Taxation Importants

(1) Discuss the computation of income under the head income section 22 to 27

Introduction

The Income Tax Act, 1961 classifies income under various heads, one of which is "Income
from House Property." Sections 22 to 27 govern the taxation of such income, ensuring a
systematic approach to computing taxable income arising from the ownership of buildings
and lands appurtenant thereto. The taxability of income under this head is based on the
concept of "annual value" rather than actual receipt.

Main Provisions

1.​ Chargeability (Section 22)

○​ The annual value of property consisting of buildings or lands appurtenant
thereto, owned by the assessee, is chargeable to tax under this head.
○​ However, if the property is occupied for business or professional purposes by
the owner and such business or profession is chargeable under "Profits and
Gains of Business or Profession," no income shall be computed under this
head​.
2.​ Determination of Annual Value (Section 23)
○​ The annual value of a let-out property shall be the higher of the fair rent,
municipal value, or standard rent. However, if the actual rent received is
higher than the expected rental value, it shall be considered.
○​ In cases of self-occupied property (up to two houses), the annual value is taken
as nil. Any additional self-occupied properties shall be deemed let out.
○​ If the property remains vacant for part of the year, the actual rent received is
considered if it is lower than the deemed rental value due to such vacancy​.
3.​ Deductions Allowed (Section 24)
○​ Standard Deduction: 30% of the annual value is deductible irrespective of
actual expenses.
○​ Interest on Borrowed Capital:
■​ Interest paid on capital borrowed for acquisition, construction, repair,
renewal, or reconstruction of property is deductible.
■​ In the case of self-occupied property, the deduction is capped at
₹2,00,000 (if acquired/constructed with borrowed capital after April 1,
1999, and completed within 5 years). Otherwise, the limit is ₹30,000​.
4.​ Disallowed Deductions (Section 25)
○​ Any interest payable outside India without TDS under Chapter XVII-B is not
deductible unless there is an agent in India who can be treated as the
representative assessee​.
5.​ Special Provision for Arrears of Rent and Unrealized Rent (Section 25A)
 ○​ Any unrealized rent recovered subsequently is chargeable as income in the
year of recovery, and a 30% deduction is allowed from such recovered
amount​.
6.​ Tax Treatment of Co-Owned Property (Section 26)
○​ If a house property is owned by co-owners and their shares are definite and
ascertainable, their share of income is taxable separately in their hands rather
than being assessed as an Association of Persons (AOP)​.
7.​ Deemed Ownership (Section 27)
○​ The following persons are deemed to be owners of house property:
■​ A person transferring property to a spouse or minor child without
adequate consideration.
■​ A holder of an impartible estate.
■​ A member of a cooperative society or company to whom a building is
allotted under a housing scheme.
■​ A person in possession of a property under part-performance of a
contract as per Section 53A of the Transfer of Property Act, 1882​.

Relevant Case Laws

1.​ Sultan Brothers Pvt. Ltd. v. CIT (1964) 51 ITR 353 (SC)
○​ It was held that rental income from letting out a building along with furniture
and fixtures is taxable under "Income from Other Sources" or "Business
Income" rather than "Income from House Property."
2.​ East India Housing and Land Development Trust Ltd. v. CIT (1961) 42 ITR 49 (SC)
○​ The Supreme Court ruled that rental income from property owned and let out
by a company, even if the company's main business is real estate, is assessable
under "Income from House Property."

Conclusion

The computation of income under the head "Income from House Property" follows a
structured approach based on the annual value concept. Deductions under Section 24 provide
relief for interest payments and a fixed percentage of expenses. Understanding these
provisions helps taxpayers optimize tax liability while ensuring compliance with statutory
requirements.

(2) Discuss Items of Income Which Do Not Form Part of Total Income but Are Part of
Salary Income

Introduction

The Income Tax Act, 1961, provides for certain exemptions under Section 10, wherein
specified components of salary income are excluded from the computation of total taxable
income. These exemptions aim to provide relief to salaried individuals by allowing tax-free
allowances and benefits.

