Law of Taxation

- 05.08.2024:
• Types of taxes:
- Direct tax
- Indirect tax
• Income Tax Act, 1961:
- Agricultural income:
• Is part of state list & therefore, State Govts. decide the tax on agricultural income.
- Residential status:
• Resident ordinary Resident (ROR)
• Resident not ordinary Resident (RNOR)
• Non-Resident (NR)
- Scope of income
- Heads of income (with case laws)
- Powers & details of Income Tax Department
- Penalties
• Finance Bill:
- Finance Act is passed yearly because the market conditions are always changing & to keep up with the
changing market conditions, the Finance Act is passed on an yearly basis.

- This Act divides taxes into “Slabs”.

- 06.08.2024:
• Concept of income:
- Income tax is a direct tax.
- Extra money generated after investment of paid up capital in a business. The profit made is what is
taxable.

- For an employee, the salary they receive is their income.

- Income generated is referred to as “income accrued” in the legal language.
- Class notes:
• Income tax is an annual tax on income.
• The law of income tax will be found in the Income Tax Act, 1961, the rules framed thereunder, the
annual finance acts of the central legislature, instructions & guidance issued by Central Board of
Direct Taxes (CBDT) & the judicial precedents.

• The tax is to be charged for a year in accordance & subject to the provisions of Income Tax Act. But,
the said charge will be in accordance with the rates prescribed under the relevant Annual Finance Act.

• The Income Tax Act is a permanent Act, whereas the Finance Act is passed every year (sometimes
even more than once) & its main purpose is to fix the rates to be charged under Income Tax Act for
that year.

• Definition of “Income”:
- Section 2(24) of Income Tax Act, 1961: No comprehensive definition has been given to “income”
under the Act. Section 2(24) of the Act defines income, but, it is only an inclusive definition. It
merely enumerates certain items which are statutorily treated as “income”. “Income” includes:

• Profits & gains

• Dividend
• Value of any perquisite or profit in lieu of salary. (Certain additional profits in addition to one’s
salary). If the organisation, once you raise the invoice & organisation pay you the amount, that it
taxable. However, if the organisation is directly paying the same, then it is not taxable, as no
income has accrued.

• Capital gains
• Profits & gains of any business of insurance.
• Any winnings from lotteries, crossword puzzles, races including (Horse Races), card games or
any form of gambling or betting.

- Principles laid down by Supreme Court with respect to scope of income:

• Form of income: The expression “income” does not mean only realisation of monetary benefits.
It may also be defined as “gain derived from land, capital or labour”. Thus, receipts in kind or
service, having money equivalent can also be service.

• Income would include loss: The explanation loss is “negative profits”. Both negative and
positive profit are of revenue character. Both must enter into computation in the same mode of
the taxable income of the assessee.

• Source of income may be legal or illegal: The Act contemplates the assessment of income. It is
not necessary that the income must be earned only by lawful means. Whatever may be the
source, legal or illegal, the income therefrom is assessable. The principle should apply even
where the assessee incurs a loss in his illegal trading activities. (CIT vs SC Kothari: 1971 82
ITR 794 SC)
- 07.08.2024:
• Income tax is paid on actuals: Tax is payable only on the final income earned by one, which will include
the profit & the losses.

- Connection with the outside agency: To establish income, a third party must be there. If there is
transfer of money amongst oneself, there is no profit being made & hence the same is not taxable.

• Class notes:
- Connection with the outside agency: A person cannot have an income without connection with any
outside agency. It is obvious that one cannot make income out of oneself. (Kikabhai Premchand vs
CIT; 1953 24 ITR 506 SC).

- Taxation on actuals, not maximum profit: For the purpose of income tax assessments, what one has
to take into account is not the maximum profits which one could have made in that transaction but it is
the actual profit made by one.

- No tax on hypothetical income: If income does not result at all there cannot be a tax. However, where
income has been received & is subsequently given up, in such circumstances, it remains the income of
the recipient. (CIT vs M/s Shoorji Vallabhdas & Co.; 1962 46 ITR 144 SC)

- Recurring nature of income not necessary: The recurring nature is not an absolute necessity for the
purpose of income tax. Income may not necessarily be recurring in nature. CIT vs GK Karthikeyan;
1993 201 ITR 866 SC).

- Voluntary payments (outside employment): Payment made by way of donation to a friend or a

relation or a stranger would not entail income in the hands of the recipient. Even if such payments
happen to be made periodically at stated intervals in a definite sum, they would still remain donations.

- Personal gifts: Gifts received by an employee from his employer in excess of Rs. 5000 is taxable.
- Pin money: Pin money received by wife for her personal expenses & small savings made by a woman
out of money received from her husband for meeting household expenses is not treated as her income.
(RBNJ Naidu vs CIT; 1956 29 ITR 194 (Nag)).

- 08.08.2024:
• Class notes:
- Definitions in Income Tax Act, 1961:
• Assessee: In general, an assessee is someone who pays income tax. Section 2(7) defines an assessee
as “A person by whom any tax or any other sum of money is payable under this Act, which includes:

- A. Every person in respect of whom any proceeding under this Act has been taken for the
assessment of his income, or of the income of any other person in respect of which he is assessable.

- 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.”
 • Person: Since every assessee is a person, the definition of “Person” has been given in Section 2(31)
of the Act. It includes:

- 1. An individual.
- 2. A HUF/ Hindu Undivided Family
- 3. Companies
- 4. Firms
- 5. An Association of Persons or a Body of Individuals, whether incorporated or not.
- 6. A Local authority
- 7. Every artificial legal person not falling within any of the preceding sub-clauses.
• Tax: As per Section 2(43), tax in relation to the assessment year commences on first day of April &
the subsequent assessment years.

• Assessment: The expression “assessment” has been defined in Section 2(8) in an inclusive way to
state that it may mean sometimes the computation of the income, sometimes the determination of the
amount of tax payable & sometimes the whole procedure laid down in the Act for imposing a liability
upon the taxpayer. Thus, there are three stages of income tax assessment:

- declaration of liability: that is part of the statute which determines what persons in respect of that
property liable.

- Assessment: liability does not depend on assessment as it has already been fixed. Assessment
particularises the exact sum which a person liable has to pay. This assessment is from the eyes of
the IT department.

- Methods of recovery: if the person taxed does not pay voluntarily, the recovery methods have to
be implied.

• Assessment Year (A.Y.): Section 2(9) defines assessment year as the period of 12 months
commencing on 1st day of April every year. It is also known as the “Financial Year”. Income tax is
charged for each assessment year for the income of the previous year.

• Previous Year P.Y. (Section 2(3)):

- Homework: Constitutional Provisions talking about tax:
• Part XII, Chapter 1 (Finance):
- Art. 265: Only a competent authority can levy or collect tax.
- Art. 269: From 01.04.1996, any tax levied or collected on sale or purchase of goods (except for those
provided in Art. 269A) shall be collected by the Govt. of India, but it shall be deemed that the same are
assigned to the State.

- Art. 269A: In case of inter-state trade or commerce, the tax shall be levied & collected by the govt. of
India & the same is to be distributed among the Union & the States in accordance with the law passed
by the parliament on the basis of the recommendations of the Goods & Service Tax Council.
 - Art. 270: All taxes & duties mentioned in the Union list, except for those referred to in Articles 268 &
269, shall be levied & collected by the Govt. of India & distributed amongst the union & states as per
the provisions of clause 2.

- Art. 274: No bill or amendment which varies or imposes any tax or duty or which varies the meaning of
“agricultural income” shall be introduced or moved in either house of parliament except on
recommendation of the President.

- Art. 276: No law of the legislature of a state which imposes taxes for the benefit of the state or
municipality shall be invalid solely on the ground that it relates to income tax. The total amount payable
in respect of any one person shall not exceed Rs. 2,500/- per annum.

