Tab 1

UNIT I
• In the year 1860, taxes known as the "Union Budget" were introduced in India by Sir James Wilson, pre-
independence India’s finance minister.
• Here, income tax was divided into 4 schedules:
• income from landed property,
• professions & trades,
• securities, and
• pensions & salaries.
TYPES OF TAX
1. Direct Tax
These types of taxes are directly imposed & paid to the Government of India. There has been a steady rise in
the net Direct Tax collections in India over the years, which is a healthy signal. Direct taxes, which are
imposed by the Government of India. The burden has to be borne by the person on whom the tax is levied
and cannot be passed on to someone else. Central Board of Direct Taxes (CBDT) governs and administers
the Direct Tax.
● Income tax- It is a type of tax imposed on the profits and income earned during the year. Income tax
is the most common example of direct tax. As the term “income tax” suggests, it is a tax levied by
the Central government on income generated by individuals and businesses in a particular financial
year. However, the amount payable for your income tax depends on how much money you earn
under different heads of income. Additionally, for a financial year, income tax applies to those with
an annual income exceeding the basic exemption limit applicable to them.
● Gift Tax- If you receive a gift from someone it is clubbed with your income and you need to pay tax
on it. This tax is called as gift tax. This tax is applicable if gift amount or value is more than 50000
Rs/- in a year.
● Corporate Tax- Corporate Taxes are annual taxes payable on the income of a corporate operating in
India. For the purpose of taxation companies in India are broadly classified into domestic companies
and foreign companies. In addition to above other taxes are also applicable on corporates.
● Capital Gains Tax-Capital Gain tax as name suggests it is tax on gain in capital. If you sell
property, shares, bonds & precious material etc. and earn profit on it within predefined time frame
you are supposed to pay capital gain tax. The capital gain is the difference between the money
received from selling the asset and the price paid for it. Capital gain tax is categorized into short-
term gains and long-term gains. TheLong-term Capital Gains Tax is charged if the capital assets are
kept for more than certain period 1 year in case of share and 3 years in case of property. Short-term
Capital Gains Tax is applicable if these assets are held for less than the above mentioned Period.
Rate at which this tax is applied varies based on investment class.
Example:-
If you purchase share at say 1000 Rs/- (per share) and after two months this price increased to 1200
Rs/-(per share) you decide to sale this stock and earn profit of 200 Rs/- per share. If you do so you
have to pay Short term CGT (capital gain tax) @ 10% +Education cess on profit as it is short term
capital gain. If you hold same share for 1 year or above it is considered as long term capital gain and
you need not to pay capital gain tax.it is considered as tax free.
Similarly if you purchase property after two year if you find that property price in which you
invested has increased and you decide to sell it you need to pay short term capital gain tax. For
property it is considered as long term capital gain if you hold property for 3 years or above.
● Securities Transaction Tax- A lot of people do not declare their profit and avoid paying capital
 gain tax, as government can only tax those profits, which have been declared by people. To fight
with this situation Government has introduced STT (Securities Transaction Tax ) which is applicable
on every transaction done at stock exchange. That means if you buy or sell equity shares, derivative
instruments, equity oriented Mutual Funds this tax is applicable. This tax is added to the price of
security during the transaction itself, hence you cannot avoid (save) it. As this tax amount is very
low people do not notice it much.
● Property tax: In India, owners of real estate properties are subject to pay a property tax. It is an
annual charge levied by the Government of India on property owners. This tax is collected by the
local government or the Municipal Corporation, whoever is authorised to do so in a given state.

2. Indirect Tax
Conversely, indirect tax is levied by the government on goods and services. Therefore, it can be shifted from
one tax-paying individual to another. Therefore, customers bear the brunt of indirect taxes. The Central
Board of Indirect Taxes and Customs (CBIC) governs and administers indirect taxes. Indirect Tax is
referred to as a tax charged on a person who consumes the goods and services and is paid indirectly to the
government. The burden of tax can be easily shifted to the another person. The tax is regressive in nature,
i.e. as the amount of tax increases the demand for the goods and services decreases and vice versa. It levies
on every person equally whether he is rich or poor. The administration of tax is done either by the Central
Government or the State government.