Exemptions Under Section 10 Related to Salary Income

1.​ Gratuity (Section 10(10))

○​ Any death-cum-retirement gratuity received by a government employee is
fully exempt.
○​ In case of private employees covered under the Payment of Gratuity Act,
1972, the exemption is limited to the least of:
■​ ₹20,00,000 (notified limit),
■​ Actual gratuity received, or
■​ 15 days’ salary for each completed year of service​.
2.​ Commuted Pension (Section 10(10A))
○​ For government employees, the entire amount is exempt.
○​ For non-government employees, exemption is available to the extent of:
■​ 1/3rd of commuted value, if gratuity is received.
■​ 1/2 of commuted value, if no gratuity is received​.
3.​ Leave Encashment (Section 10(10AA))
○​ Fully exempt for government employees.
○​ For other employees, the exemption is limited to the least of:
■​ ₹3,00,000 (notified limit),
■​ 10 months' average salary,
■​ Actual leave encashment received,
■​ Cash equivalent of earned leave due at the time of retirement​.
4.​ Retrenchment Compensation (Section 10(10B))
○​ Amount received as per Industrial Disputes Act, 1947, is exempt up to
₹5,00,000​.
5.​ Voluntary Retirement Scheme (VRS) Compensation (Section 10(10C))
○​ Compensation received under an approved VRS scheme is exempt up to
₹5,00,000​.
6.​ House Rent Allowance (HRA) (Section 10(13A))
○​ Exempt up to the least of the following:
■​ Actual HRA received,
■​ 50% of salary (for metro cities) or 40% (for non-metro cities),
■​ Rent paid minus 10% of salary​.
7.​ Perquisites Provided by Employer (Section 10(14) Read with Rule 2BB)
○​ Allowances such as travel, uniform, academic research, and conveyance
allowance to employees are exempt to the extent used for the intended
purpose​.

Relevant Case Laws

1.​ CIT v. L.W. Russel (1964) 53 ITR 91 (SC)

 ○​ The Supreme Court held that perquisites in the nature of employer-provided
accommodation are taxable only to the extent prescribed under the Act.
2.​ Gestetner Duplicators Pvt. Ltd. v. CIT (1979) 117 ITR 1 (SC)
○​ The court clarified that any reimbursement of expenses incurred by an
employee in the performance of official duties is not taxable.

Conclusion

Exemptions under Section 10 provide significant tax relief to salaried individuals, reducing
their taxable income while ensuring compliance with statutory limits. These provisions
facilitate fair taxation while considering essential financial aspects of employment.

(3) Discuss valuation of perquisites in respect of accommodation provided to employee

Introduction

Under the Income Tax Act, 1961, perquisites are taxable benefits provided by an employer to
an employee in addition to salary. The valuation of perquisites concerning accommodation
provided by the employer is governed by Section 17(2) read with Rule 3 of the Income Tax
Rules, 1962. The tax treatment varies based on the nature of the accommodation and the
category of the employer.

Provisions Governing Valuation of Rent-Free Accommodation

1.​ Definition of Perquisite (Section 17(2))

○​ Includes the value of rent-free accommodation or concession in rent provided
by the employer​.
2.​ Types of Accommodation & Valuation Rules (Rule 3 of Income Tax Rules, 1962)​
a) Accommodation Provided by the Central or State Government
○​ The perquisite value is equal to the license fee determined under government
rules​.
3.​ b) Accommodation Provided by Employers Other than Government
○​ If the employer owns the accommodation, the perquisite value is calculated as:
■​ 15% of salary in cities with a population exceeding 25 lakhs as per the
2001 census.
■​ 10% of salary in cities with a population between 10-25 lakhs.
■​ 7.5% of salary in other areas​.
○​ If the employer rents the accommodation, the perquisite value is the lower of:
■​ Actual rent paid by the employer, or
■​ 15% of salary​.
4.​ c) Furnished Accommodation
○​ The value of furniture (TV, fridge, AC, etc.) is 10% of the cost or actual hire
charges paid by the employer​.
5.​ d) Hotel Accommodation
 ○​ If an employer provides hotel accommodation, the perquisite value is 24% of
salary or the actual hotel charges, whichever is lower.
○​ If the accommodation is provided for up to 15 days due to a transfer, it is not
taxable​.

Relevant Case Laws

1.​ CIT v. L.W. Russel (1964) 53 ITR 91 (SC)

○​ The Supreme Court held that perquisites should be valued as per statutory
provisions, and the employer's cost of providing the accommodation is not
relevant in determining taxable value.
2.​ K.T. Doctor v. CIT (1983) 142 ITR 665 (Bom HC)
○​ The Bombay High Court ruled that the notional value of perquisites must be
computed as per Income Tax Rules, even if the employee does not incur any
actual cost.

Conclusion

The taxation of rent-free accommodation is based on standardized valuation norms to ensure

uniformity. Rule 3 of the Income Tax Rules provides clear parameters for determining taxable
perquisites, thereby preventing arbitrary tax treatment and ensuring fairness.