- 12.08.2024:
• Agricultural income:
- The income must originate from “Agricultural Land”:
• The land shall mandatorily be located in India.
• Example: Fruits sold in market from one’s garden will not constitute as “agricultural income”.
• Tax on “agricultural income” can be levied only by the State as the same is under “State List” in the
Constitution.

• Because of this reason, the “Agricultural income” is excluded from the computation of total income
under the Income Tax Act, as the tax under the same is paid to the Central Govt.

- The work must be in the nature of “agriculture”:

• Follows a detailed process.
- Section 2 (1A):
- Class notes:
• Under the constitution of India, the Parliament has no power to levy tax on agricultural income.
Agricultural income is exempted from Central Income Tax.

• Section 10(1) excludes agricultural income from the total income of a person. Only the State govt.
can levy tax on agricultural income.

• Section 2(1A) of the Act defines “Agricultural income”. The essential ingredients of the section are as
follows:

- Clause “a” includes within agricultural income; Any rent or revenue derived from land which is
situated in India & is used for agricultural purposes.

- Clause “b” includes within agricultural income; Income derived from such land:
• i: Agriculture, or
• ii: Performance of any process ordinarily employed to render the produce ‘fit’ to be taken to the
market, or
 • iii: Sale of such produce made ‘fit’.
- Clause “c” includes within agricultural income; Income from buildings linked to agriculture, that
is, agricultural house property & such house property to be exempted from tax must be on the
agricultural land or in the immediate vicinity of the agricultural land. It must be occupied by the
cultivator or the recipient of the agricultural income.

• The three primary conditions which must be satisfied before a particular item of income may be
treated as agricultural income are:

- That such income has relation to land.

- That such land is situated in India.
- That the land is used for agricultural purposes.
• CIT vs Raja Benoy Kumar Sahas Roy; 1957 32 ITR 466 SC:
- Facts:
• Respondent owns an area of forest land assessed to land revenue & grown with Sal & Piyasal trees.
The forest originally was of spontaneous growth & had been in existence for over 150 years.

• The last assessment year in which this forest income was taxed was 1923 - 24. However, from then
till 1944 - 45, the said land was always left out of accounts. In the year 1944 - 45, the assessment was
first made without including the said land, however, the assessment was subsequently reopened.

• Claim was raised that income from this forest is not taxable under the Income Tax Act as it was
agricultural income. This claim was rejected by the Income Tax Officer, the Appellate Assistant
Commissioner & the Income Tax Appellate Tribunal.

• At the instance of the Assessee, the dispute was referred to the High Court by the Tribunal.
• The High Court opined that the income generated from this piece of forest land is, in fact, agricultural
income & therefore exempt from assessment. The CIT obtained a certificate of appeal & hence the.
case reached the SC.

- Issues:
• Whether the sum of income generated from this land is “agricultural income” & as is it exempt from
payment of tax under Section 4(3)(viii) of the Indian Income Tax Act?

- Court observations:
• Agriculture is not defined in the Act. Therefore, after analysing precedents & if one goes by the literal
interpretation of the term, “Agriculture” would simply mean “cultivation of land”. However, there are
other operations which are also involved & absolutely necessary for the purpose of effectively raising
the produce from the land.

• The latter would all be agricultural operations when taken in conjunction with the basic operations &
it would be futile to suggest that they are not agricultural operations at all.

• However, mere performance of these subsequent operations, in the absence of any basic operations,
would not be enough to characterise them as agricultural operations. In order to invest them with the
 character of agricultural operations, there subsequent operations must be in in conjunction & in
continuation with the basic operations.

- Judgement:
• The forest in question originated as a forest of spontaneous growth.
• However, the forest at the time of the dispute was over 150 years old & various portions of the forest
have from time to time been denuded, that is to say that the trees have completely fallen & fresh trees
have been planted in their place.

• When talking about specifically these areas, any income derived from them is agricultural income.
• In view of the fact that the forest is over 150 years old, the land denuded cannot be considered to be
negligible.

• If the Income Tax Authorities had directed, it would’ve been possible to ascertain how much of the
income is attributable to spontaneous growth & how much to trees planted by the proprietors.

• But no such enquiry was conducted & in the view of the long lapse of time, it wasn’t considered
desirable.

• Judgement of the HC was affirmed & the case was disposed with costs.
- 13.08.2024:
• Class notes:
- Principles/essentials of agricultural income:
• Land must be used for agricultural purposes:
- The Supreme Court in this case (CIT vs Raja Benoy Kumar Sahas Roy) explained as to what
constitutes as “agriculture”.

- In this case, the raja owned a forest. The question was whether the income derived from sale of
trees in this forest which was originally a forest of spontaneous growth & trees were not grown
with the help of human labour on which forestry operations were carried out, that is, pruning,
weeding, guarding, digging, etc. constitute agricultural income or not.

- The assessee contended that such operations were performed on the trees, otherwise he could
hardly derive any benefit from them. What he did on the tress with the help of workmen & labour
were indeed ‘agricultural operations’ if the expressions were interpreted liberally.

- Observation & decision:

• The Supreme Court observed the primary sense in which the term “agriculture” should be
understood is “field cultivation of the land, tilling of the land, sowing of the seeds, planting &
similar operations on the land. These are basic operations & demand expenditure of human
labour & skill upon the land & further they are all directed to make the crop sprout out of the
land. After the crop sprouts from the land, there are subsequent operations, that is, weeding,
digging, removal of undesirable undergrownings etc. necessary for the efficient growing of the
crop. These subsequent operations are agricultural operations only when taken in conjunction
 with & as a continuation of the basic operations. Mere performance of the subsequent operations
where such products have not been raised by basic operations would not be enough to
characterise them as agricultural operations. Thus, without the operation on the land by way of
interfering with the soil, there would be no agricultural operations within the meaning of the
definition.

• In the present case, the forest is 150 years old, the portions of forest have been from time to time
denuded & “fresh trees” have been planted in those areas. So far as those trees are concerned,
the income derived from them would be agricultural income. But all the trees cannot be said to
have been grown in this manner, therefore, the entire income from the forest trees cannot be
termed as agricultural income.

• The Supreme Court observed that the income tax authorities should have directed an inquiry
how much of the income is attributable to forest of spontaneous growth & how much to trees
planted by the assessee. Since a lot of time had lapsed, the Supreme Court did not order any such
inquiry at this stage.

- 14.08.2024:
• Performance of process to render the produce marketable:
- Sakar Lal Naran Lal vs CIT; AIR 1965 Guj 165:
• Facts & Issues:
- In this case the assessee individual obtained Galka Seeds from abroad & raised Galkas on land.
The fully grown galkas were removed from the plant & the assessee then subjected them to process
for repaired loofahs. The question was “whether the Galkas (which does not have a market in
India) the process employed on it for the purpose of exporting & selling abroad satisfied the
requirements under the statute for the definition of agricultural income”.

- The assessee could not market his loofahs abroad because the loofahs prepared by him were of
very small size as compared to the foreign market. He suffered losses in the market which he
claimed by deduction from of the assessee.

- But the Income Tax Tribunal came to the conclusion that the process employed by the assessee was
a process within the purview of Section 2(1A), which is agricultural income & the losses suffered
by the assessee were therefore agricultural losses which were not liable to be deducted in
computing income of the assessee.

• Observation & decision:

- The HC held that it was not enough for the tribunal to find that there was no market for Galka in
India. The tribunal should have also considered the fact that there was no market for Galka outside
India as well. It was only if the tribunal found that there was no market for Galka outside India that
the tribunal could have come to the conclusion that the process employed for the purpose of
converting Galka into loofahs was the process covered by Section 2(1A).

