3: Where specific and verifiable information pointing on tax evasion is given to
Government Department/ Authorities.
Case 4: Rejection of the approval u/s 10 (23C) of the Act or withdrawing the approval
already is passed by the authority, yet the assessee found claiming tax exemption under the
aforesaid provision of the Act.
Best Judgment Assessment u/s 144
The best judgment assessment means evaluation or estimation in the context income tax law
of income of the assessee by the assessing officer. In the case of best judgment assessment,
the assessing officer will make the assessment based on best reasoning i.e. they will not act
dishonestly. The assessee will neither be dishonest in assessment nor have a bitter attitude
towards the officer. This is a type of income tax assessment which involves the input of both
the assessee and the officer equally.
Types
Compulsory Assessment: Assessing officer (AO) finds that there is non-cooperation by the
assessee or found to be a defaulter in supplying information to the department.
Discretionary/optional assessment: When AO is dissatisfied with the authenticity/validity of
the accounts given by the assessee or where no regular method of accounting has been
followed by the assessee.
Cases
1. Case 1: If a person fails to make return u/s 139(1) and has not made a return or a
revised return under sub-section (4) or (5) of that section; or
2. Case 2: If any person fails to comply with all the terms of notice under section 142(1)
or fails to follow directions mentioned to get account audited u/s section 142(2A); or
3. Case 3: If a person after filing a return fails to comply with all the terms of notice
received under section 143(2) requiring presence or production of evidence and
documents; or
4. Case 4: If the Assessing Officer is not satisfied with the correctness or completeness
of the accounts or documents.
5. Case 5: A person has a right to file an appeal u/s 246 or to craft an application for
revision u/s 264 to the commissioner.
 6. Also keep in mind, after giving a chance to the assessee of being heard, then only best
judgment assessment can be made.
Protective assessment
1. This is a type of assessments that focus on those assessments which are made
to ‗protect‘ the interest of the revenue.
2. Though, there is no provision in the income tax act authorizing the levy of income tax
on a person other than whom the income tax is payable. It is open to the authorities to
make a protective or an alternative assessment if it is not ascertainable who is really
liable to pay the tax among a few possible persons.
For example
If there are doubts on a rental income belongs to Mr. A or Mr. B. Then, the assessing officer
at his own discretion may add the rental income to any one of them on a protective basis.
This is done ensure that finality, the owner of the income has not denied the addition of
income because of limitation of time.
In making a protective assessment, the authorities are simply making an assessment and
leaving it as a paper assessment until the matter is decided. A protective order of assessment
can be passed but not a protective order of penalty.
Re-Assessment (or) Income escaping assessment u/s 147
Income Escaping Assessment under section 147 is the assessment which is done by the
Assessing Officer if there is a reason for him to believe that income chargeable to tax has
escaped assessment for any assessment year. It gives power to him to re-assess or re-compute
income, turnover etc. which has escaped assessment.
Objective
1. The objective of carrying out assessment u/s 147 is to bring them under the tax net,
any income which has escaped assessment in the original assessment.
2. Completion of assessment under section 147
3. Under section 147, notice is issued within 9 months from the end of the financial year
in which notice u/s 148 is also served.
4. Notice issued under section 148
5. Under section 148, notice can be issued within a period of 4 years from the end of the
relevant assessment.
Case 1: If escaped income amounts to Rs. 1, 00,000 or more and then notice can be issued for
up to 6 years from the end of the relevant assessment year.
Case 2: If escaped income is associated with any assets (including financial interest in any
entity) i.e. located outside India, and then notice can be issued up to 16 years from the end of
the relevant assessment year.
Notice u/s 148 can be issued by AO only after getting prior approval from the prescribed
authority mentioned in section 151.
Assessment in case of search u/s 153A
Under this type of Income Tax Assessment, the Assessing Officer will:
1. Issue notice to such person requires furnishing within such period, as specified in the
notice. Clause (b) referred to the return of income of each assessment year falling
within six assessment years and is verified in prescribed form. Setting forth such other
particulars as may be prescribed and the provisions of this Act shall, so far as may be,
apply accordingly as if such return were a return required to be furnished under
section 139;
2. Assessor re-assess the total income of six assessment years immediately preceding the
assessment year relevant to the previous year in which such search is conducted or
requisition is made.
Note: Section 153A issues a notice for 6 years, preceding the search not for the year of search
and no return is required to be filed (for the year of search) u/s 153A. File only a regular
return u/s 139.
