Principles of Taxation Law

TAX

- compulsory ….
- One of the inherent powers of the govt to collect revenue.
- One of the sources of the revenue for govt.
- Tax- 2 categories
a. Direct tax- incident and impact of tax on same person- ex. Income tax.
Progressive in nature - means more income, more tax
b. Indirect tax- incident and impact of tax on different person- ex. Custom duty, GST

Different source of Revenue to Govt

- Stamp duties
- Export

CONSTITUTIONAL PROVISIONS AS REGARDS TO TAXATION

a. Article 245

b. Article 265
- lays down that no tax shall be levied or collected except by the authority of law.

c. Article 246
- read with Schedule VII divides subject matter of law made by legislature into three
categories-
- List I Union list (only Central Government has power of legislation on subject matters
covered in the list)
- List II State list (only State Government has power of legislation on subject matters
covered in the list)
- Concurrent list (both Central &State Government can pass legislation on subject
matters).
- Entries 82 to 92 C of List I enumerate the subjects where the Central Government has
power to levy taxes.
 - Entries 45 to 63 of List II enumerate the subjects where the Central Government has
power to levy taxes.
- Parliament has a further power to make any law for any part of India not comprised in a
State even if such matter is included in the State List.

Constitution 101st Amendment Act, 2016

- Article 246 A- special provisions with respect to goods and services tax

" (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject
to clause (2), the Legislature of every State, have power to make laws with respect to goods
and services tax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect to goods and services tax
where the supply of goods, or of services, or both takes place in the course of inter-State
trade or commerce.

- Constitutional amendment act, 2016- Article 246A- for GST

- Why there was a need for such an amendment?

Difference b/w Tax and Fee

- Tax will be covered for public purpose

- In order to impose tax, there must be law
- Value of the fee must be proportionate to the service whereas this is not the case with tax

Difference b/w Tax and Cess

- Cess is collected for a particular purpose and it should be utilized for that purpose only.
- Whereas tax is utilized for general purpose.

Income tax act, 1961

- Characteristic- it divided income in 5 categories.

- Basis and procedure of charging the income tax

Income tax Rules, 1962

Finance Act

Is it possible to make retrospective amendment in the tax statute?

- Vodafone case

National Agricultural Co-op. Marketing Federation of India Ltd. Vs. UOI, 2003

CBDT

- Power to issue circular and notification

- What is the difference b/w circular and notification?
- Circular only in the nature of clarification. It is not of binding nature.
- Notification whereas is a delegated legislation and binding.

- Whether is it possible to impose tax on the basis of finance act?- Yess, for example by
finance act, 2016 Govt has imposed levy on international….

DEFINITIONS

2 (31)- Person includes-

(i) an individual,
(ii) a Hindu undivided family,
(iii) a company
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-
clauses.

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;
2(7) “Assesse”

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;

2(9) “assessment year”

means the period of twelve months commencing on the 1st day of April every year;

Sec 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.

Ex- Assessment year- 2025-26

Previous year-2024-25- 1st April 2024-31st March 2025

Exceptions to the general Rule- cases in which AY and PY will be same

i. Income of non-resident from shipping business. 7.5% - sec.172

ii. Income of person leaving India- Sec 174
iii. income of an association of persons or a body of individuals or an artificial juridical
person formed for a particular event or purpose. Sec 174 A
iv. Transfer of property to avoid tax. Sec 175
v. On discontinuation of a business or a profession. Sec 176
- Mr. X leaves India on 1st November 2023.

Sec. 2(1A) Agricultural Income

A- (i) Any rent or revenue derived from land (ii) which is situated in India and (iii) is
used for agricultural purposes.
B- (i) Any income derived from such land by agricultural operations or (ii) any process
by cultivator or receiver of rent in kind which render the produce fit for the market or
(iii) the sale of such produce.
C- Any income from a farm house.

Farm house Income

(i) The building is owned and occupied by the cultivator or receiver of the rent or
revenue of any such land;
(ii) It is situated on or in the immediate vicinity of the agricultural land;
(iii) The building is by reason of his connection with the land, used as dwelling
house or a store-house or an out-house by the cultivator or receiver of rent in kind;
(iv)The land is either assessed to land revenue in India or is subject to local tax.

OR

(a) The land is situated in non-urban area; or

(b) The land is situated within municipality or cantonment board jurisdiction, has a
population of more than 10,000 but less than 1,00,000; or
(c) The land is beyond a notified distance (maximum 8 k.m) from the local limits of any
such municipality or cantonment board.
Population – 10K to 1 lakh- 2km
1 to 10 lakh- 6 Km
Above 10 lakh-8 Km
Aerially

Partly Agriculture Income

- Profits of such sugar factories as produce sugar from cane grown on their own farms:
The average market price of sugar cane during relevant previous year shall be charged as
an expenditure and no note will be taken of the expenses of cultivating the sugarcane. The
income thus determined will be the business income.
- Income from growing and manufacturing of Tea- 60% is deemed to be Agricultural
income, 40% business income.
- Income from growing and manufacturing of centrifuged latex and cenex- 65% is
deemed to be Agricultural income, 35% business income.
- Income from growing and manufacturing of Coffee
(a) 75% of the income derived from the sale of coffee grown and cured by the seller in
India is deemed to be agricultural income and remaining 25% is business income.
(b) 60% of the income derived from the sale of coffee grown, cured, roasted and
grounded by the seller in India with or without mixing of chicory or other flavouring
ingredients is deemed to be agricultural income and remaining 40% is business
income.

INCOME

Sec. 2(24) Income includes-

(i) profits and gains;

(ii) dividend;

(iia) voluntary contributions received by a trust created wholly or partly for charitable or
religious purposes or by an institution established wholly or partly for such purposes or by
an association or institution referred to in clause (21) or clause (23), or by a fund or trust or
institution referred to in sub-clause (iv) or sub-clause (v) of clause (23C), of section 10.

Explanation. For the purposes of this sub-clause, " trust " includes any other legal
obligation;

(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of
section 17;

(iiia) any special allowance or benefit, other than perquisite included under sub-clause(iii),
specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for
the performance of the duties of an office or employment of profit;
(iiib) any allowance granted to the assessee either to meet his personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the increased cost of living;

(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained
from a company either by a director or by a person who has a substantial interest in the
company, or by a relative of the director or such person, and any sum paid by any such
company in respect of any obligation which, but for such payment, would have been payable
by the director or other person aforesaid;

(iva) the value of any benefit or perquisite, whether convertible into money or not, obtained
by any representative assessee mentioned in clause (iii) or clause(iv) of sub-section (1) of
section 160 or by any person on whose behalf or for whose benefit any income is receivable
by the representative assessee (such person being hereafter in this sub-clause referred to as
the " beneficiary") and any sum paid by the representative assessee in respect of any
obligation which, but for such payment, would have been payable by the beneficiary;

(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41
or section 59;

(va) any sum chargeable to income tax under clause (iiia) of section 28;

(vb) any sum chargeable to income-tax under clause (iiib) of section 28;

(vc) any sum chargeable to income-tax under clause (iiic) of section 28;

(vd) the value of any benefit or perquisite taxable under clause (iv) of section 28;

(ve) any sum chargeable to income-tax under clause (v) of section 28;

(vi) any capital gains chargeable under section 45;

(vii) the profits and gains of any business of insurance carried on by a mutual insurance
company or by a co-operative society, computed in accordance with section 44 or any
surplus taken to be such profits and gains by virtue of provisions contained in the First
Schedule;

(ix) any winnings from lotteries, crossword puzzles, races including horse races, card games
and other games of any sort or from gambling or betting of any form or nature whatsoever;

Explanation.- For the purposes of this sub-clause,-

(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever, under any scheme or arrangement by whatever
name called;

(ii) "card game and other game of any sort" includes any game show, an entertainment
programme on television or electronic mode, in which people compete to win prizes or any
other similar game;

(x) any sum received by the assessee from his employees as contributions to any provident
fund or superannuation fund or any fund set up under the provisions of the Employees State
Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;

(xi) any sum received under a Keyman insurance policy including the sum allocated by way
of bonus on such policy.

Explanation. For the purposes of this clause, the expression "Keyman insurance policy" shall
have the meaning assigned to it in the Explanation to clause (10D) of section 10;

(xii) any sum referred to in clause (va) of section 28;

(xiii) any sum referred in section 56(2) (vi)

(xiv) any sum of money or value of property referred to in section 56(2)(vii) and (viia)

Income v Capital

CIT v Shaw Wallac and co Ltd, 1932

Income is a flow, while capital is a fund. Income can be compared to fruits of a tree, while the
tree being a source is the capital. Income connotes a periodical return in money or moneys
coming in some sort of regularity from a definite source

“The object of the Indian Act is to tax "income" a term which it does not define. It is
expanded, no doubt, into "income profits and gains," but the expansion is more a matter of
words than of substance. Income, in this Act connects a periodical monetary return "coming
in" with some sort of regularity, or expected regularity, from definite sources. The source is
not necessarily one which is expected to be continuously productive, but it must be one
whose object is the production of a definite return excluding anything in the nature of a mere
windfall. Thus, income has been likened pictorially to the fruit of a tree, or the crop of a field.
It is essentially the produce of something, which is often loosely spoken of as "capital". But
capital, though possible the source in the case of income from securities, is in most cases
hardly more than an element in the process of production.

Scope of Chargeability of Income and Capital Receipts

Basic Test to Distinguish Income from Capital

- Whatever amount is derived, with the source being intact, will be income
- While the amount received as compensation for the loss or sterilisation of the source will
be capital

Pre commencement Receipts:

- Any interest or income earned linked directly to setting up of the business is a capital
receipts.