- The HC held that Galkas being marketable outside India, the process employed on it for
preparation of loofah is not an agricultural process.
 - The HC explained the reason behind Section 2(1A):
• A cultivator raised procedure from land with a view to sell it. If there is a market for raw produce
there is no difficulty but if there is no market for the produce as grown then performance of
some process is essential to make it marketable. Where such is the case the law says that strictly
agricultural operations ceases where the produce is raised & removed from the soil, the
performance of the process should be regarded as a continuation of the agricultural operations.
Since the process haw to be performed by the cultivator for the purpose of enabling him to sell
the produce which he otherwise cannot.

• This explains the other requirement of this Section. That the process must be such as is
ordinarily employed by the cultivator to make the produce saleable. If some special or unusual
process is employed by the cultivator to render the produce marketable it cannot be regarded as
part of the agricultural operations & the exemption would not be available to the cultivator.

• Thus there are 2 conditions which are to be fulfilled before the process performed can be said to
be an agricultural process under Section 2(1A):

- The process must be such as to render the produce fit to be taken to the market.
- The process must be such as is ordinarily employed by the cultivator.
• Thus the process must be regarded as a part of agricultural operations & not to be a special or
unusual process.

• There must be no market for the produce in its raw state. If there is a marker for raw produce no
process performed on it can be said to be a process on it can be said to be a process ordinarily
employed by a cultivator to render the produce marketable. As it is already marketable, it does
not need any produce to render it marketable. Thus if marketing process is performed on produce
which can be sold in its raw form income derived there from is partly agricultural & partly non
agricultural.

- 20.08.2024:
• Class notes:
- There are two conditions which are to be fulfilled before a process performed can be said to be an
agricultural process under Section 2(1A)(b)(ii):

• Firstly, the process must be such as to render the produce fit to be taken to the market.
• Secondly, the process must be such as is ordinarily employed by the cultivator.
Thus, the process must be regarded as a part of the agricultural operations & not to be special or unusual
process.

• Principle of direct nexus:

- Class notes:
• The assessee must have direct connection with the earning of agricultural income.
• Case law: Bacha F. Guzdar vs CIT; AIR 1955 SC 74:
 - Facts & issues: In this case, the question was “Whether dividends received by a shareholder from
a company which derived its income partly from agricultural operations & partly from other
operations would be agricultural income in the hands of shareholder or not?”. The company carried
on the business of growing & manufacturing tea (the income from sale off manufactured tea is
partially agricultural & partially non agricultural).

- Observation & decision: The Supreme Court held that term ‘derived’ means ‘springing from or
arising from’. It points to a source from which the income comes. But such source should be
immediate and effective and not the secondary or remote source. The term ‘agricultural income’
refers to the revenue received by direct association with the land used for agricultural purposes and
not by indirectly extending it to a case where that revenue changes hands either by way of
distribution of dividends or otherwise.

• Case law: CIT vs R.M. Chidambaram Pillai; AIR 1977 SC 489:

- Facts & issues: In this case, the assessee was the partner in a firm who’s business was to grow &
sell tea. He received from the firm, certain amount as salary as a partner in the firm. The issue was
“whether the amount salary received by the partner in the firm growing & selling tea was an
agricultural income?”.

- Observation & decision: The court held that the salary received by the partner cannot be regarded
as having a source different from that of his share in the profit of the firm he receives. As per the
Partnership Act, a partnership is a relation between the persons who have agreed to share the
profits of a business carried on by all of them or any of them acting for all. The persons are
individually called partners & collectively a firm. Payment of salary to a partner is a share of the
profits, and it retains the same character of income of the firm.

- Income derived from land:

• Class notes:
- The act uses the expression “rent” & “revenue” in Section 2(1A)(a). The word “rent” means
“payment of money in cash or in kind (share of crops) by any person to the owner of the land in
question in respect of a brand of rights given to such persons by the owner to use the said land”.
The expression “Revenue” means “yield, return, profit, or income”. The word “derived” means
“arising or accruing”. “Revenue” can be derived from land only if land is the immediate &
effective & not secondary or indirect source.

- HW: discuss whether the following constitute agricultural income:

• Ashok a sole selling agent of trapeze farms who’s income was exclusively agricultural income
received Rs. 5 Lakh as commission on the sale of farm products. Whether this commission received is
agricultural income or not?

- 21.08.2024:
• Residential Status and tax incidence:
- A residential status of a person is further categorised as:
• ROR: Resident ordinary Resident
 • RNOR: Resident not ordinary Resident
• NR: Not Resident
- Residential status is discussed in Section 6 of the Income Tax Act. The understanding of Section 6 is
vital to understand how taxes levied under Section 5 are assessed.

- It is vital to know the residential status of a person as the tax levied on them can differ on the basis of
their residential status.

- An individual and a HUF can be categorised as either an ROR or RNOR or NR. In case of a company or
every other person, however, they can only be categorised as a ROR or NR.

- Class notes:
• As per Section 5 of the Income Tax Act, the incidence of tax depends upon and is determined with
reference to the residential status of an assessee in the previous year.

• For the purpose of determining the residence of a person, the categories of person have been grouped
into:

- An individual
- An HUF, Firm or other association of persons.
- A company
- Every other person
- Residence of an individual:
• Provided in Section 6(1):
- Two conditions:
• The person must live in India for 182 days or more during the previous year [Section 6(1)(a)], or
• He stayed in India for 365 days in the previous four years and stays in India for at least 60 days
during the previous year. [Section 6(1)(c)].

- Exceptions to Section 6(1)(c):

• The assessee must be a citizen of India:
- Crew of Indian ships.
- Employed outside India.
- Person of indian origin who is visiting from outside.
- If an individual is not satisfying any conditions laid down in Section 6(1), he is said to be a “non-
resident”.

- If an individual is satisfying any conditions laid down in Section 6(1), he is said to be a “Resident
Ordinary Resident”.
 - If an individual is satisfying any conditions laid down in Section 6(6), he is said to be a “Resident
Not Ordinary Resident”.

- 27.08.2024:
• Resident not Ordinary Resident of Individual:
- Defined in Section 6(6)(a) of the Income Tax Act:
• Two conditions.
• The individual in question has been a non-resident in India for the past 9 of the 10 preceding years, or
• The individual in question has been in India for 729 days or less in the preceding 7 years. (The person
in question is Resident no Ordinary Resident if he is in India for 729 days or less out of 2556 days).

- If either of the criteria are not fulfilled, then the individual in question would be a “Resident Ordinary
Resident”.

- If both or either of the conditions are fulfilled, then the individual in question would be “Resident not
Ordinary Resident”.

• Residential status of HUF:

- Provided in Section 6(2).
- Resident if the control lies wholly or partially in India. Here, the control refers to the decision making
power of the HUF, which is generally the Karta. However, he can delegate this power to someone else.

- Non resident if the control in out of India.

• Resident not Ordinary Resident of HUF:
- Provided in Section 6(6)(b):
• Two conditions.
• The manager/Karta of the HUF in question has been a non-resident in India for the past 9 of the 10
preceding years, or

• The manager/Karta of the HUF in question has been in India for 729 days or less in the preceding 7
years. (The manager/Karta of the HUF in question is Resident no Ordinary Resident if he is in India
for 729 days or less out of 2556 days).

• Residential status of Firms:

- No division between Resident Ordinary Resident or Resident not Ordinary Resident.
- In this regards, a firm can only be a “resident” or a “non-resident”.
- A firms will be a resident if the said firm is controlled in its partially or wholly from India. However, for
practical purposes, the firm shall be controlled in its entirety from India.

- The country will be a non-resident if the control of the firm is from outside India.
• Residential status of companies:
 - No division between Resident Ordinary Resident or Resident not Ordinary Resident.
- In this regards, a company can only be a “resident” or a “non-resident”.
- A company will be a resident if:
• The said firm is controlled in its partially or wholly from India. However, for practical purposes, the
firm shall be controlled in its entirety from India.