(4) Discuss residential status given of an individual with case law

Introduction

The residential status of an individual is crucial in determining the scope of taxable income in
India. Section 6 of the Income Tax Act, 1961 lays down the criteria to classify an individual
as a resident and ordinarily resident (ROR), resident but not ordinarily resident (RNOR), or
non-resident (NR), which in turn affects tax liability​.

Provisions Governing Residential Status

1.​ Resident in India (Section 6(1))

○​ An individual is treated as a resident in a given financial year if:​
a) He is in India for at least 182 days in the relevant previous year, or​
b) He is in India for 60 days or more in the relevant previous year and has
been in India for 365 days or more in the preceding four years​.
○​ Exceptions:
■​ For an Indian citizen leaving India for employment or as a member of
the crew of an Indian ship, the 60-day condition is replaced with 182
days.
■​ An Indian citizen or Person of Indian Origin (PIO) visiting India is
considered a resident only if they stay for 120 days or more and have
total Indian income exceeding ₹15 lakh in the previous year​.
 2.​ Resident but Not Ordinarily Resident (RNOR) (Section 6(6))
○​ A resident is classified as RNOR if:​
a) He has been a non-resident in 9 out of 10 preceding years, or​
b) His stay in India is less than 729 days in the preceding 7 years, or​
c) He is an Indian citizen or PIO with total Indian income exceeding ₹15 lakh,
and his stay is between 120 to 181 days​.
3.​ Non-Resident (NR) (Section 6(2))
○​ An individual who does not fulfill any of the conditions mentioned in Section
6(1) or 6(6) is classified as a Non-Resident (NR)​.

Tax Implications Based on Residential Status

Residential Status Income Taxable in India

Resident & Ordinarily Resident Global Income (Income earned in India & abroad)
(ROR)

Resident but Not Ordinarily Income earned in India + Foreign income only if derived
Resident (RNOR) from a business controlled in India

Non-Resident (NR) Only Income earned in India or received in India

Relevant Case Laws

1.​ CIT v. K. Srinivasan (1953) 23 ITR 87 (SC)

○​ The Supreme Court held that residential status is determined on a year-to-year
basis, and physical presence, rather than intent, is the deciding factor.
2.​ Azadi Bachao Andolan v. Union of India (2003) 263 ITR 706 (SC)
○​ The court ruled that Non-Resident status is based on Section 6 criteria, and the
mere intention to return to India is not sufficient to claim residency.

Conclusion

The determination of residential status under Section 6 is vital for computing tax liability.
While residents are taxed on global income, NRIs enjoy tax exemptions on foreign earnings.
A clear understanding of these provisions ensures compliance and optimizes tax planning​.

(5) Define and discuss with case law definition of business

Introduction

The term "business" is defined in Section 2(13) of the Income Tax Act, 1961 and plays a
crucial role in determining tax liability under the head "Profits and Gains of Business or
Profession." The definition encompasses various activities undertaken for profit and includes
trade, commerce, and manufacture​.

Definition of Business (Section 2(13))

As per Section 2(13), "business" includes:

●​ Trade, commerce, or manufacture

●​ Any adventure in the nature of trade, commerce, or manufacture
●​ Any profession or vocation

This broad definition ensures that all profit-generating activities, whether continuous or
occasional, fall within its scope​.

Key Elements of Business

1.​ Profit Motive – The presence of an intention to earn profit is a significant indicator of
a business, but even activities carried out without profit can sometimes be included.
2.​ Continuity and Regularity – Frequent transactions suggest a business, but even a
single adventure in the nature of trade can be classified as business.
3.​ Systematic Activity – Organized and structured operations indicate a business.

Judicial Interpretations

1.​ CIT v. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1 (SC)
○​ The Supreme Court held that "business" includes not only trade and
manufacture but also activities carried out in an organized manner for
profit-making purposes.
2.​ Sole Trustee Loka Shikshana Trust v. CIT (1975) 101 ITR 234 (SC)
○​ The court ruled that a business must have an element of commerciality, and
mere charitable or philanthropic activities without a trade component will not
constitute a business.

Conclusion

The definition of business under Section 2(13) is comprehensive and covers all forms of
commercial and profit-oriented activities. The courts have consistently upheld a broad
interpretation, ensuring taxation on all structured profit-making activities​

(6)Define and discuss capital assets with case law

Introduction

The term "capital asset" is fundamental in determining tax liability on capital gains under the
Income Tax Act, 1961. Section 2(14) defines capital assets comprehensively, including
various categories of property, while also specifying certain exclusions​.