CIT v Karnal Cooperatives Sugar Mills Ltd

- A person paid margin money to open a letter of credit from a bank for the supply of
machinery for the establishment of a plant. Due to the delay on the part of the supplier
interest was accumulated on the margin money.
- Question-whether this will fall under the category of revenue receipt or capital receipt?
- SC- Directly linking to the setting of the business. Thus, capital receipt. Thus, not
income.

Tuticorin Alkali Chemical and Fertilizers Ltd v CIT, 1997

- A person has taken the loan for the purpose of establishing the manufacturing unit. He
simply kept the loan in the bank and earning the interest on it.
- Whether the interest on the loan amount will fall under revenue receipt or capital
receipt?
- SC- Interest earned not directly linked to the setting up of the business is income. Thus,
will fall under revenue receipt

Insurance Receipts

- Insurance based on the concept of the indemnity.

 - Fall under the category of capital receipt. Therefore, not considered income of assessee.
- But when you insured not only covering the cost of plant, machinery but also the
incidental profit in future. Then, the additional benefit will be covered under the
category of revenue receipt. The person will be liable to pay income tax on this
additional profit.

- Ex- X owner of the house property. He entered into contract to purchase house with Y.
in case of breach of contract, Y is liable to pay 1 Lakh Rupee to X. whether this will
considered to be income of the X?- Yes
- Thus, whenever you are receiving money to keep the source intact, then it is capital
receipt but if you are getting additional benefit, then it will be considered as revenue
receipt.

Income – categories

1. Income from salary

2. Income from house property
3. Income from business and profession
4. Income from capital gain- gain arised from transfer of capital assets
5. Income from other sources

Compensation Receipt

Application of Income

- Where the income is required to be applied to discharge an obligation after such income
reaches the assessee.
- The person has to pay tax on the entire amount

Diversion of Income

- Where the income is diverted before it reaches the assessee.

- Because the income is diverted from the very source itself. The asssessee will be liable
to pay tax only on the amount that comes to his hand.
CIT v. Padmaraji R Kadambande, 1992

- A father receives from non-resident a regular monthly allowance of Rs. 5000. The son
instructed his banker where he has a Non-resident (External) account to transfer this
amount to his father’s account every month. Assessing Officer says that it is a regular
income assessable as a revenue receipts.
- It is only amounted to application of the income. Thus, it will not be considered as the
income of the receipant/father and thus, he will not be liable to pay income tax on it.

Is the transfer of an asset, under a charge created on the asset to discharge an obligation,
amount to application of income or diversion of Income?

- Diversion of income

Sec. 100 Charges, TPA

Where immovable property of one person is by act of parties or operation of law made
security for the payment of money to another, and the transaction does not amount to a
mortgage, the latter person is said to have a charge on the property; and all the provisions
hereinbefore contained [which apply to a simple mortgage shall, so far as may be, apply to
such charge.]

Nothing in this section applies to the charge of a trustee on the trust-property for expenses
properly incurred in the execution of his trust, [and, save as otherwise expressly provided by
any law for the time being in force, no charge shall be enforced against any property in the
hands of a person to whom such property has been transferred for consideration and without
notice of the charge.

Is the transfer of income under a specific contract entered into before earning the said
income, amount to application of income or diversion of income?

Example- A firm consisted of father and three major sons. The partnership deed provided that
after the death of the father, the business shall be continued by the sons subject to the
condition that the firm shall pay 20% of the profits to mother, before determining the profits
of the firm.

Will the amount which has been paid to the mother by the firm after the death of father be
eligible as deduction to the firm?
Jit and Pal X-Ray Pvt. Ltd. v. CIT, 2004

Obligation to pay an amount if attached with the source of income, is to be treated as

diversion of income. Hence, the amount paid to the mother shall be allowed as deduction
from the income of the firm.

Is the transfer of income to discharge a liability attached to an inherited asset that

generated the said income, amount to application of income or diversion of income?

Is a discharge of a personal obligation without any charge on the asset or source of

income used, amount to application of income or diversion of income?

Is a discharge of a judicial obligation without any charge on the asset or source of income
used, amount to application of income or diversion of income?

Tainted or illegal income

- Income tax does not talk about legal or illegal income, it only mentions about the tax on
the income.

Personal gift

RESIDENTIAL STATUS AND ITS IMPACT ON TAX LIABILITY

Types of residents

a. Resident
- Ordinary residents
- Non-ordinary residents
b. Non-resident

Individuals

I. RESIDENT (ORDINARILY RESIDENT)- have to fulfil any of the basic as

well as both the additional conditions

Basic conditions: [sec. 6(1)]

1. He is in India in the previous year for a period of 182 days or more, or
- P.Y. 2021-2022 - 182 Days
2. he has been in India for at least 365 days during the four years preceding the previous
year and is in India for at least 60 days during the previous year.
- 2017-2018,2018-2019, 2019-2020, 2020-2021 = 365 days
- P.Y. 2021-2022 = 60 days

Exceptions to the rules of 60 days’ stay in India

(i) An individual who is a citizen of India and leaves India in any previous year for the
purpose of employment or as a member of the crew of an Indian ship must have
stayed in India for at least 182 days during the previous year instead of 60 days;
(ii) If any citizen of India or a person of Indian origin, who is living outside India, comes
on a visit to India in the previous year, he must have stayed in India for at least 182
days during the previous year instead of 60 days.

The period of 60 days is substituted by 120 days in case of an individual being an Indian
citizen or a person of Indian origin, who being outside India, comes on a visit to India in the
previous year (P.Y.), having total income, other than the income from foreign sources,
exceeding Rs. 15 lakh during the P.Y.

“Income from foreign sources” mean income which accrues or arises outside India (except
income derived from a business controlled in or a profession set up in India) and which is not
deemed to accrue or arise in India.

[ Amended by Finance Act, 2020 & Taxation and Other Laws(Relaxation and Amendment
of Certain Provisions) Act, 2020 w.e.f. 01-04-2021 i.e. A.Y. 2021-22]

Additional Conditions

a. He has been resident in India for at least 2 out of 10 previous years immediately
preceding the relevant previous year.

And

b. He has been in India for 730 days or more, during 7 previous years immediately
preceding the relevant previous year.
Deemed resident in India

[ 6(1A)] [Inserted by Finance Act, 2020 w.e.f. 01-04-2021, A.Y 2021-22]

An Individual shall deemed to be resident in India if he fulfils the following conditions:

(1) He must be citizen of India;

(2) His total income , other than income from foreign sources, must exceed Rs. 15 lakh
during the previous year and
(3) He is not liable to tax in any other country or territory by reason of his domicile or
residence or any other criteria of similar nature.

If these conditions are satisfied he is deemed to Not Ordinarily resident in India as per section
6(1)(d).

[Amended by Finance Act, 2020 & Taxation and Other Laws(Relaxation and Amendment
of Certain Provisions) Act, 2020 w.e.f. 01-04-2021 i.e. A.Y. 2021-22]

II. NOT ORDINARILY RESIDENT – fails to satisfy any of the additional

condition

A person is said to be “not ordinarily resident” in India in any P.Y. if such person has been-

(a) A non-resident in India in any 9 years out of the total 10 years preceding the previous
years; or
(b) In India for a period of 729 days or less during the 7 years preceding the previous year;
or
(c) A citizen of India, or a person of Indian origin , having total income from foreign
sources, exceeding Rs. 15 lakhs during the previous year , who has been in India for a
period or periods amounting in all to 120 days or more but less than 182 days(w.e.f. A.Y.
2021-22), or
(d) A citizen of India who is classified as deemed to resident u/s 6(1A), (w.e.f. A.Y. 2021-22

III. NON- RESIDENT

- Fail to satisfy any of the basic condition
Forced stay?

CIT v. Suresh Nanda, 2015, Delhi HC

- affirmed the ruling in Suresh Nanda v. Assistant Commissioner of Income-tax, that

where the assessee was forced to stay in India against his will due to impounding of
passport, the period of forced stay cannot be counted for determining residential status

HUF [sec. 6(2)]

Resident- If the control and management of its affairs is situated wholly or partly in India
during the relevant previous year.

Not ordinarily resident- On the basis of residential status of Karta or manager during the
previous year.

Non- resident - If the control and management of its affairs is situated wholly outside India.

Firm or AOP

Resident- If the control and management of its affairs is situated wholly or partly in India
during the relevant previous year

Non-resident- If the control and management of its affairs is situated wholly outside India.

Test of de facto control

CIT v. PL. M. TT. Firm 1973, High Court of Madras

Where all partners of a firm were residing in India and they appointed a person through
power of attorney in Sri Lanka who was entirely in charge of the business and the partners
did not play any role in control and management, it was held that the firm was not tax
resident in India.

held that as per the terms of the deed de jure control remained with the principal but de
facto control or actual control was with the agent. Thus, rather than mere proof of power or
capacity to control and manage, the actual power or control was relevant.
Interpretation of phrase ‘control and management of affairs’

Saraswati Holding Corpn. Inc v. Dy. DIT(IT), 2007 (Delhi)

The ITAT held that control and management of affairs do not mean the control and
management of the day-to-day affairs of the business. The fact that discretion to conduct
operations of business is given to some person in India would not be sufficient. The words
‘control and management of affairs’ refer to head and brain, which directs the affairs of
policy, finance, disposal of profits and such other vital things consisting the general and
corporate affairs of the company. Thus, where decisions on investments were taken by
directors outside India, the income from investments made in India could not be taxed in the
hands of the company only because a few persons had been given authority to conduct the
affairs.

Companies[sec.6(3)]

Resident.

i. It is an Indian company; or
ii. During that year, the control and management of its affairs is situated wholly in
India.

W.e.f. A.Y. 2017-18 point (ii) will be as under

Its place of effective management, in that year, is in India.

Expln: POEM means a place where key management and commercial decisions that are
necessary for the conduct the business of an entity as a whole are, in substance made .