• If the country is not controlled from India, then it will be a “non-resident”.

- 28.08.2024:
• Residential status & Tax incidence:
- Class notes:
• According to Section 5, incidence of tax depends upon & is determined with reference to the
residential status of an assessee in the previous year. The nationality or domicile of an individual is
irrelevant. Residence & not citizenship is the basis of taxation. Thus, a person may be resident in
more than one country at the same time for tax purposes.

• The residence of a person has to be determined with reference to a particular assessment year. The
question of residence will be dependant on the conditions obtained in the previous year.

• The residential status is to be determined every year as it may be different in different years.
• For the purpose of determining residence, S. 6 divides ‘person’ into four categories:
- An individual
- HUF
- Company
- Every other person
• For the purpose of determination of residential status, the taxable entities may be divided into the
following categories:

- Resident Ordinarily Resident in India (ROR).

- Resident not Ordinarily Resident in India (RNOR).
- Non Resident in India (NR).
This division is applicable only in case of an individual & a HUF. In all other categories of persons,
there are only two division, Resident and non-resident.

• Section 6, Residence of an individual:

- It is to be noted that residential status during preceding 10 years is to be determined whether or not
an individual is assessed as resident in the past. In other words, an individual who does not have
taxable income during preceding 10 years does not become a non-resident in the preceding 10
years merely because of the fact that he was not assessed as ‘resident’ during these years.
 - It may be noted that continuous stay of an individual or stay at one place is not essential. He may
put up anywhere for any duration of time, it is the total duration that matters. The reason or motive
for his stay is immaterial. Even involuntary or forced presence in India is treated as presence in
India for residential purposes. (Moosa S. Madhu vs CIT; 1973 89 ITR 65 (SC).

- HW: look up Baryard brown vs Burt (5 TC 667).

• Class notes:
- Residence of HUF:
• Case law: Subbagya Chettiar vs CIT; 1951 19 ITR 168 (SC):
- Facts & issues: In this case, the Karta of the HUF had been living in Ceylon with his wife and
child. He carried on business there and owned a house/property in India. In a financial year he
visited India in relation to family litigation for a period of 101 days. He started 2 partnership firms
in India and remained in India for sometime after starting the businesses. Questions arose regarding
the residential status of the HUF.

- Observations & decision: Normally a HUF is presumed to be a resident in India unless it is

proved by assessee that control and management of its affairs is situated wholly outside India.

- The “control & management” signifies the controlling & directing power, the “Head & brain” &
“situated” implies the function of such power at a particular place with some degree of
performance.

- The word “wholly” suggests the possibility of seat of power being divided between more than one
place of a HUF. Thus, the seat of power may have more than one residence.

- If the seat of power is situated outside India, the bare activities in India could not be enough to
support a finding that the seat of power had shifted or that a second centre for such management &
control had been situated in India.

- In the present case, the Karta permanently lives in Shillong & the mere fact that he has a house in
India where his mother lives cannot constitute that place as the seat of power. Merely coming to
India for a family litigation relating to property cannot be said to have shifted the seat of power or
to have started a second centre. Similarly, starting of 2nd partnership business are mere activities
cannot be the test of residence.

- However, these acts done by Karta in India, though not conclusive by themselves, prove residence
in India but by no means are irrelevant. The assessee was unable to adduce evidence to show that
the control was wholly outside India, that the affairs in India were also being controlled from
Ceylon. Thus, the HUF was taken to be a resident in the present case.

- 02.09.2024:
• Class notes:
- Case law: Erin Estate, Galah, Ceylon vs CIT; 1958 34 ITR 1 (SC):
• In this case, the SC held that the expression “control and management of affairs” means de facto
control and not merely the de jure control and management. The place of control and management is
 the place where the head, seat of power and directing power are situated. The place where the
business is carried on is not necessarily the place of control and management. Further, the residence
of individual members is immaterial for the purpose of determining the residence of the family.

- Case law: San Paulo (Brazilian) Railways Co vs Carter; 1986 AC 31 HL:

• In this case, it was held that “control and management” is situated at a place where the head, the seat
of power and the directing powers are situated. The “head and brain” is situated where “vital
decisions” concerning the policies of the business such as raising finance and its appropriation for
specific purposes, extension or diversification of business, etc are taken.

- Residence of firm and other association of persons:

• A firm or other association of persons will be taken as resident in India in a previous year if the
control and management of its affairs is situated in India, either partly or wholly, and it will be treated
as non resident if the control and management of its affairs is situated wholly outside India. The
propositions laid down in subhaiya Chettiyar case also apply to cases of firms and other association of
persons.

- Residence of a company; S. 6(3) Income Tax Act:

• Every Indian company is treated as resident in India even if its control and management is situated
wholly or partly abroad. A non Indian company is regarded as resident in India only if its control and
management is situated wholly in India.

• Generally, the control and management of the company affairs is said to be at a place where BOD
meetings are held. Therefore, in the case of a foreign company, if all the meetings of the BOD are
held in India and crucial decisions regarding the management of the company are taken in India, then
the foreign company shall be a resident of India.

- 04.09.2024:
• Charge of Tax, Section 4, Income Tax Act:
- This provision is an enabling provision.
- Allows the Govt. to take taxes from the assessee.
- Provides what is “taxable income”:
• Five types of taxable income (already given earlier).
• Deductions for computation of taxable income provided for in Chapter 6A.
• The remaining income is what is taxable income.
- Taxes to be paid in a quarterly basis in the form of “advance tax”.
- TDS: Tax deduced at source. This is proved via “form 16” at the time of final assessment.
 - Class notes:
• S. 4 of income tax act, 1961 is an essential provision that lays down the foundation for the taxation of
income in India. This section defines the scope of taxation and is critical in determining the liability
of taxpayers.

• Section 4 provides for charge of income tax on the total income of a taxpayer. The section lays down
the scope of taxable income which includes all income from whatever source derived subject to
certain exemptions and deductions. This means that all sources of income including salary, capital
gains, business income, etc are subject to taxation under this section.

• Meaning of “total income”: According to S. 2(45) of Income Tax Act, 1961 “Total income” means the
aggregate of income computed under the provisions of the Act & all other incomes chargeable to tax
after making deductions under Chapter VI(A) of the Act. This means that the total income of an
individual or a business is the sum of income from all sources reduced by the deductions specified in
chapter VI(A) of the Act.

• “Residential Status”: The residential status for the purpose of assessment of income tax is provided
for in Section 6 of the Income Tax Act, 1961. The provision provides for “Resident Ordinary
Resident”, “Resident Not Ordinary Resident” & “Non Resident” for Individuals, HUFs & Firms. On
the other hand, in cases of Companies and every other Persons, they can only be “Resident” or “Non
Resident” for the purpose of assessment of income tax. These are essential for the assessment of
income tax as depending on the residential status, the filing & further computation of taxes is done.

• “Deductions under Chapter VI(A)”: This chapter of the Income Tax Act provides for various
deductions that taxpayers can claim while computing their taxable income. These deductions are
available to individuals, HUFs, Companies & other taxpayers computing their taxable income. The
deductions are subtracted from the Gross Income of the taxpayer to arrive at taxable income.

• “TDS & advance Tax”: Taxpayers are required to pay tax on their income in advance through the
payment of advance tax. The amount of advance tax to be paid is calculated based on the estimated
income for the Financial Year. The taxpayers are also required to deduct TDS while making payment
to certain recipients such as employees, contractors, professionals, etc.

- 05.09.2024:
• Section 5: Scope of Tax:
- Relationship between residential status & incidence of income tax under the Income Tax Act, 1961:
• Incidence of tax on a tax payer depends on his residential status & also on the place & time of accrual
or receipt of income.