● Goods and Service Tax- (GST) is an indirect tax levied on various goods and services. One
significant benefit of GST is that it eliminates the tax-on-tax or cascading effect of the previous tax
regime.

● Excise duty- Is a tax imposed on licensing, sale or production of certain goods produced within the
country. This is opposite to custom duty which is charged on bringing goods from outside of country.
Another name of this tax is CENVAT (Central Value Added Tax). If you are producer / manufacturer
of goods or you hire labor to manufacture goods you are liable to pay excise duty. With the
introduction of GST, several indirect taxes have been subsumed, including excise tax. Nonetheless, it
is still applicable to a few items like petroleum, liquor, etc.

● Sales Tax- Sales tax charged on the sales of movable goods. Sale tax on Inter State sale is charged by
Union Government, while sales tax on intra-State sale (sale within State) (now termed as VAT) is
charged by State Government. The statute governing sales tax is Central Sales Tax Act, 1956. But
this tax is no longer in force in the territory of India.

● Custom duty & Octroi (On Goods)- Custom Duty is a type of indirect tax charged on goods
imported into India. One has to pay this duty , on goods that are imported from a foreign country into
India. This duty is often payable at the port of entry (like the airport). This duty rate varies based on
nature of items. Octroi is tax applicable on goods entering in to municipality or any other jurisdiction
for use, consumption or sale. In simple terms one can call it as Entry Tax. Customs duty is being
replaced by IGST, which means instead of Custom duty, Integrated Goods and services tax is
applicable on every export and import of goods and services. IGST Act 2017, defines the import of
goods to bring merchandise to India from anywhere outside India.

● EntertainmentTax: is also applicable on Entertainment; this tax is imposed by state government on

every financial transaction that is related to entertainment such as movie tickets, major commercial
shows exhibition, broadcasting service, DTH service and cable service. Consequently, there is no
separate levy of entertainment tax in India now. However, a few states had levied additional taxes on
 top of GST which is popularly known as 'entertainment tax'. These states are Assam, Bihar, Kerala,
Madhya Pradesh, Maharashtra, Odisha, Tamil Nadu, Telangana and West Bengal.

ASSESSMENT YEAR & PREVIOUS YEAR

Section 2 (9) “assessment year” means the period of twelve months commencing on the 1st day of April
every year.
Therefore, basically the Assessment year is considered to be a 12 months period starting from April 1,
during which an assessee is required to file the return of income (ITR) for the previous year and the ITO
has to initiate assessment proceedings for such returned income and tax thereon. Since Income Tax is on
income of a financial/ previous year or period, so tax filings and assessment can start thereafter.
Probably, that’s why it’s called assessment year/ period.
Section 3. “Previous year” defined.—For the purposes of this Act, “previous year” means the financial
year immediately preceding the assessment year: Provided that, in the case of a business or profession
newly set up, or a source of income newly coming into existence, in the said financial year, the previous
year shall be the period beginning with the date of setting up of the business or profession or, as the case
may be, the date on which the source of income newly comes into existence and ending with the said
financial year.
Therefore, basically the Previous Year indicates the year/ period prior to another. Under Income Tax, the
returns are filed by assessees after the end of the year/ period during which earnings are made and that
period is called previous year/ financial year. However, when such earnings are subjected to assessment/
review by ITO in the subsequent period/ year, the same is called assessment year/ period.
FY is the year in which you earn an income. AY is the year following the financial year in which you have
to evaluate the previous year’s income and pay taxes on it.
PERSONS
Section 31 “person” includes—
(i) an individual, It refers to a natural human being whether male or female, minor or major.
(ii) a Hindu undivided family, It is a relationship created due to operation of Hindu Law. The manager of
HUF is called “Karta” and its members are called ‘Coparceners’.
(iii) a company, It is an artificial person registered under Indian Companies Act 1956 or any other law.
(iv) a firm, It is an entity which comes into existence as a result of partnership agreement between persons
to share profits of the business carried on by all or any one of them. Though, a partnership firm does not
have a separate legal entity, yet it has been regarded as a separate entity under Income Tax Act. Under
Income Tax Act, 1961, a partnership firm can be of the following two types (
● a firm which fulfill the conditions prescribed u/s 184.
● A firm which does not fulfill the conditions prescribed u/s 184.
It is important to note that for Income Tax purposes, a limited liability partnership (LLP) constituted
under the LLP Act, 2008 is also treated as a firm.
(v) an association of persons or a body of individuals, whether incorporated or not, Co-operative societies,
MARKFED, NAFED etc. are the examples of such persons. When persons combine togather to carry on a
joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an
association of persons. Receiving income jointly is not the only feature of an association of persons. There
must be common purpose, and common action to achieve common purpose i.e. to earn income. An AOP.
can have firms, companies, associations and individuals as its members. A body of individuals (BOl) cannot
have non-individuals as its members. Only natural human beings can be members of a body of individuals.
Whether a particular group is AOP. or BOl. is a question of fact to be decided in each case separately.
(vi) a local authority, Municipality, Panchayat, Cantonment Board, Port Trust etc. are called local
authorities.
(vii) every artificial juridical person, not falling within any of the preceding sub-clauses. A public
corporation established under a special Act of legislature and a body having juristic personality of its own
are known to be Artificial Juridical Persons. Universities are an important example of this category.

Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local
authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body
or authority or juridical person was formed or established or incorporated with the object of deriving
income, profits or gains
ASSESSEE
Section 2(7) “assessee” means a person by whom [any tax] or any other sum of money is payable under this
Act, and includes—
(a) every person in respect of whom any proceeding under this Act has been taken for the [assessment of
his income or assessment of fringe benefits] or of the income of any other person in respect of which he is
assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or
to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this Act;
 1. Normal assessee: A normal assessee is a person who is required to pay taxes on income generated during
the fiscal year. In addition, any individual who is required to pay interest or penalties to the government or
is entitled to a refund under the act is termed a typical assessee.
2. Assessee representative: A person who is obligated to pay taxes on income or losses caused by a third
party. It usually occurs when the individual obligated to pay taxes is a non-resident, a juvenile, or a lunatic.
3. Deemed assessee: A person who is legally obligated to pay taxes. It can be anybody who is regarded to
be an assessee under the Act or anyone for whom an action has been brought under the Act to assess the
income/loss of any other person in respect of whom he is assessable or the amount of refund due to him or
such other person. Furthermore, this group includes a person who pays taxes on behalf of another person in
certain circumstances.
4. Assessee-in-default: Individuals become assessees in default when they fail to satisfy their statutory
obligations of paying tax. For example, before paying his employees, an employer should deduct tax from
their pay. Furthermore, the employer is required to pay deducted taxes to the government on time. If,
however, the employer fails to deposit this tax, he becomes an assessee-in default.
Assessment- Section 2(8) 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 practice of imposing that tax
responsibility on that individual.
INCOME
Section 2(24)
Introduction
Income is the money an individual receives in compensation for their work, services, or investments. For
businesses, income means revenue that a business generates by selling its goods and services. Revenue is
the money earned by a company from selling goods or services throughout its operations.
The income can be divided into a total of five categories:
● Income from salary
● Income from house property
● Income from business or profession
● Income from capital gains
● Income from other sources
Income from Salary
The first category of income is salary, which includes any remuneration an individual receives in exchange
for services rendered under a contract of employment. This sum qualifies for income tax consideration only
if an employer-employee relationship exists between the payer and the payee. The salary; advance
compensation, pension, commission, gratuity, perquisites, and annual bonus should all be included in the
salary. Salary is taxable on the due or received basis, whichever is earlier. The complete amount or gross
salary is taxed after making a total aggregate of the total amount of income excluding the exemptions if any
are present. All basic salary, as well as commissions and bonuses, are subject to full taxation.
Under this head, salary includes various allowances such as:
● Leave travel allowance: When you go on a holiday, the expense required for travel is a leave Travel
allowance or LTA. Because this is paid, it is tax-free twice over four years.
● Conveyance Allowance: Up to Rs 800 a month is exempt from tax.
● House rent allowance: HRA can be claimed to lower taxes by individuals who live in a rented house.
● Medical allowance: Medical expenses up to Rs 15000 per annum is tax-free. The medical expense of the
individual and the family of the individual is Included.
Income from House Property
In terms of income tax, a vacant residential property is considered self-occupied. When a taxpayer owns
more than one self-occupied house, only one is classified as house property. Rest is regarded as let out.
Taxes are imposed on any commercially owned residence or property. A few conditions must be met in
order for income from housing property to be taxable. A house, a building, or any land must be included in
the house property. The taxpayer should be an owner of the property. The taxpayer may not use the
residential property for any company or professional purposes that he or she is involved in.
The income from house property is calculated as follows:
● Gross Annual Value (GAV): It is the highest of the following three amounts:
○ The actual rent received or receivable for the property during the year.