Definition of Capital Asset (Section 2(14))

As per Section 2(14), a capital asset means:

1.​ Any property held by an assessee (whether connected with business or not),
including:
 ○​ Land, buildings, securities, jewelry, patents, trademarks, and machinery.
○​ Rights and interests in property.
2.​ Certain Exclusions: The following are not considered capital assets:
○​ Stock-in-trade, raw materials, or consumables held for business.
○​ Personal effects (excluding jewelry, paintings, sculptures, etc.).
○​ Agricultural land in rural areas outside specified limits​.

Classification of Capital Assets

Capital assets are categorized based on their holding period:

1.​ Short-term Capital Asset – Held for not more than 36 months immediately before
transfer. However:
○​ In the case of listed securities, units of equity-oriented mutual funds, and
zero-coupon bonds, the period is 12 months.
○​ In the case of unlisted shares and immovable property, the period is 24
months.
2.​ Long-term Capital Asset – Any capital asset held for more than the above-specified
periods​.

Judicial Interpretations

1.​ CIT v. Miss P. Sarada (1998) 229 ITR 444 (SC)

○​ The Supreme Court held that capital assets must be distinguished from
stock-in-trade, and merely converting an asset into stock-in-trade does not
change its original nature.
2.​ Navinchandra Mafatlal v. CIT (1954) 26 ITR 758 (SC)
○​ The court emphasized that the definition of capital asset must be interpreted
broadly, covering all property rights unless explicitly excluded by law.

Conclusion

The concept of capital assets under Section 2(14) is crucial for taxation purposes,
distinguishing between long-term and short-term gains. The judicial approach has reinforced
a broad interpretation while ensuring compliance with statutory exclusions​

(7) Interest leviable non payment and short payment of advance tax

Introduction

The Income Tax Act, 1961 mandates the payment of advance tax to ensure timely collection
of revenue. Interest is levied under Sections 234A, 234B, and 234C in cases of non-payment
or shortfall in advance tax payments. These provisions aim to discourage delays and ensure
tax compliance​.

Provisions Governing Interest on Default in Advance Tax Payments

 1.​ Interest for Default in Furnishing Return of Income (Section 234A)
○​ Applicable when the assessee fails to file the income tax return within the due
date as per Section 139(1) or files it after receiving a notice under Section
142(1).
○​ Interest is charged at 1% per month or part thereof on the tax amount
remaining unpaid from the due date till the date of filing the return​.
2.​ Interest for Default in Payment of Advance Tax (Section 234B)
○​ Applicable if the assessee fails to pay advance tax or pays less than 90% of the
assessed tax by the end of the financial year.
○​ Interest is levied at 1% per month or part thereof, calculated from April 1st of
the following financial year till the date of payment of tax​.
○​ Assessed Tax = Total tax liability – TDS/TCS credits and allowed foreign tax
credits​.
3.​ Interest for Deferment of Advance Tax (Section 234C)
○​ Levied when the assessee fails to pay the required percentage of advance tax
installments as per Section 211.
○​ For taxpayers (other than those under Section 44AD or 44ADA), interest is
charged at 1% per month for three months on the shortfall in payments due as
follows:
■​ 15% by June 15th,
■​ 45% by September 15th,
■​ 75% by December 15th,
■​ 100% by March 15th​.

Relevant Case Laws

1.​ CIT v. Anjum M.H. Ghaswala (2001) 252 ITR 1 (SC)

○​ The Supreme Court held that interest under Sections 234A, 234B, and 234C is
mandatory, and no authority, including the Settlement Commission, can waive
it unless specifically allowed by law.
2.​ Ranchi Club Ltd. v. CIT (1996) 217 ITR 72 (Pat HC)
○​ The court ruled that interest under Section 234B is compensatory, not penal,
and is applicable in cases of default in advance tax payment.

Conclusion

The interest provisions under Sections 234A, 234B, and 234C ensure timely tax payments
and discourage delays. Since these are mandatory and compensatory in nature, taxpayers
must comply with advance tax obligations to avoid additional financial liability​.

(8)Chargeability of gift from non relative with case law

Introduction
The taxation of gifts in India is governed by Section 56(2)(x) of the Income Tax Act, 1961,
which provides for the taxation of gifts received from non-relatives exceeding a specified
monetary threshold. The objective is to curb tax evasion through disguised transfers​.