• This is discussed in Section 5 of the Income Tax Act.

- Section 5(1):
• Incidence in case of Resident/Resident Ordinary Resident:
- The total income of any previous year of a person who is a resident or resident ordinary resident
includes all the income from whether source derived which:
 • Is received or deemed to be received in India in such year by or on behalf of such persons, or
• Accrues or arises or is deemed to accrue or arise to him in India during such year, or
• Accrues or arises to him outside India during such year.
- Case law: Ashok Bhai Chiman Bhai; 1965 56 ITR 42 SC:
• Income is said to be received when it reaches the assessee. Income is said to accrue or arise
when the right to receive income becomes vested in the assessee.

• Incidence of tax in case of Resident not ordinary resident:

- RNOR is assessable to tax in respect of:
• Income which is received or deemed to be received in India in such year or on behalf of such
persons, or

• Income which accrues or arises or is deemed to accrue or arise to him in India in such year, or
income which accrues or arises to him outside India during the previous from a business
controlled in or profession set up in India.

- Section 5(2):
• Incidence of tax in case of non resident:
- The total income of any previous year of a person who is a NR includes all income from whatever
source derived which:

• Is received or deemed to be received in India in such year by or on behalf of such persons, or

• Accrues or arises or is deemed to arise to him in India during such year
- 06.09.2024:
• Class exercise: The assessee an individual was an employee of a company entitled to salary of Rs. 500/-
or a share of 4% in the company’s profit, whichever was higher. The company’s accounts were closed each
year on 31st march. It was then that the profits were ascertained and the share in the profits was paid to the
Assessee. He died in June 1990. The company worked out its profit for the accounting year ending on 31st
march 1991 and determined the remuneration payable to the assessee on a proportional basis for the period
April 1989 to June 1990. This share in the profits was credited to the assessee’s account. The amount so
credited on 31st march, 1991 was Rs. 15,000/-. The legal heir of the assessee claimed this amount did not
accrue to the deceased during his lifetime & as such could not be taxed as the income of the deceased.

- 09.09.2024:
• Heads of income:
- Provided for in Section 14 of the Income Tax Act, 1961.
- Types:
• Salary:
- Profits in lieu of salary.
 - A contractual relationship between the employer & employee is necessary for the income to fall
under this head.

• House property
• Capital gains
• Profits from business & profession
• Other sources
- Whenever income is accrued, there must be a source of the same. The govt. by way for the income tax
act has divided these sources into five different sources.

- Class notes:
• Section 14 provides that all income shall for the purpose of charge of income tax & computation of
total income be classified under the following heads of income:

- Salary
- Income from house property
- Profits & gains of business or profession
- Capital gains
- Income from other sources
• There are specific modes of computation of income of income under each particular head which must
be strictly followed. Charge under specific head of income is obligatory. It other words, income
which is chargeable under a specific head cannot be charged under a different head in lieu of or in
addition to being charged under its specific head. In East India Housing & Land Development
Trust Ltd; (1961 42 ITR 49 SC), the Apex Court held that “the distinct heads specified in S. 14 are
mutually exclusive & income derived from different sources falling under the specific head has to be
computed for the purpose of taxation in the manner provided by the relevant provisions. If the income
from a source falls within a specified head prescribed in the Act, the fact that it may indirectly be
covered by another head will not make the income taxable under the latter head”.

• Further, income cannot be assessed under a wrong head merely because the assessee has returned it
under the wrong head (Bihar State Co-operative Bank Ltd vs CIT; 1960 39 ITR 114 SC). Thus,
income is to be taxed under the appropriate & specific head of income.

• If a particular item of income falls under two heads, the assessee has the right to choose the head
which subjects him to lesser tax (CIT vs Bosotto Bros. Ltd; 1940 08 ITR 41 Mad). However, if
there is no doubt about the head under which a particular income falls, the income will have to be
taxed under that head & there is no option either for the assessee or the IT department to change the
head in regard to such income (United Commercial Bank vs CIT; 1957 32 ITR 688 SC). Where
any particular item of income cannot be considered as coming under any of the first four specific
heads of income, it may be brought under the residuary fifth head, which is, income from other
sources.
 • There are five different heads of income but an assessee has to pay tax not by reference to the income
under any particular head but on total income which is the aggregate of the income & losses under all
the heads taken together. In other words, income tax one tax & not a collection of taxes levied
separately on income computed under each head of income separately.

• “Head of income” & “source of income”, both the expressions don’t have the same meaning.
“Source” indicates the specific source from which a particular income arose & thus it does not
indicate the head of income. There may be more than one source of income for the same head of
income. (Shri Sobhag Mal Lodha vs CIT; 1967 63 ITR 424 All).

- 10.09.2024:
• Salary (Section 15-17):
- Section 15:
• Tells us about the chargeability of tax:
• Class notes:
- The salary received by the assessee is part of his total income & it is chargeable to income tax.
Section 15 is the charging section. The income which are chargeable under the head “salaries” are:

• Any salary due from an employer or a former employer to an assessee in the previous year,
whether paid or not.

• Any salary paid or allowed in the previous year though not due or before it became due.
• Any arrears of salary paid or allowed in the previous year if not charged to income tax in any
previous year.

- Explanation 1 provides that where any salary paid in advance is included in the total income of any
person for previous year, it shall not be included again in the total income of the person when the
salary becomes due.

- Explanation 2 provides that any salary, bonus, commissions or remuneration due to or received by
a partner of a firm from the firm shall not be regarded as salary for the purposes of this section.

- Q. Whether the salary of a partner in a partnership firm is assessable as income under the head
“salary”:

• Answer: As per Explanation 2, Section 15, the “salary” received by the partner in this case will
not be considered to be salary for the purpose of assessment of tax.

- Q. “There can be many sources of income under one head of income, but, there cannot be more
than one head for a particular source of income”. Comment.

- * The existence of employer-employee relationship or master-servant relationship or the contract of

employment is a must. Salary is paid by an employer to an employee.

- Section 17:
• Class notes:
 - This section lists various “benefits arising from employment” as being the salary of the assessee.
The payment must be a reward or return for his acting as an employee.

- Section 17 lays down that the term “salary” includes:

• Wages.
• Any annuity or pension.
• Any gratuity.
• Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages.
• Any advance of salary
• Any payment received by an employee in respect of any period of leave not availed by him.
• The aggregate of all sums that are comprised in the transferred balance of an employee
participating in a recognised provident fund.

• The contribution made by the central government in the previous year to the account of an
employee under a pension scheme.

- It may be noted that the definition of salary under Section 17 is inclusive & not exhaustive.
- 11.09.2024:
• Perquisites:
- Benefits for employment.
- The moment a benefit is accrued, it becomes taxable.
- If the benefit is not accrued, they are not taxable.
- Class notes:
• The term salary includes “perquisites” also. A perquisite is taxable as salary when provided by the
employer during the continuance of the employment. Ordinarily, perquisite is taken to mean “gain or
profit incidentally made from employment in addition to regular wages & salary”. In other words,
perquisite can be defined as any casual fee or profit attached to an office or position in addition to
salary.

• Perquisite is given in a variety of forms. Under Section 17(2), the term perquisite includes:
- Value of any rent accommodation provided to the assessee by the employer.
- Value of any benefit granted or provided free of cost or at a concessional rate in the following
cases:

• By a company to an employee who is a director thereof.

• By a company to an employee who has a substantial interest in the company.
- The value of any other fringe benefit as may be prescribed provided that nothing in this clause shall
apply to:
 • Value of any medical treatment provided to an employee or his family in any hospital maintained
by the employer.

• Any sum paid by the employer in respect of any expenditure actually incurred by the employee/
his family on medical treatment in any hospital maintained by the government or any local
authority or any government hospital.