○ The municipal value of the property.
○ The fair rent of the property, which is the rent that a similar property in the same or similar locality would
fetch.
● Net Annual Value (NAV): It is the GAV minus the municipal taxes paid by
the owner.
● Income from House Property: It is the NAV minus the deductions allowed under Section 24 of the Income
Tax Act, 1961. These deductions are:
○ A standard deduction of 30% of the NAV, irrespective of the actual expenditure incurred by the owner.
○ Interest on borrowed capital, subject to a maximum limit of Rs 2 lakh for a self-occupied property and no
limit for a let-out property.
Income from Business or Profession
The third category of income is income from business or profession, which includes any profit or gain
derived from carrying on any trade, commerce, manufacture, or any other economic activity. It also includes
any income from rendering any professional service, such as legal, medical, engineering, accounting, etc.
The income from business or profession is computed on the basis of the books of accounts maintained by
the taxpayer, subject to the provisions of the Income Tax Act, 1961.
The income from business or profession is calculated as follows1:
● Gross Profit: It is the difference between the revenue from sales or services and the cost of goods sold or
services rendered.
● Net Profit: It is the gross profit minus the expenses incurred for carrying on the business or profession,
such as rent, salary, interest, depreciation, etc. These expenses must be wholly and exclusively for the
purpose of the business or profession and must not be personal, capital, or illegal in nature.
● Income from Business or Profession: It is the net profit minus the deductions allowed under Chapter VI-A
of the Income Tax Act, 1961. These deductions are for various purposes, such as scientific research, rural
development, social welfare, etc.
Income from Capital Gains
The fourth category of income is income from capital gains, which arises from the transfer of a capital asset,
such as land, building, shares, securities, etc. A capital asset is any property held by the taxpayer, whether or
not connected with his or her business or profession, except the following:
● Stock-in-trade, consumable stores, or raw materials held for the purpose of business or profession.
● Personal effects, such as clothes, furniture, etc., except jewellery, archaeological collections, drawings,
paintings, sculptures, or any work of art.
● Agricultural land in India, not situated in specified urban areas.
● 6.5% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the
Central Government.
● Special Bearer Bonds, 1991, issued by the Central Government.
● Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999. The income from capital gains is
calculated as follows1:
● Full Value of Consideration: It is the amount received or receivable by the taxpayer as a result of the
transfer of the capital asset. It may be in cash or in kind.
● Cost of Acquisition: It is the amount for which the capital asset was acquired by the taxpayer. It may
include the purchase price, brokerage, registration fees, stamp duty, etc.
● Cost of Improvement: It is the amount spent by the taxpayer for making any additions or alterations to the
capital asset after its acquisition. It does not include normal maintenance or repair expenses.
● Expenses on Transfer: It is the amount incurred by the taxpayer in connection with the transfer of the
capital asset, such as legal fees, commission, advertisement, etc.
● Capital Gains: It is the difference between the full value of consideration and the sum of the cost of
acquisition, cost of improvement, and expenses on transfer. It may be short-term or long-term, depending on
the period of holding of the capital asset. Short-term capital gains arise from the transfer of a capital asset
held for not more than 36 months (12 months for shares, securities, etc.). Long-term capital gains arise from
the transfer of a capital asset held for more than 36 months (12 months for shares, securities, etc.).
● Income from Capital Gains: It is the capital gains minus the deductions allowed under Sections 54 to 54H
of the Income Tax Act, 1961. These deductions are for various purposes, such as investment in residential
house, bonds, etc.
Income from Other Sources
The fifth and the last category of income is income from other sources, which includes any income that is
not covered under any of the other four categories.
Some examples of income from other sources are:
● Interest on bank deposits, securities, loans, etc.
● Dividend from shares of companies, mutual funds, etc.
● Winnings from lottery, crossword puzzles, races, games, gambling, betting,etc.
● Gifts received in cash or in kind, exceeding Rs 50000 in a year, except fromrelatives or on certain
occasions.
● Income from sub-letting of house property.
 ● Income from royalty, patent, or copyright.