Certain rulings prior to insertion of PoEM

Radha Rani Holdings v. Asstt. DIT, 2007 (Delhi)

It was held that even if a partial control and management is exercised from outside India, it
would not fall within ambit of Section 6(3)(ii) and the company would be treated as a non-
resident.
Presently PoEM is part of the statutory provisions and Circular No.6 of 2017 dated 21-1-2017
and Circular No.25 of 2017 dated 23-10-2017 have been issued by the CBDT in this regard.
By Circular No.8 of 2017 dated 23-2-2017, it has been clarified that the PoEM provisions
shall not apply to a company having turnover or gross receipts of INR 50 crore or less in a
financial year.

As per the PoEM guidelines, a company shall be said to be engaged in “active business
outside India” if the passive income is not more than 50% of its total income and

(i) less than 50% of its total assets are situated in India; and
(ii) less than 50% of total number of employees are situated in India or are resident in
India; and
(iii) the payroll expenses incurred on such employees is less than 50% of its total payroll
expenditure.

Every other person [sec. 6(4)]

Resident- If the control and management of its affairs is situated wholly in India during the
relevant previous year

Non- resident- If the control and management of its affairs is situated wholly outside India.

INCIDENCE OF TAX ON THE BASIS OF RESIDENCE

1. Incidence of tax in case of resident (ordinary)-

The total income of any of a person who is a resident includes all income from whatever
source derived which:
a) Is received or deemed to received in India in such year by or on behalf person,
whether accrued or arisen anywhere or,
b) Accrues or arise or deemed to accrue or arise in India during such year, whether
received any where.
c) Accrues or arises to him outside India during such year.

- Has to pay on global income

2. Incidence of tax in case of not ordinarily resident.

 The total income of any of a person who is a not ordinarily resident includes all income
from whatever source derived which:
a) Is received or deemed to received in India in such year by or on behalf person,
whether accrued or arisen anywhere or,
b) Accrues or arise or deemed to accrue or arise in India during such year, whether
received any where.
c) Accrues or arises to him outside India from a business controlled in or profession set
up in India.
3. Incidence of tax in case of non resident.
The total income of any of a person who is a non resident includes all income from
whatever source derived which:
a) Is received or deemed to received in India in such year by or on behalf person,
whether accrued or arisen anywhere or,
b) Accrues or arise or deemed to accrue or arise in India during such year, whether
received any where.

INCOME RECEIVED IN INDIA

Tapas Kr. Bandopadhyay v. DDIT, 2016, Kol)Trib

Mr. X (Assessee), a non-resident, rendered services as a marine engineer on board a ship

outside territorial waters of any country, salary received by him in India by way of fund
transfer from foreign companies directly to his NRE account in India.

Whether the salary of X is taxable in India?

- Yes, the salary is taxable in India

DCIT v. Chukkapalli Mallikarjuna, 2019, Vishakapatnam Trib.

X , assesse, non-resident seafarer working in Marine Shipping rendered services outside India
and earned salary which was remitted by his foreign employer in his NRE account
maintained with an Indian bank.

Whether the salary of X is taxable in India?

 - It will not fall under the category received in India. Received in India means directly
received in India. Thus, it is not taxable in India

Mustaq Ahmed, In re(2008)

A non-resident was getting gold jewellery manufactured in India, but selling it abroad with
sale proceeds received in India in the non-resident’s bank account in India, the income is
taxable on receipt basis in India.

INCOME DEEMED TO ACCRUE AND ARISE IN INDIA

- Sec 9(1)- only applicable in cases in which there is no agreement by India of DTAA.
- Sec 90-gives power to govt to enter into DTAA (Double taxation avoidance agreement)
- When there is conflict b/w DTAA and income tax act- then the provisions of DTAA will
prevail.

Income through or from business connection in India is deemed to Accrue or Arise in

India - 9(1)(i)

Explanation 2 to Section 9(1) (i) From the assessment year 2004-05, it has been clarified
that the term business connection will include to the following:

(a) Business activity through a person having an authority to conclude contracts on behalf
of the non-resident provided he/it habitually exercise such authority [ Exp 2(a) to
Sec.9(1)].
(b) Business activities through a person who have habitually maintain stock of goods on
behalf of the non-resident from which he regularly delivers good and merchandise on
behalf of the non-resident without having any authority [Expl. 2(b) to Sec. 9(1)].
(c) Business activities through a person who habitually secures order mainly or wholly for
the non-resident or/ and other non-resident entities controlling controlled by or under
the same control of the same non-resident person [Exp.2(c) to Sec 9(1)].

Exceptions [Proviso to Sec 9(1)]: Business connection will exclude any business activity
through brokers are commission agents of independent status acting in ordinary course of
their business [First proviso to Exp. 2 to Sec.9(1)].
However where search broker or commission agent works mainly on behalf of the non
resident or and other non-resident entities controlling controlled by or under the same control
as the non-resident, such brokers or agent will not be considered as having an independent
status.

Lubrizol Corporation USA v. ADIT, 2013, (Mum)(Trib)

Where Indian subsidiary only assisted in sale of products in India and did not have any
authority to negotiate terms of sales or conclude contract on behalf of foreign assessee
company, it could not be considered as agency Permanent Establishment in India and
therefore no profit could be taxed in India.

Amendment made by Finance Act, 2018, w.e.f A.Y. 2019-20

1. Business connection to include any activity carried out through a dependent

agent[ Explanation 2 to section 9(1)(i)]
Aligning the scope of “Business connection with modified Permanent Establishment
Rule
2. Significant Economic presence- Explanation 2A under section 9(1) (i)
Business connection shall include “Significant Economic presence” also

“Dependent Agent Permanent Establishment” - DAPE

Reasons for amendment

Under the existing provisions of clause (a) of Explanation 2 to section 9 (1)(i), “ business
connection” includes business activities carried on by non-resident through dependent agents.
The scope of business connection under the Act is similar to the provisions relating to
Dependent Agent Permanent Establishment (DAPE) in India’s Double Taxation Avoidance
Agreements (DTAAs) in terms of the DAPE rules in tax treaties, if any person acting on
behalf of the non-resident is habitually authorised to conclude contracts for the non-
resident, then such agent would constitute a PE in the source country.

However, in many cases, with a view to avoid establishing a permanent establishment (PE)
under Article 5(5) of the DTAA, the person acting on the behalf of the non-resident,
negotiates the contract but does not conclude the contract.

BEPS action plan 7 recommended modification to paragraph 5 of Article 5 to provide that an

agent would include not only a person who have actually concludes contract on behalf of
the non-resident, but also a person who habitually plays a principal role leading to the
conclusion of contracts.

BEPS Action Plan 7 have now been included in Article 12 of Multilateral Convention to
Implement Tax Treaty Related Measures (MLI), to which India is also a signatory

Amendment in Explanation 2 to section 9(1)(i) relating to DAPE

- In view of the above, the Act has amended the provision of section 9 of the act so as to
align them with the provisions in the DTAA as modified by MLI so as to make the
provisions in the treaty effective.
- Accordingly, clause (a) of Explanation 2 to section 9(1)(i) has been substituted by a new
clause (a) to provide that business connection shall include any business activities
carried through a person who, acting on behalf of the non-resident—
i. has and habitually exercises in India, and authority to conclude contracts on behalf of
the non-resident or
ii. habitually concludes contract or
iii. habitually place the principal role leading to conclusion of contracts by that non-
resident and
- and the contracts are –
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property
owned by that non-resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident.

“Significant Economic presence”

The Finance Act, 2018 has inserted Explanation 2 A under section 9(1)(i), w.e.f. 2019-20.
According to Explanation 2A, Business connection shall include “ Significant Economic
presence”.

Reasons for making amendment relating to “Significant Economic presence”

BEPS Action plan1 – Taxation of digital taxation

2016- Equalisation of levy

Significant economic presence shall mean-

 a) Transaction in respect of any goods, services, or property carried out by a non-
resident in India including provision of download of data or software in India if the
aggregate of payments arising from such transaction or transactions during the
previous year exceeds INR 20 million; or
b) Systematic and continuous soliciting of business activities or engaging in interaction
with more than 3,00,000 users in India, through digital means.

Provided that the transactions or activities shall constitute significant economic presence in
India, whether or not-

(i) The agreement for such transactions or activities is entered in India; or

(ii) The non-resident has a residence or place of business in India ; or
(iii) The non-resident renders services in India.

A new Explanation 3A has been added to section 9(1)(i) so as to provide that the income
attributable to operations carried out in India, as referred to in Explanation 1 to section 9(1)(i)
shall include income from:

- such advertisement which targets a customer who resides in India or a customer who
accesses the advertisement through internet protocol address located in India;
- sale of data collected from a person who resides in India or from a person who uses
internet protocol address located in India; and
- sale of goods and services using data collected from a person who resides in India or
from a person who uses internet protocol address located in India.
- Explanation 3A – added by Union budget 2020-21

CIT v. Hindustan Shipyard Ltd, 1977

- A foreign company non-resident in India sells diesel engine with accessories to an

Indian company. The engines were agreed to be erected by the staff of the purchaser
under the supervision of an engineer of the foreign company. The agreement also
provided overseas training course for some technical employees of the purchaser.
- Is the income of non-resident company deemed to be accrue or arise in India through
business connection in India?
 - There will be no business connection in such case as the non resident company merely
agree to render certain limited services connected with the effective fulfilment of the
contract of sale. Such services as are merely incidental to the contract and are usually
included in all such contracts by way of guarantee of the efficient working of the
product sold. To confirm with the requirement of the expression business connection it
is necessary that the common thread of mutual interest beyond a contract of sale must
run through the fabric of the trading activities.