• Any portion of premium paired by employer for an insurance policy for health of employer
under any scheme approved by the central government.

• Any expenditure incurred by the employer or paid to the employee when the latter incurred it on
medical treatment outside India.

• Travel & stay for such treatment, travel & stay abroad of one attendant who accompanies the
patient. This is subject to the condition that such expenditure & treatment & stay is excluded
from perquisites is excerpted only up to the extent only by RBI.

- 16.09.2024:
• Tax free benefits:
- Class notes:
• Certain perquisites are completely exempted from income tax:
- Ordinary medical facilities to employees.
- Wages of gardener paid by the employer for proper upkeep of the employee’s house, free telephone
at the residence of the employee.

- Free meals, provision of refreshments during office hours & in the office premises.
- Subsidised lunch or dinner provided during working hours.
- Provision of recreational facilities for employees in general.
- Conveyance facilities to employees from their residence to office or vice versa.
- Provision of privilege passes or tickets to certain employees.
- Leave travel concession (LTC), free holiday trips, reimbursement of car expenses upto a certain
limit, etc.

- Free educational facilities to children of the employee in an educational institution owned or

maintained by the employer.

- Rent free official residence provided to a judge of HC or the SC, officer of Parliament, a Union
Minister & a Leader of Opposition in Parliament.

• Cash allowances:
- Are included in the ordinary meaning of perquisites & would fall under Section 17 (2). Thus, city
compensatory allowance, shift allowance, incentive bonus were held to be perquisites & thus,
taxable.
 - Dearness allowance, city compensatory allowance, medical allowance, overtime allowance, family
allowance, house rent allowance constitute taxable income as they are part of income by way of
salary. (Karamchari Union Agra vs UOI; AIR 2000 SC 1226).

• To assess taxable income:

- Taxable income under the head “salary”.
- Reduce the deductions provided in Section 16, which is specifically in relation to “salary”.
- On the basis of this, taxable income is derived.

• Section 17(3), Profits in lieu of salary:

- Class notes:
• Provides that profits in lieu of salary include:
- Any compensation due to or received by an assessed from his employer or former employer in
connection with the termination of his employment or modification of terms & conditions of his
employment.

- Any payment due to or received by an assessed from an employer or a former employer or from
provident fund to the extent to which it does not consist of contributions by the assessee.

- Any amount due to or received by an assessee whether in lump sum or otherwise from any person
before his joining any employment with that person or after cessation of his employment with that
person.

• With regards to salary:

- Charging section: Section 15.
- Deductions: Section 16.
- Section 17:
• Salary (provided for in Section 17(1)).
• Perquisites (provided for in Section 17(2)).
• Profits in lieu of salary (provided for in Section 17(3)).
• Income from house property:
- Class notes:
• Income from house property is part of total income & the said income is taxed by Income Tax Act,
1961. The mode of computation of income from house property is stated in Section 22-27.
 • Essential ingredients of S. 22:
- Section 22 is a charging section. The provisions of Section 22 apply to house property in a foreign
country also. In Chelmsford Club vs CIT; AIR 2000 SC 1092, the SC has made it clear that the tax
levied under Section 22 is a tax on income & not on property.

- Ingredients:
• House property having annual value:
- House property means any building or land appurtunent thereto (attached or connected). Thus,
an open or vacant plot of land, which is not attached to a building is not a house property &
the income from it is chargeable under the head “income from other sources”, unless it is
agricultural income. Section 22 does not apply to income derived from bare ground
(Chowdhury Sharafat Hussain vs CIT; 1956 29 ITR 759 Pat).

- The term “building” means “a structure possessing some annual value”. Thus, temporary
camps or tents are not building. However, the term “building” or “land appurtunent thereto”
include market consisting of shop, building, godowns & income derived by the owner from
letting out these is income from house.

- The expression “building” includes the ground upon which the walls stands & the ground
within those walls. (DG Gouse & Co. vs Kerala; AIR 1980 SC 271).

• The house property must not be occupied by the assessee for the purpose of any business or
profession:

- The house property may be let out by the assessee for residential purposes or for any other
commercial purpose. The income derived from letting out of such House Property will always
be taxable under this head. The annual value of house property must be charged under this
head if the property is not used by the assessee for the purpose of his own business. House
owing, however profitable, is neither trade nor business for the purpose of this act. Income
from a commercial complex is only neutral income, however, there are some exceptions to
this rule:

• The annual value of the property which the assessee uses for the purpose of his business or
profession is excluded from charge under Section 22. In this condition, the House Property
becomes one of the assets of business.

• Where the property is let out with the object of carrying on business of the assessee in the
official manner then the received income shall be taxable as business income.

- 18.09.2024:
• Class notes:
- Where a company is incorporated with the objective to develop markets consisting of shops, the income
derived by letting out these is taxed under the head “house property” & not under “profits from
 business”. The character of the income was not altered even when it was received by a company formed
with the objective of developing & setting up markets.

- In Attukal Shopping Complex Pvt Ltd vs CIT; 2003 259 ITR 567 Ker, the assessee company was
formed with the objective of erecting shopping complexes, houses, buildings etc & sell, lease, let out,
mortgage or dispose off the shopping complexes. It provided common facilities to the tenants such as
electricity, parking etc & maintained a separate office in the office complex to oversee these
arrangements.

- It was held that income from building formed part of business & part of house property. The company’s
objective was not limited to lease out but to sell it also.

- It is to be noted that where a building is erected & let out on lease for the purpose of running a hotel, the
letting out of the building cannot be taken as carrying on business & income from the same is
considered as income from house property (Sultan Brothers vs CIT).

- But where the assessee is carrying on the business of running the hotel & subsequently he lets out a
fully equipped hotel to someone, the income derived by him from such letting out will be taxed as
income from business (CIT vs Bosotto Brothers).

- In Mukherjee Estate Pvt Ltd vs CIT; 2000 244 ITR 1, it was held that when hoarding on the roof was let
out for advisement of various companies, it will be income from other sources but if the roof is let out
for hoarding it will be income from house property.

- Property situated outside India also come within the purview of this Section if the owner is resident of
India.

- 19.09.2024:
• The assessee must be the owner of the property:
- Class notes:
• It is the owner of the house property & not the occupier or the possessor who is liable to pay tax in
respect of the income from house property. Here, “owner” means “the person who can exercise the
right of the owner, not on behalf of the owner but in his own right”. The term “legal owner” includes
a trustee, an executor, an official receiver, etc.

• On the principle of tax being levied where the income is found, it cannot be assessed in the hands of
the person who is in receipt of income, if he does not happen at the same time to be owner of the
property. Where the assessee (owner) executed a settlement deed under which he gave his father right
to receive the income of house property, it was held that the ownership continued to vest in the
assessee & therefore, the assessee (owner) not his father was liable to pay income tax. (Sardar Kartar
Singh vs CIT; 1969 73 ITR 438 Del.

• Case law: RB Jodhamal Kuthiala vs CIT; 1971 3 SCC 369:

- Facts: In this case, the assessee company based in India had some property situated in Pakistan.
The said property was purchased after taking a loan from a bank in Lahore. After partition, the said
property was declared an “evacuee property” & consequently vested in the custodian in Pakistan.
In its returns for the relevant assessment years. The assessee claimed losses on account of interest
 payable to the bank but showed annual letting value from the said property at nil. Since the said
property had been vested in the custodian in Pakistan, the ITO held that no income or loss from
that property can be considered in the assessee’s case. He accordingly disallowed the assessee’s
claim in respect to the interest paid to the bank.

- Issue: The question arose “whether the assessee company can be considered as owner of that
property for the purpose of Section 22 of the Income Tax Act?”.

- Observation & decision: The court observed that in view of Pakistan (Administration of evacuee
property) ordinance, 1949 all the rights that the evacuee had in the property he left in Pakistan were
exercisable by the custodian. The evacuee could not exercise any rights in the property except with
the consent of the custodian.