DIVERSION OF INCOME
Diversion of Income is a contrasting concept where income is diverted before it is earned by the assessee. In
this case, the income never actually becomes the income of the assessee, as it is transferred to another
person or entity through an overriding title before it can be claimed by the assessee. Because the income is
diverted at the source, it is not included in the total income of the assessee and is therefore not taxable in
their hands.
Consider the case of M/s ABC, a partnership firm where A and his two sons B and C are partners.
According to the partnership deed, after the death of Mr. A, 20% of the firm’s profits are to be paid to Mrs.
D, the wife of Mr. A and mother of B and C. After Mr. A’s death, this 20% of profit is diverted to Mrs. D
before it becomes part of the firm’s income. As a result, this amount is not included in the taxable income of
the firm, M/s ABC. D has overriding title over the income.

CIT v. Bijli Cotton Mills (P) Ltd [(1979) 116 ITR 60 (SC)]. In this case, the Supreme Court held that for
an income to be considered diverted at source, there must be an overriding title that diverts the income
before it reaches the assessee. If such a title exists, the income never becomes the property of the assessee
and therefore is not taxable in their hands.
Another significant case is CIT v. Imperial Chemical Industries (India) Pvt. Ltd [(1969) 74 ITR 17
(SC)], where the Supreme Court differentiated between diversion of income by an overriding title and
application of income. The court ruled that where income is diverted before it is earned due to an overriding
obligation, it does not form part of the assessee’s total income.

The following conditions must be met:

a) Existence of a legal obligation: There must be a legal obligation on the taxpayer to apply the income in a
particular manner before it accrues or arises to the taxpayer. This legal obligation can arise from a contract,
an agreement, a statute, or any other legal arrangement.
b) Diversion before accrual or arising of income: The income must be legally diverted to a third party before
it accrues or arises to the taxpayer. Once the income accrues or arises to the taxpayer, it becomes taxable in
the hands of the taxpayer unless it satisfies the conditions for diversion of income.
c) Diversion without the taxpayer's control: The income must be diverted to a third party without the
taxpayer having control over it. The taxpayer must not have any power or control over the diverted income
after it is diverted.
d) Genuine and bona fide transaction: The diversion of income must be a genuine and bona fide transaction,
and it must not be a sham or colorable transaction intended to evade taxes.
If all these conditions are met, the diverted income will not be treated as the taxpayer's income for tax
purposes, and it will be taxable in the hands of the third party to whom it is diverted.
The essentials are the following:
(i) Income is diverted at source,
(ii) There is an overriding charge or title for such diversion, and
(iii) The charge / obligation is on the source of income and not on the receiver.
Examples of diversion by overriding title are –
 (i) Right of maintenance of dependents or of coparceners on partition
(ii) Right under a statutory provision
(iii) A charge created by a decree of a Court of law.

CIT v. Sitaldas Tirathdas (1961)

(i) an income diverted at source by overriding charge is not chargeable to tax in the hands of the actual
recipient;
(ii) a charge created for diversion of income by overriding title will insulate the recipient from tax
consequences and merely because he receives the same, he could not be taxed.
An example of overriding charge is that a person giving a property as a gift to another person may create a
charge that the recipient is eligible to enjoy the property and its income subject to satisfying certain
conditions. The conditions could be to pay a specified sum to a particular person at periodic intervals or to
share the rental income from the property with a particular person for a particular period of time.
APPLICATION OF INCOME
Application of Income refers to the allocation or expenditure of income after it has been earned by the
assessee. The essential aspect of this concept is that the income in question is first earned by the assessee
and only then is it applied towards fulfilling an obligation or making a payment. As such, the income is part
of the total income of the assessee and is subject to taxation.
Under the Income Tax Act, 1961, Application of Income is not explicitly defined, but its principles are
derived from the general understanding of income taxation. Income is generally understood to be taxable
when it is received or deemed to be received by the assessee. Once income is earned, any subsequent
application or expenditure of that income does not affect its taxability.