Provisions Governing Taxability of Gifts from Non-Relatives

1.​ Taxability Under Section 56(2)(x)

○​ Any sum of money or property (movable or immovable) received without
consideration or for inadequate consideration from a non-relative, exceeding
₹50,000 in a financial year, is treated as income from other sources and is
taxable​.
2.​ Exemptions from Taxation
○​ Gifts received in the following cases are not taxable, even if received from
non-relatives:
■​ On the occasion of marriage of the recipient.
■​ Under a will or by way of inheritance.
■​ In contemplation of the death of the donor.
■​ From local authorities or certain specified trusts and institutions​.
3.​ Types of Gifts Covered
○​ Monetary Gifts: If the total amount received from non-relatives exceeds
₹50,000, the entire amount becomes taxable.
○​ Immovable Property: If received without consideration, and the stamp duty
value exceeds ₹50,000, the entire value is taxable. If received for inadequate
consideration, the difference between the consideration paid and the stamp
duty value (if exceeding ₹50,000) is taxable.
○​ Movable Property (Shares, Securities, Jewelry, etc.): If the fair market value
(FMV) exceeds ₹50,000 without consideration, the entire FMV is taxable. If
received for inadequate consideration, the difference between the FMV and
actual consideration (if exceeding ₹50,000) is taxable​.

Relevant Case Laws

1.​ CIT v. Dr. R.S. Gupta (1987) 165 ITR 36 (Del HC)
○​ The Delhi High Court held that gifts received without valid documentation
and not backed by sufficient evidence may be treated as income and taxable
under relevant provisions.
2.​ Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC)
○​ The Supreme Court ruled that tax laws must be interpreted strictly, and any
monetary benefit received outside the exempted categories must be taxed as
per the Act.

Conclusion

Gifts received from non-relatives beyond the specified monetary threshold are taxable under
Section 56(2)(x) unless falling within specified exemptions. Proper documentation and
legitimate transactions are crucial to avoid unnecessary tax liability
(9) Define and explain agriculture income with two landmark judgements

Introduction

Agricultural income in India is exempt from taxation under Section 10(1) of the Income Tax
Act, 1961. The concept is defined under Section 2(1A), which includes income derived from
agricultural land and activities directly connected with farming. This provision ensures that
income from genuine agricultural activities remains outside the tax net​.

Definition of Agricultural Income (Section 2(1A))

As per Section 2(1A), agricultural income includes the following categories:

1.​ Rent or revenue from agricultural land

○​ The land must be situated in India and used for agricultural purposes.
○​ Revenue from leasing out such land is also considered agricultural income​.
2.​ Income from agricultural operations
○​ Includes income from cultivation, sowing, planting, and harvesting of crops.
○​ Any activity that contributes directly to the growth of agricultural produce
qualifies​.
3.​ Income from processing agricultural produce
○​ If a cultivator or rent receiver performs a process (such as drying, husking, or
milling) to make the produce marketable, the income remains agricultural.
○​ However, if the processing is beyond ordinary agricultural practices, the
excess income is not considered agricultural income​.
4.​ Income from a farm building
○​ A building used as a storehouse, dwelling, or work-shed for agricultural
purposes on or near the land is included as agricultural income.
○​ It must be occupied by the cultivator or the lessee​.

Exemptions and Non-Agricultural Income

The Act explicitly excludes certain types of income from the definition of agricultural
income:

●​ Income from sale of agricultural land (unless classified as capital gains).

●​ Rental income from land used for non-agricultural purposes.
●​ Income from agricultural processing beyond ordinary cultivation processes.
●​ Income from trading in agricultural produce (if not directly grown by the seller).

Judicial Interpretations

1.​ CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)
 ○​ The Supreme Court ruled that agriculture involves both primary (basic
cultivation) and secondary (subsequent processing) operations.
○​ Any non-agricultural process applied beyond what is necessary to make the
produce marketable will not qualify as agricultural income.
2.​ Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC)
○​ The Supreme Court held that mere ownership of agricultural land does not
make the income agricultural unless it is derived from actual farming
activities.

Conclusion

Agricultural income remains tax-free under Section 10(1), but the scope is strictly limited to
genuine agricultural activities as defined in Section 2(1A). The courts have reinforced that
any additional processing beyond basic cultivation may attract taxation under other
provisions​.

(10) Explain set off of losses in case of speculative business and capital gains

Introduction

The Income Tax Act, 1961 provides specific provisions for set-off and carry forward of
losses. Section 73 deals with speculative business losses, while Section 74 governs capital
gains losses. These provisions ensure that losses are adjusted appropriately to determine the
correct taxable income​.