- A property cannot be owned by two persons, each one having independent & exclusive right over
it. Hence, for the purpose of Section 22, the owner must be that person who can exercise the right
of the owner, not on behalf of the owner, but in his own right. Thus, the assessee was not the owner
of the property for the purpose of Section 22.

- 23.09.2024:
• Case law: CIT vs Podar Cement (P) Ltd; AIR 1997 SC 2523:
- Facts & issues:
• In this case the assessee purchased certain flats, paid the entire price, obtained possession but not the
legal conveyance of title. He let out all the flats. The question was whether the rental income derived
by him in absence of legal conveyance of title to him taxable under Section 22 of the Income Tax Act.

- Observation & decision:

• It was held by the SC that where a property is handed over to a purchaser to enjoy fruits of that
property by the builder, the purchaser is treated as owner of the property even though no registered
document has been executed in his favour.

• The SC held that the liability to pay income tax as owner is on the person who receives it or is
entitled to receive the income from the property in his own right. The requirement of registration of
sale deed in the context of Section 22 is not a prerequisite. Although under the common law an owner
means a person who has got the valid title legally conveyed to him after complying with the
requirements of law such as transfer of property act, registration act, etc. but in the context of Section
22 of the Income Tax Act, “to tax the income”, owner is a person who is entitled to receive income
from the property in his own right.

• Class notes:
- The house property must not be occupied by assessee for the purposes of any business or profession.
The house property may be let out by the assessee for residential purposes or for any commercial
purpose. The income derived from letting out of such house property will always be taxable under this
head. The annual value of household, though belonging to a business must be charged under this head if
the property is not used by the assessee for the purposes of his own business. House owning however
 profitable is neither a trade nor business for the purpose of the Act. Income from a commercial complex
is only rental income.

- However, there are exceptions to the above rule:

• The annual value of a property which the assessee uses for the purposes of his business or profession
is excluded from charge under Section 22. In this condition the house property becomes one of the
assets of the business.

• Where the property is let out with the objective of carrying on business of the assessee in an efficient
manner, then the rental income shall be taxable as business income.

• Question: what is meant by annual value of property chargeable to income tax under the head “income
from house property”.

• Ashok transferred a house property to his wife out of love & affection. Whether income from such house
would be taxable under the head “income from house property”.

• Whether the income from a house wherein the assessee is owner of super structure only is taxable under
the head “income from house property”.

• Whether the rental income of a tenant from a sub-tenant is taxable under the head “income from house
property”.

- 25.09.2024:
• Capital gains:
- Consists of two things:
• Capital asset:
- Anything which is used in day to day use will not be considered an “capital asset”.
- Anything which has a personal aspect involved would not be considered “capital asset”.
• Transfer:
- Class notes:
• Capital gains means profit or gain arising to the assessee from the transfer of a capital asset.
• Section 2(14) defines capital asset: It means property of any kind held by the assessee, whether or not
connected with his business or profession, but does not include any stock-in-trade, consumable stores
or raw materials held for business purposes. It does not include personal effects that is movable
property held for personal use by the assessee or any member of his family dependent on him.

• The expression “capital asset” includes all kinds of property, movable or immovable, tangible or
intangible, fixed or circulating, except those referred in Section 2(14) which are excluded by the
definition itself.

• A right is a property & thus a capital asset. Thus, goodwill of business, partner’s share in a firm,
tenancy rights, patents, trademarks, license for manufacturing of a commodity, right of management
of business, etc are all capital assets.
 • The right to sue for damages being not transferable, it cannot be treated as a capital asset.
- 26.09.2024:
• Capital gains:
- Transfers:
• Anything where we are trying to transfer the asset, the means & what all is acceptable under the
Income Tax Act.

• Provided for in Section 2 (47).

• Class notes:
- Capital gains arise only on the transfer of a capital asset. Section 2(47) defines the word “transfer”
in relation to a capital asset. The expressions in Section 2(47) include:

• Sale, Exchange or Relinquishment of asset

• Extinguishment of any right therein
• Compulsory acquisition under any law
- Thus, any transaction whereby the ownership of an assessee in a capital asset ceases is regarded as
transfer.

- Case law: Vania silk Mills vs CIT; 1991 ITR 647 SC:
• (The decision of this case is no more applicable in view of Sub-Section 1A in Section 45 by
1999 Amendment to IT Act.)

- Class notes:
• Short terms & long term capital assets:
- Capital assets have been subdivided into two categories, that is, short term capital assets & long
term capital assets. Section 2(29A) defines a long term capital asset as “a capital asset which is not
a short term capital asset”.

- The expression “short term capital assets” has been defined in Section 2(42A) as “to mean a capital
asset held by an assessee for not more than 36 months preceding the date of transfer”.

- This classification of capital assets has important consequences for the charge of capital gains’ tax
which similarly becomes divided into short term capital gain tax & long term capital gains tax.

- In case of short term capital gain, the assessee can avail of various deductions but in case of long
term capital gains, a flat rate is charged & deductions are not available.

- 14.10.2024:
• Profits & gains from business or profession:
- Capital expenditure: long term investment or expenditure.
- Revenue expenditure: short term investment or expenditure towards the business.
- It essential to understand which expenditures can be categorised under which head.
- Look at the intention behind the expenditure to ascertain its nature.
- Business:
• Class notes:
- Definition of business (S. 2(13)): The term “business” as defined in S. 2(13) includes any trade,
commerce or manufacture. If a person purchases goods with a view to selling them at profit, it is
trade. If such transactions are repeated on a large scale, it is commerce. Manufacture is the making
of an article by physical labour or applied power. The thing produced is commercial commodity
which is capable of being sold or supplied. The word business in its commercial sense implies an
element of continuity. The income tax law does not require that there should be a series of
transactions provided that such transactions can be termed to be an adventure or concern in the
nature of trade, commerce or manufacture.

- Whether a transaction is in the nature of trade, commerce or manufacture, depends on the facts &
circumstances of each case.

• Trade: Intention of selling the products we purchase at a profit.

• Commerce: Conduct of trade at a large scale.
• Manufacture: creation of goods by manual labour or machine labour.
- Profession:
• Covers “vocation” also.
• Requires a professional qualification in order to work in the field.
• Class works:
- The term profession includes vocation. A profession implies an occupation which may involve
intellectual or manual skill or both. For example, medicine, engineering, law, painting. An example
of vocation is writing books, articles, etc.

- The distinction between business, profession & vocation is not important as the rules for
assessment are same for them.

- Section 28, income taxable under business or profession:

• Section 28- 44D specify how the income under the head Profits & gains from business or profession
is to be computed. According to section 28 profits & gains of any business or profession will be
chargeable to income tax provided that business or profession has been carried on during the previous
year. It may be noted that the business may be legal or illegal.

• In CP Pictures ltd vs CIT; 1962, the assessee was carrying on business of motion pictures in his own
cinema house. By an agreement of lease, the assessee leased its premises to the lessee for the purpose
of exhibiting motion pictures for a period of 5 years with an option to renew it for another three years.
The question arose whether the income of the assessee from the lease of the premises was income
from business. The SC held that income which the assessee received from the lease of the cinema
 house & its equipment was income from business. A mere circumstance that the commercial asset
which was being used by the assessee & exploited for his business & is capable of being so used has
been let out by him temporarily to a stranger will not amount to cessation of business activity by the
assessee.