CIT v. Sitaldas Tirathdas [(1961) 41 ITR 367 (SC)], where the Supreme Court held that when income is
earned by the assessee, its subsequent application towards discharge of an obligation does not remove it
from the purview of taxation.
In this case, the assessee was obligated to pay a certain portion of his income to his wife and children under
a court decree. The assessee claimed that this income should not be taxed as it was applied towards a legal
obligation. However, the Supreme Court ruled that the income was taxable because it was first earned by the
assessee and then applied to fulfill the obligation.

Aspect Application of Income Diversion of Income

Definition Allocation or expenditure of Redirection of income before it

income after it is earned. is earned by the assessee.

Timing Income is first earned by the Income is diverted before it

assessee. reaches the assessee.

Taxability Taxable in the hands of the Not taxable in the hands of the
assessee. assessee.
 Overriding Title No overriding title is present. Presence of an overriding title
that causes income diversion.

Legal Obligation Fulfillment of an obligation Income is diverted due to a

after income is earned. legal obligation before it is
earned.

Example Mr. A paying alimony to his Partnership firm diverting 20%

ex-wife from his salary. of profit to a partner’s wife as
per the deed.

Effect on Total Included in the total income Excluded from the total income
Income of the assessee. of the assessee.

Practical Income remains taxable Income is excluded from

Implications despite its application. taxation due to diversion.

Importance for Must be carefully identified to Can be structured to optimise

Tax Planning avoid misclassification. tax liabilities legally.

CAPITAL RECEIPTS
Capital receipts are the income received by the company which is non-recurring in nature. They are part of the
financing and investing activities rather than operating activities. The capital receipts either reduces an asset or
increases a liability. The receipts can be generated from the following sources:
● Issue of Shares
● The issue of debt instruments such as debentures.
● Loan taken from a bank or financial institution.
● Government grants.
● Insurance Claim.
● Additional capital introduced by the proprietor.
REVENUE RECEIPTS
Revenue Receipts are the receipts which arise through the core business activities. These receipts are a part of
normal business operations that is why they occur again and again, however its benefit can be enjoyed only in the
current accounting year as its effect is short term. The income received from the day to day activities of business
includes all the operations that bring cash into the business like:
● Revenue generated from the sale of inventory
● Services Rendered
● Discount Received from the creditors or suppliers
● Sale of waste material/scrap.
● Interest Received
● Receipt in the form of dividend
● Rent Received
Similarities
1. Both receipts are a part of business activities.
2. Both are necessary for the survival and growth of the company.
3. The source of business income.
CIT Vs. Shaw Wallace & Co.
Co. worked as merchants and agents of various companies. The crux of the case starts on receiving compensation
from termination of its agencies in companies. The income tax department considered it as revenue in nature as it
was regular business of the co. whereas shaw wallace co. argued it to be capital receipt in nature as keeping
managing agency rights as capital assets and was loss of not just financial asset but strategic asset.
Bombay HC- the compensation received by the co. was capital in nature and not taxable as income:
 1. The agency and managing rights of the co. were akin to be capital assets of the co. (nature of the asset)
2. Compensation received was not just merely replacement of the loss, it was not recurring payment for
services rendered it was a one time payment received for termination of a valuable right
3. Established that compensation received for the loss of capital asset even if that asset is a source of income
will be treated as capital receipt
CIT v. Govt. Shamsher Publishing Company (2002)

In this case the acquisition of the Assessee Land was ordered by the Government under the Land Acquisition Act, 1894.
Government awarded compensation to the Company for the ordered acquisition of land The issue was whether
compensation should be distributed by Shamsher Printing Press received in the enforced acquisition of his land as a
capital receipt or revenue.

The Delhi High Court confirmed the decisions of the lower authorities and ruled that the compensation received by
Shamsher Printing Office for the enforced acquisition of its land was capital receipt and not taxable as income if they are
found. The Court emphasized the distinction between capital receipt and revenue receipt if the gain arises from the
transfer or loss of a capital asset such as land, it is considered to be in the nature of capital. The Supreme Court
concluded that the compensation in question was a loss of substantial property and therefore exempt from income tax.