Set-Off and Carry Forward of Speculative Business Losses (Section 73)

1.​ Restriction on Set-Off

○​ Losses from a speculative business can only be set off against profits from
another speculative business in the same assessment year​.
2.​ Carry Forward of Speculative Losses
○​ If the speculative loss cannot be set off in the same year, it can be carried
forward for four subsequent assessment years.
○​ Such losses can only be set off against speculative profits in future years​.
3.​ Deemed Speculative Business
○​ Companies engaged in share trading are deemed to be carrying on a
speculative business. Hence, losses from such businesses must follow the
provisions of Section 73​.

Set-Off and Carry Forward of Capital Gains Losses (Section 74)

1.​ Set-Off in the Same Year

○​ Short-term capital losses (STCL) can be set off against both short-term and
long-term capital gains.
○​ Long-term capital losses (LTCL) can only be set off against long-term capital
gains​.
 2.​ Carry Forward of Capital Gains Losses
○​ Unadjusted capital losses can be carried forward for eight assessment years.
○​ The same rules of set-off (STCL against any capital gains, LTCL against
LTCG only) apply during these years​.

Judicial Precedents

1.​ CIT v. D.P. Sandu Bros. Chembur (P) Ltd. (2005) 273 ITR 1 (SC)
○​ The Supreme Court ruled that capital losses cannot be adjusted against
business income and must be set off strictly as per Section 74.
2.​ CIT v. Apollo Tyres Ltd. (2002) 255 ITR 273 (SC)
○​ The Court held that a company engaged in share trading is deemed to be
carrying on a speculative business, making Section 73 applicable.

Conclusion

The Income Tax Act restricts set-off and carry forward of speculative business losses and
capital gains losses to ensure that only related incomes can absorb such losses. Understanding
these provisions helps taxpayers manage tax liabilities effectively​

(11) Explain tax evasion and tax avoidance

Introduction

Tax evasion and tax avoidance are two different strategies used by taxpayers to reduce tax
liability. While tax evasion is illegal and involves deliberate non-compliance with tax laws,
tax avoidance exploits loopholes within the legal framework to minimize tax liability. The
Income Tax Act, 1961 incorporates various provisions, including Section 94 and Chapter
X-A, to prevent tax evasion and impermissible tax avoidance​.

Tax Evasion

1.​ Definition:
○​ Tax evasion refers to illegal practices used to avoid paying taxes, such as
underreporting income, inflating deductions, falsifying records, and hiding
taxable income.
○​ It is punishable under Sections 276 to 278 of the Income Tax Act, leading to
penalties, interest, and prosecution​.
2.​ Examples of Tax Evasion:
○​ Non-disclosure of foreign assets and income.
○​ Manipulation of accounts to suppress actual profits.
○​ Concealment of capital gains from property sales.
3.​ Legal Consequences:
○​ Section 276C prescribes imprisonment for wilful evasion of tax.
 ○​ Section 278 allows for prosecution for knowingly making false statements in
tax returns​.

Tax Avoidance

1.​ Definition:
○​ Tax avoidance refers to structuring financial transactions in a way that reduces
tax liability within the boundaries of the law. However, it is discouraged under
the General Anti-Avoidance Rules (GAAR).
○​ The Income Tax Act, 1961, through Chapter X-A (Sections 95-102), provides
for GAAR provisions, which empower tax authorities to declare tax avoidance
schemes as impermissible arrangements​.
2.​ Examples of Tax Avoidance:
○​ Using corporate restructuring to shift profits to tax-friendly jurisdictions.
○​ Taking advantage of tax treaties to avoid higher taxation in India.
○​ Engaging in "round-tripping" transactions to disguise income sources​.
3.​ Legal Provisions Against Tax Avoidance:
○​ Section 94 prevents tax avoidance through transactions in securities.
○​ GAAR (Chapter X-A) applies if a transaction:
■​ Lacks commercial substance.
■​ Abuses the provisions of the Income Tax Act.
■​ Creates artificial tax benefits​.

Judicial Precedents

1.​ McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC)
○​ The Supreme Court held that tax planning is legitimate, but tax avoidance that
is colorable and contrary to law is not permissible.
2.​ Vodafone International Holdings B.V. v. Union of India (2012) 341 ITR 1 (SC)
○​ The Court ruled that taxpayers have the right to arrange their affairs to
minimize tax liability, provided transactions have genuine commercial
substance.

Conclusion

While tax evasion is a criminal offense, tax avoidance is discouraged through GAAR
provisions. The Income Tax Act incorporates safeguards to ensure that tax compliance is
maintained and artificial arrangements meant to avoid tax liability are prevented​.