Kanchanganga Sea Foods Ltd. v. CIT, 2010, SC

- Assessee company was engaged in sale and export of seafood and for that purpose it
obtained permit to fish in exclusive economic zone of India.
- To exploit fishing rights, it entered into an agreement, chartering two fishing vessels
with a non-resident company.
- Charter fees was payable from earnings from sales of fish and for that purpose 85% of
gross earning from sale of fish was to be paid to non-resident company.
- Actual fishing operations were done outside territorial waters of India but within
exclusive economic zone.
- Thereafter chartered vessels with entire catch were brought to Indian port, catch were
certified for human consumption valued and after customs and port clearances non
resident company received 85 % of catch .
- It was held that non resident company effectively received charter fees in India and
same would be chargeable to tax under section 5 (2). Assessee was liable to deduct tax
under section 195 on payment made to non resident company because income of non-
resident company is deemed to be accrue or arise in India through business connection
in India.

Star Cruise Management Ltd. v. DCIT, 2013 Mum.(Trib)

- Assessee company was receiving the remittance of ticket sold by the Indian company
outside India
- It was held that assessee was not having any business connection in India within the
meaning of section 9(1)(i) of the Act. Hence no income has been accrued to the assessee
in India in respect of booking on sale of tickets for tour packages of the cruise in India
which was done through Star Cruises (India) Travel services Pvt. Ltd.

Satellite Television Asian Region v DCIT(2006)

 - Mumbai tribunal was dealing with the case of an assessee, a non-resident company
incorporated in Hong Kong, selling television 'air ad time ' to various Indian advertisers
through its advertising sales agent (namely, Star India Private Limited, an Indian
company), wherein the assessee acquired the air ad time meant for advertisement from
various television channel companies who were also non-resident.
- Is the income of non-resident company deemed to be accrue or arise in India through
business connection in India?
- It was held that there exist a business connection between the assessee and the television
channel companies as the assessee was acting as a functional agent of the television
channel companies.
- Although the assessee contended that the contract is between the assessee and the
television channel companies were principal -to -principal in nature, the tribunal held
that since the assessee and the television companies were ultimately controlled by a
mother holding company, the functions carried out by all the companies were therefore
towards the commonness of interest involving in carrying out this business activity
hence the proposition of principle to principal relationship is almost irrelevant and
theoretical in nature.
- Therefore, the income earned by the television companies was treated as taxable in India
since the television channel companies had a business connection in India.

Income through or from property in India is deemed to Accrue or Arise in India sec.9(1)
(i).

- Property includes only tangible property.

Income through or from any asset or source in India deemed to Accrue or Arise in India
sec.9(1)(i).

- Asset or the source include both tangible and intangible asset

Performing Right Society Ltd. v. CIT, 1977

- Broadcasting fee paid in England by All India Radio to the Performing Right Society of
England for broadcasting the musical works belongs to the society, such income will
accrue or arise to the performing society in India as the source of income lies in India.
Income through the transfer of a Capital asset situated in India deemed to Accrue or
Arise in India sec.9(1)(i)

- Ex. Mr. X resident of country z and India does not have any kind of DTAA with country
Z. he transfers his capital asset in Bhopal. The person who is purchasing the property is
under obligation to deduct the amount of tax before making the payment to Mr. X. If
the purchaser fails to deduct the amount of tax, he will fall under the category of
assessee in default.

Vodafone International Holdings B.V. v. Union of India, 2012

- British telecom giant(V.I.Holding) registered in Netherland – purchased the 100%

shares in CGP from HTIL. The agreement of sale of shares of CGP took place outside
India.
- Two issues
a. First – HTIL by reason of instant transaction have earned income liable for capital gain
tax in India as this income was earned towards sale consideration of transfer of its
business, economic interests in India as a group in fabour of Vodaphone.
b. Second – Whether on payment made by Vodaphone to HTIL on such transaction,
Vodaphone was liable deduct tax under section 195 from sale consideration paid to HTIL.
- In order to override the judgment the govt came up with amendment – finance act 2012-
retrospective amendment

The Finance Act, 2012 has retrospectively amended the definition of:

i. Section 2(14): Amendment in Definition of Capital Asset

- Following Explanation has been added to section 2(14) i.e. the definition of Capital
Asset:
 - Explanation – For the removal of doubts, it is hereby clarified that: “Property” includes
and shall be deemed to have always included any right in or in relation to an Indian
company, including rights of management or control or any other rights whatsoever.
ii. Section 2(47): Amendment in Definition of Transfer
- Following Explanation has been added to Section 2(47): For the removal of doubts, it is
hereby clarified that:
“transfer” includes and shall be deemed to have always included disposing of or
parting with an asset or any interest therein, or creating any interest in any asset in
any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily
or involuntarily, by way of an agreement (whether entered into in India or outside
India) or otherwise, notwithstanding that such transfer of rights has been
characterised as being effected or dependent upon or flowing from the transfer of a
share or shares of a company registered or incorporated outside India.
iii. Following two Explanation have been added by Finance Act, 2012:
- Explanation 4:- For the removal of doubts, it is hereby clarified that the expression
“through” shall mean and include and shall be deemed to have always meant and
include “by means of “, “in consequence of” or “by reason of”.
- Explanation 5:- For the removal of doubts, it is hereby clarified that an asset or a
capital asset being any share or interest in a company or entity registered or
incorporated outside India shall be deemed to be and shall always be deemed to have
been situated in India, if the share or interest derives, directly or indirectly, its value
substantially from the assets located in India.

Cairn UK Holdings Limited v. DCIT, 2017

- Assessee , a U K based company transferred to another Indian group company its share
held in non-resident subsidiary company which in turn was holding controlling interest
in nine Indian subsidiary companies engaged in oil and gas sector in India.
- It was held that there was a transfer of rights of control and management of Indian
subsidiaries hold through holding subsidiary structure and assessee would be liable to
tax in India.

- The Taxation Laws (Amendment) Act, 2021

Salary earned in India and received outside India – [Sec. 9(1)(ii)]

- Salary income liable to be charge as tax. Because it will be considered as that the
income accrued and arisen in India

Salary payable by the government to a citizen of India for service outside India-[Sec.
9(1)(iii)]

- Ex. to consulate officer.

- Their income will deemed to be accrue and arise in India

Dividend paid by an Indian Company outside India-[Sec. 9(1)(iv)]

- This income will deemed to be accrue and arise in India

Income by way of Interest - sec. 9(1) (v)

- Income will deemed to be accrue and arise in India.

- Govt- will deduct the tax before paying the interest.

Income by way of interest payable by –

a. The Government; or
b. A person who is a resident always except where the interest is paid on debt incurred or on
money borrowed and used for business or profession outside India or for earning any
income from any source outside India, it is not deemed to accrue or arise in India.
Accordingly, where a resident person borrows money outside India but uses the loan
money for earning income in India, interest payable or paid on such borrowing is deemed
to accrue or arise in India.
- X(resident of India) - Y(Non-resident)
c. A person who is non-resident borrows money outside India and uses such loan money for
business purpose in India, interest payable on such loan is deemed to accrue or arise in
India.
- X(Non-resident) - Y(Non-resident)
- Finance Act, 2015- Explanation has been inserted in Section 9(1)(v)

Accordingly, in the case of a non-resident, being a person engaged in the business of

banking, any interest payable by the PE in India of such non-resident to the head office or
any PE or any other part of such non-resident outside India, shall be deemed to accrue or
arise in India
Income by way of royalty - sec. 9(1) (vi)

Income by way of royalty payable by –

a. The Government; or
b. A person who is a resident, except where the royalty is payable in respect of any right,
property or information used or services utilised for the purposes of a business or
profession carried on by such person outside India or for the purposes of making or
earning any income from any source outside India; or
- X(resident of India) - Y(Non-resident)
c. A person who is a non-resident, where the royalty is payable in respect of any right,
property or information used or services utilised for the purposes of a business or
profession carried on by such person in India, or for the purposes of making or
earning any income from any source in India .
- X(Non-resident) - Y(Non-resident)

Expln. 2 sec.9(1)(vi) – Royalty means-

(i) The transfer of all or any rights (including the granting of a licence) in respect of a
patent, invention, model, design, secret formula or process or trade mark or similar
property;
(ii) The imparting of any information concerning the working of or the use of, a patent,
invention, model, design, secret formula or process or trade mark or similar property;
(iii) The use of any patent, invention, model, design, secret formula or process or trade
mark or similar property;
(iv) The imparting of any information concerning technical, industrial, commercial or
scientific knowledge, experience or skill;
(v) The transfer of all or any rights (including the granting of a licence) in respect of any
copyright, literary, artistic or scientific work including films or video tapes for use in
connection with television or tapes for use in connection with radio broadcasting, but
not including* consideration for the sale, distribution or exhibition of
cinematographic films; or
(vi) The rendering of any services in connection with the activities referred to in sub-
clauses (i) to (v); [* Finance Act, 2020, w.e.f.. A.Y.2021-22]

Qualcomm Incorporated v. ADIT, 2013

 - ‘X’ a US resident Company had licensed certain (IP) relating to the manufacture of
Code Division Multiple Access (CDMA) mobile hand sets and network equipment to
‘Y’ (Non-resident) original equipment manufacturer.
- The tax authority alleged that the royalty payment to the extent it related to equipment
sold to customers in India, was taxable in India as the IP that was licensed was utilized
in a business carried in India or was earning income from India sources
- The ITAT ruled that secondary source rule was not applicable in the present case as ‘Y’
did not carry on a business in India nor did the customers who purchased the equipment
constitute the source of Income .
- Further ITAT ruled that onus on the tax authority to prove that royalty payable by NR
for the purpose of business carried in India

XYZ In Re, 1999

- Royalty was paid by an NR company to another NR company for use of trade mark in
India by its Indian subsidiary.
- The AAR observed that the trade mark in respect of which royalty was payable was in
effect used in India and therefore royalty must be deemed to be sourced in India under
secondary source rule

Google India(P) Ltd. v. Additional CIT, (2017), Bang Trib

- Assessee Google-India was appointed as a non exclusive authorized distributor of

Adword programs to advertisers in India by Google-Ireland.
- Google- Ireland’s Adword program is a continuous targeted advertisement campaign
making available technology to Google India. Assessee had been provided access to
IPR, Google brand features, secret process embeded in Adwords Program as tool of
trade for generation of income.
- Assessee was also having right, title and interest over IPR of Google standard
advertisement with advertiser, which specifically empowers assessee to delete, remove/
withdraw advertisement.
- Payment by Assessee to Google-Ireland = Royalty income not business income.