Time limit for completion of assessment u/s 153A/153C: [153B]
1. Case 1: Person searched under section 153A
2. 21 months from the end of the financial year this does not include the last
authorization for search u/s 132 or requisition u/s 132A.
3. Similar time limits shall apply in respect of the year of search also.
4. Case 2: Any other person 153C
5. As provided in above clause (a) or clause (b) or 9 months from the end of the
Financial Year where BOA/documents/assets seized/requisitioned are handed over to
the assessing officer (AO), whatever is latest.
Rectification of Mistakes
Who are empowered to rectify?
Under Section-154(1), errors which can be rectified are:
1. an error of fact
2. an arithmetic mistake, or
3. a small clerical error, or
 4. error due to overlooking compulsory provisions of law.
A rectification can be filed by a Taxpayer (assessee) bringing the mistake to the notice of the
authority concerned, or, an Income Tax Authority. The authorities concerned are:
1. Income Tax Assessing Officer (under Section-143(1))
2. Commissioner (Section-23 or Section-264)
3. Commissioner (Appeals) (Section-250)
4. Other Income Tax Authorities (Section-116)
5. The Appellate Tribunal (under Section-254(2) but not Section154 as it is not an
income tax authority).
6. Some Important points regarding filing application for rectification under Section
154(1).
7. One cannot use this rectification request for changing bank account or address details
of one‘s Income Tax Return. If upon rectification there is a change in income, in that
case, one must file a Revised Income Tax Return. No new deductions or exemptions
are allowed to be claimed in the rectification request.
Time limit for rectification under Section 154
Rectification of an order can be made only within four years from the end of the financial
year. However, the time limitation shall not be applicable where correction is made under
Section 155. If the assessee makes an application for rectification , the authority shall pass an
order within a period of 6 months from the end of the month in which the application is
received by it making the amendment or refusing to allow the claim. The opportunity of
being heard is given to assessee if rectification results in enhancement or reduction or
increase in liability of the assessee. Moreover, the authority concerned must give notice to
the assessee. Even when Returns are already processed in Central Processing Centre (CPC)
Bangalore, a rectification request can be filed. When the income tax return was filed online,
only online rectification is allowed.
CIT V. Madhukant M.Mehta (2001) 247 ITS 805 (SC)
Judgment Text
These appeals by the Revenue relate to entitlement to set-off under section 78(2) of the
Income-tax Act, 1961 (hereinafter referred to as "the Act"), in respect of losses sustained in
the proprietary business carried on by Mudhakant M. Mehta against the income of the
assessee, a registered partnership firm. These appeals relate to the assessment years 1965-66
to 1971-72. In relation to the assessment years 1965-66 to 1969-70, the matter was
considered by the Gujarat High Court in its judgment dated August 12, 1980, in Income-tax
Reference No. 115 of 1975, whereby the following questions referred to it for its opinion by
the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal") were answered
against the Revenue and in favour of the assessee (page 164):
Whether the Tribunal was right in law in holding that there was succession by inheritance in
this case as contemplated by section 78(2) of the Act and, therefore, the assessee is entitled to
carry forward and set off the deceased Shri Madhukant M. Mehta's loss in business against
the income for these years ?
Whether the Tribunal was right in law in holding that section 75(2) of the Act does not
prevent the assessee from claiming the set off of losses in question ?"
Civil Appeals Nos. 94 to 98 (NT) of 1982, have been filed by the Revenue against the said
decision of the High Court on the basis of certificate of fitness granted under section 261 of
the Act. The said judgment was followed by the High Court in its judgment dated August 14,
1980, in Income-tax Reference No. 121 of 1977, in relation to the assessment years 1970-71
and 1971-72. Civil Appeals Nos. 99 and 100 (NT) of 1982, have been filed against the said
judgment.The facts, briefly stated, are as follows :
Madhukant M. Mehta was carrying on proprietary business of speculation in shares, cotton
and other commodities. He died on March 23, 1964, leaving behind his widow, a son and a
daughter. On April 22, 1964, the three heirs of Madhukant M. Mehta entered into a
partnership and executed a partnership deed wherein they agreed to carry on the said business
of speculation. In the said speculation business carried on in the name of the partnership firm,
profits were earned and the assessee sought to carry forward and set off the losses incurred by
the deceased in his proprietary business against the income from the speculation business of
the partnership firm. The Income-tax Officer disallowed such set-off on the ground that there
was no succession to the business of the deceased. The Appellate Assistant Commissioner
dismissed the appeals filed by the assessee but on further appeal the Tribunal allowed the set-
off. The Tribunal found that there was succession to the business of the deceased on the basis
of the following circumstances (page 163) :
The partnership deed which was drawn up on April 22, 1964, within a month of the death of
the deceased, records the fact of the parties thereto as heirs and legal representatives of the
deceased, and having succeeded to and carried on the speculation business of the deceased.