(12) Explain with judgement on “means” and “includes” in definition clauses

Introduction

In statutory interpretation, the words "means" and "includes" in definition clauses play a
crucial role in determining the scope of a term. "Means" provides an exhaustive definition,
restricting the meaning to what is explicitly stated. "Includes", on the other hand, expands the
definition, incorporating additional elements not ordinarily covered by the term​.

Interpretation of "Means"

●​ When a definition "means" a particular thing, it is restrictive and exhaustive.

●​ It signifies that the definition is self-contained, and nothing outside the stated scope is
included.

Example from the Income Tax Act:

●​ Section 2(29B): "Long-term capital gain" means capital gain arising from the
transfer of a long-term capital asset​.
○​ Here, capital gains must strictly be from a long-term capital asset to qualify
under this provision.

Interpretation of "Includes"

●​ When a definition "includes" certain elements, it is expansive and illustrative, not

exhaustive.
●​ It brings within its ambit additional instances that may not ordinarily be considered
part of the term.

Example from the Income Tax Act:

●​ Section 2(31): "Person" includes an individual, HUF, company, firm, association of

persons, local authority, and any artificial juridical person​.
○​ The term "person" is not limited to just individuals; it also extends to entities
like companies and trusts.

Judicial Precedents

1.​ Bangalore Turf Club Ltd. v. Regional Director (2014) 7 SCC 572
○​ The Supreme Court held that "means" is restrictive, while "includes" is
expansive.
2.​ CIT v. Taj Mahal Hotel (1971) 82 ITR 44 (SC)
○​ The Court ruled that where a term is defined using "includes", it covers both
the ordinary meaning and additional elements explicitly stated in the Act.

Conclusion

The distinction between "means" and "includes" is fundamental in tax law interpretation.
While "means" confines, "includes" enlarges the scope of a term. Courts have consistently
upheld this principle to ensure the fair and precise application of statutory provisions​.

(13) Explain the historical development of income tax law in India

Introduction

The concept of income tax in India has evolved significantly over time, influenced by
colonial rule, economic policies, and legal developments. The modern Income Tax Act, 1961
has its roots in earlier laws dating back to the British era, particularly the Income Tax Act of
1860, which was the first formal taxation law in India.

Evolution of Income Tax Law in India

1.​ Income Tax Act of 1860

○​ Introduced by Sir James Wilson to compensate for the financial losses
incurred by the British during the Revolt of 1857.
○​ It imposed a direct tax on income but was discontinued in 1865.
2.​ Income Tax Act of 1886
○​ Reintroduced the concept of income tax with a structured classification of
income into different heads.
○​ Provided the foundation for future income tax laws in India.
3.​ Income Tax Act of 1918
○​ Incorporated provisions for exemptions and deductions.
○​ Introduced the concept of total income as the basis for taxation.
4.​ Income Tax Act of 1922
○​ A major development in Indian taxation history.
○​ It empowered tax authorities with assessment, appeals, and collection
procedures.
○​ The system of self-assessment and scrutiny was introduced.
5.​ Income Tax Act of 1961 (Current Law)
○​ Came into force on April 1, 1962, consolidating all previous laws into a
comprehensive tax code.
○​ Includes residential status rules, exemptions, deductions, and anti-avoidance
measures.
○​ Has undergone numerous amendments through annual Finance Acts.

Judicial Precedents on Income Tax Law

1.​ A.V. Fernandez v. State of Kerala (1957) AIR 657 (SC)

○​ The Supreme Court emphasized that tax laws must be interpreted strictly and
any ambiguity must be resolved in favor of the taxpayer.
2.​ CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC)
○​ The Court ruled that capital gains tax provisions must be read in the context of
the legislative intent, ensuring a fair tax structure.

Conclusion

The evolution of income tax law in India reflects its dynamic nature, adapting to economic
and legal challenges. The Income Tax Act, 1961 remains the cornerstone of direct taxation,
continuously modified to align with modern financial and international tax principles​.
(14) Explain Deduction under Section 80C

Section 80C of the Income Tax Act, 1961 provides deductions from gross total income to
incentivize savings and investments by individuals and Hindu Undivided Families (HUFs).
This provision allows a deduction of up to ₹1,50,000 per financial year for specified
contributions and expenses​.