Engineering Analysis Centre of Excellence Private Limited vs. CIT (Supreme Court)
 - Fact : the appellant, Engineering Analysis Centre of Excellence Pvt. Ltd. (EAC), is a
resident Indian end-user of shrink-wrapped computer software, directly imported from
the United States of America.
- The Assessing Officer by an order dated 15.05.2002, after applying Article 12(3) of the
Double Taxation Avoidance Agreement (DTAA), between India and USA, and upon
applying section 9(1)(vi) of the Income Tax Act, 1961 (Act), found that what was in fact
transferred in the transaction between the parties was copyright which attracted the
payment of royalty and thus, it was required that tax be deducted at source by the Indian
importer and end-user, EAC.
- Since this was not done for both the assessment years, EAC was held liable to pay the
amount of Rs. 1,03,54,784 that it had not deducted as TDS, along with interest under
section 201(1A) of the Income Tax Act amounting to Rs. 15,76,567.

- The EULAs do not grant any such right or interest, least of all, a right or interest to
reproduce the computer software. In point of fact, such reproduction is expressly
interdicted, and it is also expressly stated that no vestige of copyright is at all
transferred, either to the distributor or to the end-user.
- Further, What is “licensed” by the foreign, non-resident supplier to the distributor and
resold to the resident end-user, or directly supplied to the resident end-user, is in fact the
sale of a physical object which contains an embedded computer programme, and is
therefore, a sale of goods, which, as has been correctly pointed out by the learned
counsel for the assessees, is the law declared by this Court in the context of a sales tax
statute in Tata Consultancy Services v. State of A.P., 2005 .

Will the subscription charged by a non-resident company for providing access to its
products over the internet from its data server be taxable in India?

CIT v. Wipro Ltd. (2011) 203 Taxman 621(Karn)

- Such kind of income fall under the royalty income and tax will be charged on this
income

Gartner Ireland Ltd. v. ADIT(2013) Mumbai Tribunal

- Followed the case of Wipro

Income by way of fees for technical services- Sec. 9(1) (vii)

Income by way of fees for technical services payable by –

a. The Government; or
b. A person who is a resident, except where the fees are payable in respect of services
utilised in a business or profession carried on by such person outside India or for the
purposes of making or earning any income from any source outside India; or
X(resident of India) - Y(Non-resident)

c. A person who is a non-resident, where the fees are payable in respect of services
utilised in a business or profession carried on by such person in India or for the
purposes of making or earning any income from any source in India .

X(Non-resident) - Y(Non-resident)

d. Provided that nothing contained in this clause shall apply in relation to any income by
way of fees for technical services payable in pursuance of an agreement made before
the 1st day of April, 1976, and approved by the Central Government.

Meaning of fees for technical services

Sec.9(1)(vii) Explanation 2 : For the purposes of this clause, “fees for technical services”
means any consideration (including any lump sum consideration) for the rendering of any
managerial, technical or consultancy services (including the provision of services of technical
or other personnel) but does not include consideration for any construction, assembly, mining
or like project undertaken by the recipient or consideration which would be income of the
recipient chargeable under the head “Salaries”.

ISRO v. CIT (2011) ITAT. Bangalore.

- ISRO has taken the help of foreign space agency in order to send satellite in geo-
stationary orbit of earth. The tax department served notice to ISRO that it amounts to fee
for technical services. Thus, the fee to non-resident person will deemed to be accrue and
arise in India. Since ISRO fallen to deduct the tax amount, it will fall under the category
of assessee in the default.
- Tribunal held that it would not amount to fee for technical services, it is only amount to
transportation charges in order to send satellite to the geo-stationary orbit of the earth.

Case: Yash Raj Film Pvt Ltd v CIT, 2012

 - The YRF shoot various movies on foreign locations with the help of non-resident
service provider which provided them logistics services of equipment, crew members,
artist etc and afterwards they released the movie in India. The taxing officer is of the
view that the payment made to them will amount to fees of technical services and since
they failed to deduct the amount of tax before making payment to them YSR will fall
under the category of asssessee in default
- ITAT- This will not amount to be a fee for technical service but it is their business
income to provide the service which was accrue or arise outside India therefore not
taxable by India

Endemol (P) Ltd. In Re (2013)

- Endemol shoots various series with the help of various foreign service provider
- Referred the case of YSR

CIT v. Indusind Bank Ltd.(2019), Bom

- Amount paid by assessee to foreign bank for rendering financial services in order to
raise capital abroad through issuance of Global Depository Receipts.
- Not liable to tax in India

Regen Powertech (P.) Ltd. v DCIT, 2019, (Mad.)

- Assessee, engaged in manufacturing and export of wind turbines, availed services of

foreign companies in installing and carrying out repair work of wind turbines abroad,
payment made for said services was liable to tax in India as ‘fee for technical services’.

Income not Deemed to Accrue or Arise in India[Expln. 1 to Sec. 9(1) ]

a. Purchase of Goods in India by Non-resident for Export is not Deemed to Accrue or

Arise in India.
b. Income from collection of News and views in India by Non-resident for transmission
out of India is not Deemed to Accrue or Arise in India.
c. Income from shooting of any Cinematograph Film by any Non-resident in India is not
Deemed to Accrue or Arise in India.

Will the consideration for sale, distribution or exhibition of cinematographic film rights
to be treated as royalty?
Ishikawajama-Harima Heavy Industries Ltd. v. Director of Income Tax(2007)

- In case the SC held that income of a non-resident person under 9(1)(v), (vi), (vii) would
be charged to taxed in India and would be deemed to be accrue and arise in India if the
non-resident person having a place of resident in India or they rendered the services in
India.
- In order to override this judgment parliament in finance act came up with retrospective
amendment that it is not necessary that the income of non-resident person would be
charged to tax in India under 9(1)(v), (vi), (vii) not necessary having the place of
resident or service in India.

Board of Control for Cricket in India v. CIT, 2023

Facts of the Case

- The assessee-BCCI was the national body for Cricket in India, and deriving substantial
income from Cricket tournaments & matches. In 2008, the assessee commenced
conducting a Cricket tournament, namely, the Champions League T20 (“CLT20”).
- To maximise the commercial success of the CLT20, the assessee arrived at an
arrangement with Cricket South Africa (“CSA”) that the assessee paid a quantified
participation fee to CSA each year towards the participation of teams from its
jurisdiction for the duration of the CLT20 term and deducted tax thereon. After a certain
period, the agreement was discontinued, and BCCI made payment to the CSA on the
termination of such agreement in the nature of non-compete fees.
- Assessee filed an appeal under section 248 seeking a declaration that the tax was not
required to be deducted from the amount it paid to the CSA. However, CIT(A)
dismissed the appeal and held that said payment is taxable as ‘Income from business’
under section 28(va).
- Aggrieved-assessee challenged the order of CIT(A) before the Mumbai Tribunal.

ITAT Held-

- The Tribunal held that as per the provision of the Explanation 1(a) to section 9(1)(i),
only the portion of the income which is “reasonably attributable” to the operations
carried out in India shall be deemed to accrue or arise in India for taxation.
- In the present case, it was evident that the assessee and CSA agreed to cease in full all
arrangements amongst them. Accordingly, CSA was not obligated to ensure the
participation of any domestic team in the CLT20 Tournament. Further, it was not
 involved in directly or indirectly managing, operating, staging, involving itself and/or
any teams from South Africa and/or otherwise participating in any tournament similar to
CLT20 Tournament. Thus, in the year under consideration, no services were rendered by
facilitating two domestic teams for participation in the CLT20 Tournament.
- Therefore, the payment to CSA was not arising from any operations carried out in India
in the year under consideration. Thus the same was not taxable under section 9(1).

TAXATION OF CHARITABLE TRUST

- Fully exempted from tax

- Exemption is given to public charitable trust, if they are private charitable trust
exemption is not granted to them.
- Sometimes not possible to determine the distinction b/w the commercial and charitable
activity. Just because one of the activity is charitable one it doesn’t mean that it is a
charitable trust. We need to look at primary and dominant purpose of the trust
- The exemption under section 11 is allowed to the following:
(1) A charitable trusts
(2) A religious trust,
- However the word “trust “ as used in the context of section 11 to13 of the Income Tax
Act, includes in addition to the ‘trust’ any other legal obligations

Legal obligations

- Property of the estate of deceased held by the executors

- Muslims Wakfs
- Religious Endowments under the Hindu Law
- Institutions registered under the Societies Registration Act, 1860
- Bar councils, Chamber of commerce, endowments, monasteries, maths etc.