This claim of the assessee having carried on the speculation business even prior to the date of
the partnership deed had not been disputed. Even, if the date of the partnership deed is
assumed to be the date from which the business had been carried on under the partnership
deed, there was an interval of less than one month between the death of the deceased and the
date from which the assessee had carried on the business, and such interval even reckoning
the partnership to have commenced from the date of the deed of partnership could not be
regarded as long or unusual in a case where succession is claimed to have taken place by
inheritance on the death of the deceased.
1. The nature of the business was identical, namely, speculation business, which was
being carried on by the deceased.
2. The business name continued to be the same.
3. The business was carried on in the same premises.
4. The same telephone which was being used by the deceased also continued to be used
by the assessee.
5. The constituents of the assessee's business were the same as those of the business of
the deceased.
6. The partnership deed clearly evidenced the intention of the legal heirs who constituted
the assessee-firm to continue and carry on the business which was carried on by the
deceased."
7. The Tribunal held that the partners, as heirs, had succeeded to the business of the
deceased and there was inheritance for the purpose of section 78(2) of the Act. The
said finding recorded by the Tribunal has been accepted by the High Court. The High
Court has observed (page 169) :
"At the risk of repetition, it might be stated that the Tribunal has found in the instant case that
there was no dispute that even prior to the execution of the partnership deed, the three heirs
had carried on the same speculation business and that the partnership was brought into
existence within about a month of the death of the deceased. The Tribunal has further found
that even after the partnership was brought into existence, the business was continued in the
same name and in the same premises and the constituents of the assessee's business were the
same as those of the business of the deceased. It has been found earlier that during the
interval of time between the death of the deceased and the formation of the partnership the
outstanding recoveries were effected and the subsisting transactions were cleared and the
assets of the business were utilised in clearing the liabilities by the three heirs in the process
of carrying on the business as successors."
section 154 of Income Tax Act, 1961, Rectification of Income Tax order which is subject to
appeal or revision, Initiation of rectification by whom, Time-limit for rectification, The
procedure to be followed for making an application for rectification, etc.
Sometimes there may be a mistake in any order passed by the Assessing Officer. In such a
situation, mistake which is apparent from the record can be rectified under section 154. The
provisions relating to rectification of mistake under section 154 are discussed in this part.
Order which can be rectified under section 154 With a view to rectifying any mistake
apparent from the record, an income-tax authority may, –
a) Amend any order passed under any provisions of the Income-tax Act.
b) Amend any intimation or deemed intimation sent under section 143(1).
c) Amend any intimation sent under section 200A(1) [section 200A deals with processing of
statements of tax deducted at source i.e. TDS return].
d) amend any intimation under section 206CB.
Under section 200A, a TDS statement is processed after making correction of any
arithmetical error in the statement or after correcting an incorrect claim, apparent from any
information in the statement Similarly a new section 206CB is inserted by Finance Act, 2015
to provide for the processing of TCS statement. If due to rectification of mistake, the tax
liability of the taxpayer is enhanced or refund is reduced, the taxpayer shall be given an
opportunity of being heard. Rectification of order which is subject to appeal or revision If an
order is the subject-matter of any appeal or revision, any matter which is decided in such an
appeal or revision cannot be rectified by the Assessing Officer. In other words, if an order is
subject matter of any appeal, then the Assessing Officer can rectify only those matters which
are not decided in such appeal.
Initiation of rectification by whom
The income-tax authority can rectify the mistake on its own motion. The taxpayer can
intimate the mistake to the income-tax authority by making an application to rectify the
mistake. If the order is passed by the Commissioner (Appeals), then the Commissioner
(Appeals) can rectify mistake which has been brought to notice by the Assessing Officer or
by the taxpayer. Time-limit for rectification No order of rectification can be passed after the
expiry of 4 years from the end of the financial year in which order sought to be rectified was
passed. The period of 4 years is from the date of order sought to be rectified and not 4 years
from original order. Hence, if an order is revised, set aside, etc., then the period of 4 years
will be counted from the date of such fresh order and not from the date of original order. In
case an application for rectification is made by the taxpayer, the authority shall amend the
order or refuse to allow the claim within 6 months from the end of the month in which the
application is received by the authority.