CIT Vs. RaiBahadurJairamWalji (1959)

The Supreme Court held that compensation received in the termination of business contract are generally capital receipt
if they affect the profitable structure of the business.

AGRICULTURAL INCOME
Section 2(1A) of the Income Tax Act, 1961, lays down the definition of ‘agricultural income’ under the
following three activities:
● Rent or revenue derived from agricultural land situated in India and used for agricultural purposes.
● Income earned from agricultural land through agriculture and the commercial sale of produce gained
from this land by applying only ordinary process to the produce, to make it fit for the market.
● Revenue derived from renting or leasing of buildings in or around agricultural land.
However, this criterion is subject to the following conditions:
● This building should be occupied by a farmer or cultivator through revenue or rent.
● It is used as a residential space, warehouse/storeroom, or outhouse.
● The land on which this building is located is assessed for land revenue or a local rate evaluated and
collected by government officers.
● Where the land is not so assessed, it should not be located
1. in any area which is comprised within the jurisdiction of a municipality or a cantonment
board and which has a population of not less than ten thousand or
2. in any area within the distance of local limits from such municipality or a cantonment board;
a. not being more than two kilometres and which has a population of more than ten
thousand but not exceeding one lakh
b. not being more than six kilometres and which has a population of more than one lakh
but not exceeding ten lakh
c. not being more than eight kilometres and which has a population of more than ten
lakh.
The court also held that the income derived from the sale of spontaneously grown trees of a forest is not
agricultural income, unless it is proved that human skill and labour was employed for cultivating the land
and making it fit for raising the forest trees.
The court also laid down some tests to determine whether an income is agricultural or not, such as:
● The nature and character of the land.
● The connection between the land and the produce.
● The source of the income and the process by which it is earned.
● The extent and proportion of the basic and subsequent operations
FACTS
Here Respondent owns 6000 acres of forest of sal and piyasal trees.
• The forest was of spontaneous growth and it was 150 years old.
• Respondents used to sell those trees and income was generated from those trees.
• Here, Respondents say that generated income is agricultural income and this is exempted under section
10(1) of taxation act therefore there should be no income tax imposed on it.
• But the income tax officer rejects his plea and he does not consider it as an agricultural income and he
deducts the expenditure required on maintaining the forest.

Exceptions:
a. If a person sells processed produce without carrying out any agricultural or processing operations, the
income would not be regarded as agricultural income.
b. Likewise, in cases where the produce is subjected to substantial processing which changes the very nature
of the product (for instance, canning of fruits), the entire operation is not considered as an agricultural
operation. The profit from the sale of such processed products will have to be apportioned between
agricultural income and business income.
c. Income from trees that have been cut and sold as timber is not considered as an agricultural income since
there is no active involvement in operations like cultivation and soil treatment.
[Explanation 3.—For the purposes of this clause, any income derived from saplings or seedlings grown in a
nursery shall be deemed to be agricultural income.

Non- Agricultural Income- The following are not agricultural income based on judicial decisions:-
1. Income from fisheries.
2. Royalty income of mines.
3. Income from butter and cheese- making.
4. Income from poultry farming.
5. Dividend paid by a company out of its agricultural income.
6. Interest received by a money- lender in the form of agricultural produce.
7. Income of salt produced by flooding the land with sea water, as it is not derived from land used for
agricultural income.
8. Income from sale of forest trees, fruits and flowers growing on land naturally and spontaneously and
without the intervention of human agency.
9. Interest on arrears of rent payable in respect of agricultural land as it is neither rent nor revenue derived
from land. Profit accruing from the purchase of a standing crop and resale of it after harvest by a merchant
having no interest in land except a mere license to enter upon the land and gather upon the product, since
land is not, the direct, immediate or effective source of income.
Casey vs CIT
Brihan Maharashtra sugar ltd vs CIT
Bacha F Guzdar vs CIT
Appellant was a shareholder of two agricultural companies who grew and manufactured tea. Appellant got a
dividend from both these companies and argued it to be included partially 60% as agricultural income
(growing of tea) and 40% as non agricultural (manufacturing)
SC held- in order to determine the nature one had to consider the immediate and effective source of income.
The appellant did not earn the dividend directly from the land and co. and shareholders are separate legal
entities. So in order to be considered as agricultural income the income must arise from land