Income Tax Act, 1961, Section 2(15)

The expression “charitable purpose” has been defined under Section 2(15) of the Act to
include:

(a) relief of the poor,

(b) education,
 (c) medical relief,
(d) preservation of environment (including water sheds, forests and wild life)
(e) preservation of monuments or places or objects of artistic or historic interest
(f) Yoga and any other object of public utility

C.I.T. v. Tollygunge Club, 1977

To get exemption u/s. 11 of the Income Tax Act, the Trust Deed should specifically contain
the following provisions:

(a) the benefits of the trust are open to all , irrespective of caste, creed, religion and sex
(b) no activities of the trust will be carried out outside India
(c) any amendment to the Trust Deed will be carried out only with the approval of the
competent authority
(d) the trust is irrevocable
(e) in the event of the trust not being able to function in fulfilment of its objects the
trustee shall, after discharging all liabilities transfer the entire assets of the trust to any
other public charitable institution having similar objects
(f) The income and the funds will be solely utilized towards the objects
(g) The trust will not carry on any activity with the intention of earning profit.

- All these should be clearly laid out in the Trust Deed.

- It is pertinent to note that benefit under section 11 of the Income tax Act is not
available suo moto to all public trusts satisfying aforementioned criteria but, in order
to avail the benefits the trust must be registered with the Principal Commissioner or
Commissioner of Income tax under Section 12AA.

East India Industries (Madras) Private Ltd.v C.I.T, 1967

- In this case the trust was established for various objects, one of which was to
manufacture, buy, sell and distribute pharmaceutical, medicinal, chemical and other
preparations and other articles.
- The objects included several charitable and religious purposes.
- One of the clauses of the trust deed provided that the objects shall be independent of
each other and the trustee shall have power to apply the whole or any part of the trust
property or fund whether capital or income, in carrying out all or any of such objects
of the trust as the trustees may deem fit.
 - It was held by the Supreme Court that as the trustees could under the deed validity
spend the entire income of the trust in carrying on business of manufacture, sale and
distribution of medicinal and other preparations, which act was neither charitable nor
religious, the trust property was not held for religious or charitable purposes within
the meaning of the I.T.

C.I.T. v. Andhra Chamber of Commerce, 1965

- The Supreme Court that if the primary or dominant purpose of a trust is charitable,
another object which by itself may not be charitable but which is merely ancillary or
incidental to the primary or dominant purpose would not prevent the trust from being
a valid charity. The primary purpose of the Chamber in this case was to promote and
protect trade, commerce and industries and to watch over and protect the general
commercial interests of India or any part thereof.

- Prior to Assessment Year 2009-10, business income of a charitable trust or institution

was also eligible for exemption subject to conditions that such business should be
incidental to the attainment of its objects, and that separate books of account are
maintained for such business.

- With effect from 01.04.2009 (i.e., from assessment year 2009-10 onwards), however,
the “advancement of any other object of general public utility” shall not qualify as a
“charitable purpose” if the same involves the carrying on of any activity in the nature
of trade, commerce or business, or rendering of any service in relation to any trade,
commerce or business, for a consideration. This new restriction applies irrespective of
the nature of use or application of the income arising from such activity.

- However, the rigour of this amendment has been reduced somewhat by a subsequent
amendment brought in by the Finance Act, 2010 (with retrospective effect from 1-4-
2009) to the effect that the said restriction shall not apply if the aggregate value of
receipts from such activity during the given financial year does not exceed Rs.
25,00,000.

Amendment made by the Finance Act, 2015 w.e.f. AY 2016-17

 - Trust / institution covered under advancement of any other object of general public
utility can do commercial activities upto 20% of its total receipts as against Rs.
25,00,000 allowed earlier[ proviso to section 2(15)]

Charitable purpose- “Education”

- Section 10 of the IT Act exempts from the field of taxation certain classes of income.
- Section 10 (23C), reads as follows: In computing the total income of a previous year
of any person, any income falling within any of the following clauses shall not be
included— (vi) any university or other educational institution existing solely for
educational purposes and not for purposes of profit, other than those mentioned in
sub-clause (iii ab) or sub-clause (iii ad) and which may be approved by the Principal
Commissioner or Commissioner or..

DIT(E) v. Lala Lajpatrai Memorial Trust, 2016

- Bombay tribunal held that if the pre-dominant object of the educational trust is to
carry out a charitable purpose and not to earn profit, the purpose would not lose its
charitable character merely because the some profit arises from the activity. Therefore
exemption cannot be denied under section 11 Income tax Act, to an educational trust
if it let out its auditorium for educational activities.

DDIT v. Institute of Chartered Accountants of India, 2016

- Delhi tribunal held that ICAI is an educational institute and its coaching activities
fall within meaning of charitable purpose under section 2(15), hence it is entitled to
exemption under section 11.

CIT v. Surat Art Silk Cloth Manufacturers' Association, 1980

- It has been held by Supreme Court that test of predominant object of the activity is to
be seen whether it exists solely for education and not to earn profit. However, the
purpose would not lose its character merely because some profit arises from the
activity. That, it is not possible to carry on educational activity in such a way that the
expenditure exactly balances the income and there is no resultant profit, for, to
achieve this, would not only be difficult of practical realisation but would reflect
unsound principles of management. In order to ascertain whether the institute is
carried on with the object of making profit or not it is the duty of the prescribed
 authority to ascertain whether the balance of income is applied wholly and exclusively
to the objects for which the applicant is established.

M/S Queen's Educational Society vs Comm.of Income Tax, 2015

- Supreme Court held that even though the surplus was made by educational institution
but it was ploughed back for educational purposes. Hence said institution was held to
be existed solely for educational purpose and not for purpose of profit.

CIT v. Managing Committee, Arya High School, Mausa Punjab(2019)

- Supreme Court held that where assessee educational society had utilised its income
for purchase of land for further extension of school building, which was for
educational purpose only, exemption under section 10(23C)(vi) could not be denied.

New Noble Educational Society v. Chief Commissioner of Income-tax [2022]

- It is held that the requirement of the charitable institution, society or trust etc., to
‘solely’ engage itself in education or educational activities, and not engage in any
activity of profit, means that such institutions cannot have objects which are unrelated
to education. In other words, all objects of the society, trust etc., must relate to
imparting education or be in relation to educational activities.
- Where the objective of the institution appears to be profit-oriented, such institutions
would not be entitled to approval under Section 10(23C) of the IT Act. At the same
time, where surplus accrues in a given year or set of years per se, it is not a bar,
provided such surplus is generated in the course of providing education or educational
activities.
- The reference to ‘business’ and ‘profits’ in the seventh proviso to Section
10(23C) and Section 11(4A) merely means that the profits of business which is
‘incidental’ to educational activity – i.e., relating to education such as sale of text
books, providing school bus facilities, hostel facilities, etc. e. The reasoning and
conclusions in American Hotel (supra) and Queen’s Education Society (supra) so far
as they pertain to the interpretation of expression ‘solely’ are hereby disapproved. The
judgments are accordingly overruled to that extent.
- While considering applications for approval under Section 10(23C), the
Commissioner or the concerned authority as the case may be under the second proviso
is not bound to examine only the objects of the institution. To ascertain the
 genuineness of the institution and the manner of its functioning, the Commissioner or
other authority is free to call for the audited accounts or other such documents for
recording satisfaction where the society, trust or institution genuinely seeks to achieve
the objects which it professes. The observations made in American Hotel (supra)
suggest that the Commissioner could not call for the records and that the examination
of such accounts would be at the stage of assessment.
- It is held that wherever registration of trust or charities is obligatory under state or
local laws, the concerned trust, society, other institution etc. seeking approval
under Section 10(23C) should also comply with provisions of such state laws. This
would enable the Commissioner or concerned authority to ascertain the genuineness
of the trust, society etc. This reasoning is reinforced by the recent insertion of another
proviso of Section 10(23C) with effect from 01.04.2021.

- Income Tax Act, 1961 – Section 12AA

- Foreign Contribution (Regulation) Act, 2010

Registration under the Foreign Contribution (Regulation) Act, 2010 (‘the FCRA’):

- Any charitable trust desirous of receiving foreign contributions from foreign sources
is required to obtain registration under FCRA. Any such trust which is not registered
or which has been denied registration, can receive foreign contributions only after
obtaining prior permission from the home ministry of the central government under
FCRA. In order to obtain registration under the FCRA, the applicant association
should preferably be incorporated as a legal entity, ie as a charitable trust and should
have been working for a period of at least three years. The association must not have
received any foreign contributions previously without prior permission of the
government.

Anonymous donations

- A significant legal change has been brought about by Finance Act, 2006 with effect
from 01.04.2007 by inserting a new provision (Section 115BBC) whereby anonymous
donations will not enjoy exemption but would be chargeable to tax at the rate of 30
per cent from Assessment Year 2007-08 onwards.
 - This provision, as it stands after further amendment by Finance Act, 2009 lays down
that from Assessment Year 2010-11 onwards, tax treatment of anonymous donations
(i.e., donations in respect of which the assessee fund/trust/institution etc. does not
maintain records of identity indicating the name and address, or other particulars of
the donor as are prescribed under the I-T Act) would be as follows:
i. Anonymous donations received by wholly religious institutions shall remain
exempt from tax.
ii. In the case of partly religious and partly charitable institutions, anonymous
donations to medical or educational institutions run by them will be taxable
at 30 percent if the same exceed 5 per cent of total donations received by
such trust/institution or Rs. 1 lakh, whichever is more. Donations to partly
religious and partly charitable institutions which do not run such medical or
educational institutions shall remain exempt from taxation.
iii. In the case of wholly charitable institutions, anonymous donations will be
taxable at 30 percent if such donations exceed 5 per cent of total donations
received by such trust or institution or Rs. 1 lakh, whichever is more.

Finance Act, 2022

- In any financial year a trust or institution is required to apply at least eighty-five per
cent of its income. The term ‘application’ means actually spent or paid.
- Where during any previous year, any sum has been claimed to have been applied by
such trust, such sum shall not be allowed as application in any subsequent previous
year.

Corpus

- Where any trust or institution has treated any sum received by it as forming part of the
corpus and subsequently any of the conditions specified under section 11(1) are
violated, such sum shall be deemed to be the income (and not capital) of such trust or
institution of the previous year during which the violation takes place.