Eligible Investments and Payments Under Section 80C

1.​ Life Insurance Premium (LIC) [Section 80C(2)(i)]

○​ Premiums paid for a life insurance policy for self, spouse, children, or HUF
members qualify.
○​ The policy must be from LIC or any other approved insurer​.
2.​ Employee Provident Fund (EPF) and Public Provident Fund (PPF) [Section
80C(2)(v)]
○​ Contributions made to statutory provident funds, recognized provident funds,
and PPF accounts qualify for deduction.
3.​ National Savings Certificate (NSC) [Section 80C(2)(x)]
○​ Investment in NSC is eligible for deduction, and accrued interest is also
eligible, provided it is reinvested.
4.​ Tuition Fees [Section 80C(2)(xvii)]
○​ Deduction is available for tuition fees paid for up to two children for full-time
education in India.
5.​ Fixed Deposit (FD) in Scheduled Banks [Section 80C(2)(xxi)]
○​ A 5-year tax-saving fixed deposit in scheduled banks qualifies under Section
80C.
6.​ Equity-Linked Savings Scheme (ELSS) [Section 80C(2)(xx)]
○​ Investment in ELSS mutual funds, subject to a 3-year lock-in period, is
eligible.
7.​ Home Loan Principal Repayment [Section 80C(2)(xviii)]
○​ Repayment of the principal component of a home loan for a self-occupied or
rented house qualifies.
8.​ Sukanya Samriddhi Yojana (SSY) [Section 80C(2)(xiv)]
○​ Contributions to SSY accounts for a girl child are eligible.
9.​ Senior Citizens Savings Scheme (SCSS) [Section 80C(2)(xxii)]
○​ Investment in SCSS, meant for senior citizens, is eligible.

Limit on Deduction (Section 80CCE)

●​ The maximum deduction under Section 80C, along with Sections 80CCC and
80CCD(1), is capped at ₹1,50,000 per year​.

Judicial Precedents on Section 80C

 1.​ CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)
○​ The Supreme Court held that deductions should be interpreted strictly in
accordance with statutory provisions.
2.​ Dr. Prannoy Roy v. CIT (2002) 254 ITR 755 (SC)
○​ The court ruled that genuine investment-based deductions should not be
denied on technical grounds.

Conclusion

Section 80C provides significant tax benefits, encouraging long-term savings and
investments. However, taxpayers must comply with eligibility conditions and documentary
requirements to claim deductions effectively​

(15) Explain the effect of a donor donating his personal wealth to a Private trust where
he is a beneficiary

Introduction

The taxation of income and assets transferred to a private trust where the donor remains a
beneficiary is governed by various provisions of the Income Tax Act, 1961, including
Sections 60 to 63 (regarding transfer of income without transfer of assets) and Sections 160
to 164 (regarding taxation of trusts). These provisions ensure that such transactions are not
misused for tax avoidance​.

Taxability of Income from Private Trusts

1.​ Revocable vs. Irrevocable Trusts (Sections 61-63)

○​ If the trust is revocable (i.e., the donor retains control or the power to revoke
the trust), the income from the trust continues to be taxed in the hands of the
donor as per Section 61.
○​ If the trust is irrevocable (i.e., the donor permanently gives up control), the
income is taxed in the hands of the trust or its beneficiaries. However, if the
donor retains any benefit, Section 63 deems the transfer as revocable, and
taxation remains in the donor’s hands​.
2.​ Taxation Under Section 164
○​ If the share of each beneficiary is determinate, tax is levied at the applicable
rates of the beneficiaries.
○​ If the beneficiaries' shares are indeterminate or unknown, the trust is taxed at
the maximum marginal rate​.
3.​ Applicability of Section 56(2)(x) (Gift Taxation)
○​ If the transfer of personal wealth involves gifting money or assets without
adequate consideration, it may be taxable under Section 56(2)(x) in the hands
of the trust or beneficiaries unless specifically exempted​.
Judicial Precedents

1.​ CIT v. Trustees of H.E.H. Nizam’s Family Trust (1977) 108 ITR 555 (SC)
○​ The Supreme Court held that where the trust is revocable, income remains
taxable in the hands of the donor under Section 61.
2.​ CIT v. Kamla Town Trust (1996) 217 ITR 699 (SC)
○​ The Court ruled that when a settlor transfers assets to a trust but remains a
beneficiary, taxation depends on whether the trust is revocable or irrevocable,
as per Sections 61-63.

Conclusion

A donor transferring personal wealth to a private trust while remaining a beneficiary must
ensure that the trust is genuinely irrevocable to avoid continued tax liability under Sections
61-63. Additionally, Section 164 applies to undisclosed beneficiary shares, and transfers must
comply with Section 56(2)(x) rules to avoid unintended tax consequences​.