Power to cancel tax exemption

- Section 12AB (4) giving powers to the Principal Commissioner or Commissioner to

pass an order in writing cancelling the registration of such trust or institution, after
affording a reasonable opportunity of being heard, for such previous year and all
 subsequent previous years, if he is satisfied that one or more specified violation have
taken place;
- The term “specified violation” is proposed to be defined by inserting an Explanation
to section 12AB (4) of the Act to mean the following violation:
(a) where any income of the trust or institution has been applied other than for the objects
for which it is established; or
(b) the trust of institution has income from profits and gains of business which is not
incidental to the attainment of its objectives or separate books of account are not
maintained by it in respect of the business which is incidental to the attainment of its
objectives; or
(c) the trust or the institution has applied any part of its income from the property held
under a trust for private religious purposes which does not enure for the benefit of the
public; or
(d) the trust or institution established for charitable purpose created or established after the
commencement of this Act, has applied any part of its income for the benefit of any
particular religious community or caste; or
(e) any activity being carried out by the trust or the institution, is not genuine; or is not
being carried out in accordance with all or any of the conditions subject to which it
was registered; or
(f) the trust or the institution has not complied with the requirement of any other law and
the order, direction or decree, by whatever name called, holding that such non-
compliance has occurred, has either not been disputed or has attained finality.

Utilization of accumulated income

- While a trust or institution is required to apply at least eighty-five per cent of its
income during the fiscal year, Income tax Act also allows income of a trust or
institution to be accumulated for a period of up to five years. Section 11(3) of the Act
provided that if any income is not utilized for the purpose for which it is so
accumulated or set apart shall be deemed to be the income of such trust or institution
of the previous year being the last previous year of the period, for which the income is
accumulated or set apart under section 11(2)(a), but not utilized for the purpose for
which it is so accumulated or set apart.

Income chargeable to tax

 - Section 115BBI in the Act providing that where the total income of any Assessee
being a trust, includes any income by way of any specified income, the income-tax
payable shall be the aggregate of the amount of income-tax calculated at the rate of
thirty per cent on the aggregate of specified income; and the amount of income-tax
with which the Assessee would have been chargeable had the total income of the
Assessee been reduced by the aggregate of specified income.

TAXABLE INCOME UNDER THE HEAD OF SALARY

Salaries –Section 15-17

- Any amount received or receivable by an assessee from his employer or even former
employer by virtue of rendering services is chargeable to tax under the head “Salaries”.
- It includes monetary value of those benefits and facilities provided by the employer
which are taxable.
- Employer – employee relationship
- Contract of Service and contract for service
- Place of Accrual of Salary
- Basis of Charge- Charge on salary is either on Due basis or Receipt basis , whichever is
earlier.
Basic Salary

- Rs. 20,000- 2000- 40,000

Allowances

- Payment in cash made by the employer to his employees monthly other salary is called
an allowance.
a) Taxable Allowances
b) Partly taxable Allowances
c) Fully exempted Allowances
a. Fully Taxable Allowances
- Dearness Allowance and Dearness pay
- City compensatory Allowance
- Fixed medical Allowance
- Servant Allowance
- Non practising Allowance
- Hill Allowance
- Warden Allowance /Proctor Allowance
- Deputation Allowance
- Overtime Allowance
- Other Allowance

b. Partly Taxable Allowances

- House Rent Allowance
- Entertainment Allowance
- Special allowance for meeting certain expenditure
A. Special allowance exclusively to be incurred in the performance of the duties of his office
(a) Travelling Allowance
(b) Daily Allowance
(c) Conveyance Allowance
(d) Helper Allowance
(e) Academic Allowance
(f) Uniform Allowance

B. Special Allowance to meet the personal expenses

 (a) Special Compensatory Allowance in the nature of –snow bound area, high altitude
(rate of Allowance prescribed by C.G.)
(b) Special Compensatory Allowance in the nature of – Border area, remote locality,
difficult area (rate of Allowance prescribed by C.G.)
(c) Special Compensatory (Tribal/ Schedule area) – Rs. 200 p.m. In M.P.
(d) Any allowance granted to an employee working in any Transport system – (i) 70% of
such allowance or, (ii) Rs. 10,000 p.m. Which ever is less.
(e) Children education allowance- Rs. 100 p.m. Per child up to maxi. Of 2children
(f) Children hostel allowance- Rs. 300 p.m. Per child up to maxi. Of 2 children
(g) Transport allowance – Rs. 1600 p.m.
(h) Underground allowance – Rs. 800 p.m.
(i) Special allowance to members of Armed forces

c. Fully exempted Allowances

- Foreign Allowance
- Sumptuary Allowance to High Court or Supreme Court Judges
- Allowance from UNO
- Per-diem Allowance

Perquisites

- The term perquisites means any benefit, attached to an office or position in addition to
salary or wages. Perquisites denotes a personal advantage. It may be given in cash or
in kind.

Profit in lieu of salary

- Compensation for Termination of employment

- Compensation for modifications of terms of employment
- Surrender Value of Keyman Insurance policy

- Basic salary
- D.A.
- Allowances
- Perquisites
 - Bonus
- Commission
- Employer contribution in P.F.
- Gratuity
- Pension
- Leave encashment
- VRS- voluntary retirement scheme

YSC Babu v. Chairman and Managing Director Syndicate Bank, 2002, A.P.

- ‘B’ an employee of a public sector opted for VRS and was paid Rs. 10 lakhs being
50% of the compensation under VRS and the balance was to be paid in 5 equal
instalments of Rs. 2 Lakh each.
- The A.O. assessed the full amount of Rs. 20 lakh was assessable in P.Y. ‘B’ contended
that he should be taxed only of Rs. 10 lakh received by him during the P.Y. And the
balance to be received by him should be assessed in the respective years of receipts

Takenaka v. CIT (1999), Kar.

- The Assessee was a foreigner who worked as technical adviser to ‘Y’ India Ltd. As
per the terms of his employment , he was to be paid a fixed amount of net salary and
the tax component was to be borne by his employer. The employer paid income tax of
Rs. 34,000 on behalf of the assessee
- A.O. contended that tax component which was borne by the employer is a perquisite
therefore it should be grossed up and added in the total salary and afterwards tax
would be determined.
- Assessee contended that if tax component added in the salary then it would amount to
be tax on tax.

CIT v. Parthasarathy (1979)

- ‘P’ the assessee was requested by his employer to visit London, Canada in connection
with the business of the employer company. The company further desired that the
wife of the assessee accompany him on foreign tour , so that she could attend the wife
of the guest during visit.
 - During the assessment A.O. Determined that the expenditure met by the company in
connection with the tour of the Assessee’s wife is perquisite and added the said
amount in the income of assessee.

Sugra Sulaiman v. CIT (1990), Mad

- The Assesse was an employee of a company of which her husband was the managing
director . During a particular P.Y. she spent Rs. 1,60,000 on foreign tour when she
accompanied her husband. The company met the expenditure of the assessee.
- A.O. Assessed the expenditure on foreign tour as perquisites in the hand of assessee.

TAXABLE INCOME UNDER THE HEAD FROM HOUSE PROPERTY

Basis of Charge

- Basis of Charge under the head Income from House property is the annual value of
property.

Section 22 -House Property

The property:

(i) Consists of any buildings and land appurtenant thereto,

(ii) Of which the assessee is the owner, and
(iii) Which is not used for purposes of assessee’s business or profession.
- The assessee should be the owner of the house property - Owner , Deemed owner

Deemed owner

(a) An individual who transfer any house property to his or her spouse without adequate
consideration or not being an agreement to live apart or to a minor child not being a
married daughter shall be deemed to be the owner of the house property so
transferred.
(b) A member of a cooperative society, company or an association of person to whom a
building or its part is allotted or leased under a house building scheme of the society,
company or association shall be deemed to be the owner of house property.
(c) A person who is allowed to retain the possession of house under part performance of
contract.
 (d) A person having lease right in the property under a lease extending to 12 years or
more in the aggregate including the term for which the lease may be extended shall be
deemed to be owner of the property.
(e) If a person takes a land on lease and construct a house upon it, he will be deemed to
be its owner.
(f) Disputed ownership- The person who is in the possession or recipient of rental
income.

House property is not used for purposes of assessee’s business or profession.

(a)Buildings or staff quarters let out to employees and others

CIT v. Delhi Cloth Mills Ltd. 1966

- Building or staff quarters let out to employees and other

- In order to facilitate the business, they have given the poprerty to employee. So it will
not be charged under the head house property but under the head income from the
business.

(b)Building is let out to authorities for locating bank, post office, etc.

CIT v National News and Paper Mills Ltd. 1978

Assessee’s business is let out the property and collect the rent . Whether such income
would be charge to tax under the head income from house property?

Chennai Properties and Investment Ltd. v. CIT 2015

- Facts- The assessee company was incorporated with main objective to acquire properties
and let out those properties . The company had rented out such properties and the rental
income was shown as its business income in the return filed by the assessee.
- A.O. ,however assessed the rental income under the head “Income from house property”
- Decision: The main objective of the company as per its memorandum of association is to
acquire and hold properties and let out those properties. Further in the return of income
files by the company and accepted by the A.O., the entire income of the company
comprised of income from letting out of such properties. SC, accordingly held that the
assessee had rightly disclosed the income deriving from letting out of such properties
under the head “ Profit and gains of business and profession”

Rayala Corporation Pvt. Ltd. v. Asst. CIT, 2016

- The assesse engaged in the business of renting its properties and received rent from it as
business income, which assessee claimed to taxed under the head “ Profit and gains of
business and profession”
- A.O. , however brought it to tax under the head “Income from house property”
- Decision: It was admitted fact that the assessee company has only one business and that
is of leasing its property and earning rent there from. Since the business of the company
was to lease its property and to earn rent, the income so earn should be treated as it
business income and therefore the same was to be charged to tax under the head “ Profit
and gains of business and profession” .

Raj Dadarkar and Associates v. ACIT, 2017

- Assessee having obtained a property on lease, constructed various shops and stalls on it
and gave the same to various persons on sub-licensing basis.
- Assessee claimed to taxed the income under the head “ Profit and gains of business and
profession”
- -A.O. , however brought it to tax under the head “Income from house property”
- Decision: Merely because there is a entry in the objects clause of the business showing a
particular object, that would not be the determinative factor to arrive at a conclusion that
the income is to be treated as a business income. The assessee must show that its entire
income or a substantial part there of was from letting of property which was its principal
business activity.
- In the instant case , the object clause in partnership deed was to take premises on rent and
to sublet them.
- The SC accordingly held that since assessee was not engaged in systematic or organized
activity of providing service to occupiers of shops/ stalls , income from sub-licensing was
 to be taxed as income from house property and not as income from “business and
profession”

Other important points regarding Income from House Property

- Income from house property situated abroad

- Property owned by co-owners(Sec.26)
- Composite Rent

Fully exempted Income from H.P.

- Income from farm house [Sec. 2(1A) (c)]

- Annual value of one palace of Ex-India ruler[Sec. 10(19A)]
- Income from property owned by:
Local Authority, Scientific Research Association, Trade Union, Charitable Trust,
Political party, University or other educational Institution, Hospital or medical
institution existing for philanthropic purposes and not for purposes of profits.
- Income from property used by assessee’s own business or profession
- Income from two self occupied house
- Income from house property meant for self residence but could not occupied through
out the P.Y. On account of his service, business or profession at any other palace.

Annual Value (Sec.23)

Gross Annual Value

a. Where Standard Rent has not been fixed(Which ever is greater)

(i) Municipal Value
(ii) F.R.V.
(iii) Actual( De facto)rent

Example – M.V.= Rs. 50,000 FRV= Rs. 60,000

Actual Rent = Rs. 72,000

b. Where Standard Rent has been fixed( Which ever is less ) shall be the expected rent of the
building
(i) The value determined under (a), or
 (ii) The standard rent fixed under the Rent Control Act.

Example – M.V.= Rs. 50,000 FRV= Rs. 60,000

Actual Rent = Rs. 72,000, S.R= Rs. 80,000

- GAV - Rs. 66,000

- Municipal tax - Rs. 6,000
- P.Y. Interest on loan Rs. 20,000

Self-occupied house or Unoccupied house

Where the property consist of a house or a part of a house which:

a) is in the occupation of the owner for the purposes of his own residence; or
 b) house property meant for self residence but could not occupied through out the P.Y. on
account of his service, business or profession at any other palace.

The annual value of such house property shall be taken as nil

Point to note

(1) The self occupied house or part of it should not be let out during the whole or any part
of the P.Y.
(2) If a building consists of more than one floor/flat/unit and more than one floor/flat/unit
are self occupied, the annual value of all such floors/flats/units shall be taken to be nil.
(3) If a building consists of more than one floor/flat/unit and a floor/flat/unit is self
occupied and other floors/flats/units are let-out, the benefit of self occupancy shall be
available in relation to the floor/flat/unit which is self occupied.
(4) If the construction of the building is completed at any time during P.Y. And afterwards
self occupied ,it will be taken as self-occupied for the whole P.Y.

Deduction from the Annual value of self occupied house

a. Interest on borrowed capital

a) Where such property has been (i) acquired (ii) constructed(iii) repaired (iv) renewed
or (v) reconstructed with capital barrowed on or before 31.03.1999, the maximum
limit for deduction of interest shall be Rs. 30,000.
b) Where such property has been(i) repaired (ii) renewed or (iii) reconstructed with
capital barrowed on or after 31.03.1999, the maximum limit for deduction of interest
shall be Rs. 30,000.
c) Where such property has been (i) acquired (ii) constructed with capital barrowed on
or after31.03.1999, the maximum limit for deduction of interest shall be Rs. 2,00,000.
More than two house property

- Two house for self-residence would be exempt from tax and other house considered
deemed to be let-out
- Difference between self-occupied house and let out house(deemed to be let out).

Unsold flat in the hand of builder liable to tax under the head income from house
property?

CIT v. Ansal Housing and Constuction Ltd, 2013

- Delhi High Court held that the assessee was engaged in business of construction and
sale of flats is liable to pay tax on notional rent in respect of unsold flats, owned by the
assessee at the end of the relevant F.Y. if these flats are not let out.
- In view of Delhi High Court decision, Finance Act 2017, inserted new section 23(5),
which provided that-

Where the property consisting of any building or land appurtenant thereto is held as stock in
trade and the property or any part of the property is not let out during the whole year or any
part of the .PY. the annual value of such property or part of the property for the period of
one year from the end of the F.Y. in which the certificate of completion of construction of the
property is obtained from the competent authority shall be taken to be nil.

- Finance Act, 2019 extended the period of one year to two year

Example:

- Construction completed – August , 2020

- Exemption – 2021-2022, 2022-2023

Anik Financial Services (P) Ltd. v. ITO, 2013

- The Assessee company purchased an office which was used as it registered office.
However due to scaling down of business operation, it commercially exploited the said
premises as business service centre.
- The concept of business service centre is generally operational and workable for
temporary offices, for conducting meetings outside regular place or time.
- The Assesse company received rent of office premises from a single party.
 - The Assessee company prepared a consolidated profit and loss account, debiting the
entire expenditure on the maintenance of office and claimed the same as deductible
business expenditure . It claimed entire receipts as business income.
- The A.O. rejected the same and assessing the entire rental receipts as income from house
property.
- Tribunal held that where the concept of business service centre is generally operational
and workable for temporary offices, for conducting meetings outside regular place or
time , income received by Assessee from renting of office premises to a single party was
assessable as income from house property.

Vikas Keshav v. ITO, 2016

- Where Assesse intended to let out the property and took appropriate efforts in letting the
property but ultimately failed to let the same, in terms of section 23(1)(c) , it annual
value had to be regarded as nil.

Sharan Hospitality(P.) Ltd. v DCIT, 2020

- Where the house could not be let as it was not occupiable and not also occupied, cannot
be charged to tax on notional rental

Sunder raj v. CIT, 1983

- The Assessee ,an employee working in VS Tobacco Co. Ltd. let out his residential house
to the employer on a monthly rent of Rs. 2,500 and the same was in turn allotted rent free
to the assessee by the employer for his residential purposes. The assessee claimed that the
income from house property should be taken as nil under section 23(2), being self
occupied by him.
- Once the property is let out then it is considered to be let out house property and it is
immaterial that the same property assessee got from the employer for residence. Assesse
also getting monthly rent from that particular property.
- Mr. X owned two adjoining flats in a building in Mumbai, where he is residing with his
family. Mr X also owned a flat in Pune, which is used by his parents for residence
purpose.
- A.O. is of view that Mr. X would be liable to pay income on the third house on the basis
of notional rent.

Co-owned house property

- In respect of self-occupied property each co-owner shall be allowed deduction of actual
interest subject to maximum of Rs. 2,00,000.
- Suppose X and Y jointly owned a house property and used the property for self residence.
P.Y. ‘X’ paid interest on borrowed loan for purchasing that particular house property Rs
2,10,000 and ‘Y’ paid interest Rs. 1,80,000.
- X can claim deduction of Rs. 2,00,000(maximum limit)
- ‘Y’ can claim deduction of Rs. 1,80,000

Co-owned house property by husband and wife

Case1 – Both husband and wife are co-owners of property and their respective share in the
property is 50:50 as they have made equal contribution.

- The interest shall be allowed as deduction in equal ratio provided the husband and
wife pay the same from their respective source of income.
- Further, the repayment of loan should be made in equal ratio.
- Suppose ‘X’ and ‘Y’ are husband and wife, having equal share in a house property.
P.Y. paid interest on loan Rs. 4,10,000 taken for purchasing that particular house.
- ‘X’ shall be allowed deduction of Rs. 2,00,000(maxi. Limit)[ 50% of 4,10,000=
2,05,000] &
- ‘Y’ shall be allowed deduction of Rs. 2,00,000(maxi. Limit)[ 50% of 4,10,000=
2,05,000]

Case 2 - Both husband and wife are co-owners of the property and their respective shares in
the property is 60:40 as they made contribution in that ratio.

- The interest shall be allowed as deduction in 60:40 ratio provided the husband and
wife pay the interest in the ration 60:40 from their respective source of income.
- Further, the repayment of loan should be made in the ratio of 60:40.
- Suppose ‘X’ and ‘Y’ are husband and wife, having equal share in a house property.
P.Y. paid interest on loan Rs. 4,00,000 taken for purchasing that particular house.
- ‘X’ shall be allowed deduction of Rs. 2,00,000(maxi. Limit)[ 60% of 4,00,000=
2,40,000] &
- ‘Y’ shall be allowed deduction of Rs. 1,60,000[ 40% of 4,00,000= 1,60,000]

Case 3 - Husband is the sole owner of the house but loan has been taken in co-borrower
names as the bank advised them that they can get higher amount in that case.
 - The husband shall be allowed deduction for the entire amount of interest. However in
respect of self-occupied house, husband shall be allowed actual interest subject to
maximum of Rs. 2,00,000.
- The wife shall not be allowed any deduction as she is not the owner of the property.

Class notes

House property is not used ofr purpose of assessse’s business or profession

- Supose a person gave property on rent to someone and that person started using the
property for business. However, since it is not related to assessee own business.
Therefore it will be charged under the head income from house property.