- 15.10.2024:
• Section 29:
- Class notes:
• Provides the manner in which the income from profits & gains from business or profession is to be
computed. It provides that such profits & gains are to be computed in accordance with the provisions
contained in section 30 to 43D. Section 30 to 43D provide for deductions to be allowed in the
computation business income. Some deductions which are expressly allowed are:

- Repairs or insurance for the building

- Repair and insurance of machinery, furniture
- Depreciation
- Rehabilitation allowance
- Expenditure on acquisition of patents or copyrights
- Expenditure on scientific research
- Expenditure on acquiring know how for business purposes
- Expenditure by way of payment to association and institutions for carrying our rural development
or conservation of natural resources programmes.

• It may be noted that the list of allowances enumerated in section 30 to 43D is not exhaustive.
Deduction is allowed in the year of expenditure or loss. The expenditure or losses relating to one
business cannot be deducted from the profits of other business. Though the profits of each district
business may have to be computed separately, the tax is chargeable not on the separate income of
every distinct business but on the aggregate on profits of all businesses carried on by the assessee.
(CIT vs P.M. Mathuraman Chettiyar).

• Distinction between capital & revenue expenditure:

- Class notes:
• In computing the taxable income of the assessee, the revenue expenditure is deducted therefrom but
capital expenditure is not deducted. On account of it, the difference between capital & revenue
expenditure is of utmost importance. The Act has not defined the expressions “capital expenditure” &
“revenue expenditure”. The line that divides the expenditures is often very thin. Various general tests
have been laid down by the court in this regard, but the difficulty arises in applying those tests to a
given set of facts.

• The following tests may be applied in determining the character of an expenditure as capital or
revenue:
 - Test of fix or circulating capital: Expenditure which acquires a capital asset is capital expenditure.
If it acquires stock in trade, then it is revenue expenditure. Fixed capital is what the owner turns to
profit by keeping it in his own possession. Circulating capital (stock-in-trade) is he makes profit by
parting with it & letting it change masters. For example, expenditure on construction of a factory or
fitting machinery has been treated as a capital expenditure, while the expenditure incurred by a
book seller on the purchase of books for resale is a revenue expenditure. The expenditure on the
creation of a capital asset is capital expenditure only when the capital asset belongs to the assessee.

- 16.10.2024:
• Test of enduring benefit:
- Class notes:
• Viscount Cave LC, in Artherton vs British Insulated & Helby Cables Ltd (1924) laid down the
aforementioned test:

- “When an expenditure is made not only once & for all but with a view to bringing into existence an
asset or advantage for the enduring benefit of a trade, there is very good reason for treating such
expenditure as properly attributable not to revenue, but to capital”. The above test has been
approved by the SC in L.B Sugar Factory & Empire Jute Co. cases. However, the test of enduring
benefits is not free from difficulties. It is therefore not a certain or conclusive test & it cannot be
applied blindly & mechanically without regard to the particular facts & circumstances of a given
case. It is the aim & objective of expenditure that would determine the character of expenditure. If
it is so related to the carrying on or the conduct of the business it may be regarded as an integral
part of the profit earning business, it should be held to be revenue expenditure. However, if the
purpose be acquisition of an asset or a right of permanent character, the possession thereof is the
condition prerequisite to the commencement or continuance of business, the expenditure would be
a capital expenditure.

- It may be noted that the word “enduring” is not synonymous with the word “everlasting”. The
word “enduring benefit” must respond to the changing economic realities of business. fast
changing scientific & technological atmosphere, the expenditure on know-how obtained may not
be of enduring nature. Constant update of technology is essential to business. By making technical
knowledge available, the supplier does not part with any asset of his business nor does the assessee
acquire any asset of an enduring nature. (CIT vs Ciba of India Ltd; 1968).

- Case law: Alembic Chemical Works Ltd vs CIT; 1989:

• Facts & issues: The assessee company, manufacturer of penicillin with a view to increase its
production entered into an agreement with a Japanese company which in consideration of the
once for all payment of 50K $ agreed to supply to the assessee the sub-cultures of company’s
most suitable penicillin producing strains. The technical information, know-how etc along with a
flow sheet of the process, the design & the specifications of the main equipments in such pilot
plant. It was also stipulated that the technical know-how supply was to be kept confidential by
the assessee which was prohibited from parting with it in favour of others or to seek any patent
for the process.
 • The question was whether the amount paid by the assessee to the Japanese company was a
revenue expenditure or a capital expenditure. The tribunal held that the outlay could not be
treated as an expenditure laid down on & for the purposes of the existing business, but must be
regarded as one incurred for a new venture on a new process on a new type of plant, the payment
was once for all payment & was made for acquisition of a capital asset. The HC upheld the
conclusion of the tribunal.

• Observation & decision: The SC held that the payment made by the Assessee to the foreign
company was in the nature of of revenue expenditure & as such, deductible under Section 37.
The financial outlay under the agreement was for the better conduct & improvement of existing
business. The circumstances

- 28.09.2024:
• Income from other sources:
- Class notes:
• Is the fifth & final head in which the total income of an assessee falls. It is a residuary head. When a
particular income cannot be brought under any of the four specific heads, that is, salaries, income
from house property, profits & gains of business & profession & capital gains, it is only that an
income can be brought under the head “income from other sources” (S.G. Mercantile Corp. pvt. Ltd.
vs CIT, 1972).

• Conditions to understand under which income can be put under this head:
- This residuary head can be invoked only if three conditions are satisfied (S. 56(1)):
• There is income within the meaning of S. 2(24).
• The income is not exempted from tax under S. 10-13A.
• The income does not fall in one of the four other specified heads of income.
• Section 56(2) specifically provides for inclusion of some incomes under the head “income from other
sources”. The list is not exhaustive. The following income shall be chargeable under the head
“income from other sources”, namely:

- Dividends.
- Any winnings from betting, gambling, lotteries etc.
- any sum received by the assessee from his employee as contribution to any provident fund or
superannuation fund.

- Income by way of interest on securities.

- Income from machinery or furniture belonging to the assessee & letting on hire.
- Any sum of money exceeding 25K received without consideration by an individual or HUF from
any person on or after 1st September, 2004, provided that this clause shall not apply to any sum of
money received:

• From any relative,

 • On the occasion of marriage,
• Under will or by way of inheritance.

• Who are relatives:

- Spouse of the individual.
- Brother or sister of the individual.
- Brother or sister of the spouse of the individual.
- Brother or sister of either of the parents of the individual.
- Any lineal ascendants or descendants of the individual.
- Any lineal ascendants or descendants of spouse of the individual.
- Spouse of the person referred to in clauses 2-6.
- 04.11.2024:
• Income of other persons included in assessee’s total income:
- Class notes:
• The definition of assessee in S. 2(7) expressly includes the case of an individual who is assessable for
the income of another person. Section 60-65 have been enacted to counteract the growing tendency
on the part of the taxpayers to avoid or reduce tax liability in such a way that the income should no
longer be received by him & at the same time, he may retain powers over the property or its income
by transferring assets to his spouse, minor child, son’s wife, etc.

• In SP Jaiswal vs CIT (SC), it was held that where the transfer by the assessee to his children & wife
was nothing but a paper device, designed to reduce the tax burden of the assessee & by no stretch of
imagination could be held to be a loan transaction by the assessee in favour of his children & wife,
the interest is taxable in the hands of the assessee.

• Section 60 (transfer of income without transfer of assets):

- If there is a transfer of income without there being a transfer of assets, all income arising from such
assets shall be included in the total income of the transferor. Transfer includes any settlement,
agreement or arrangement.

- Under this Section, income is transferred but the source of income is not transferred & therefore, it
is mere application of money in a particular manner for a particular purpose. The income
transferred remains the income of the transferor & thus is taxed in the hands of the transferor.

• Section 61-63:
- All income arising to a person by virtue of a revocable transfer of assets shall be included in the
total income of the transferor (S. 61)

- For the purposes of S. 60-62, transfer shall be deemed to be revocable if:

 • It contains any provision for retransfer, directly or indirectly of the whole or any part of the
income or assets to the transferor, or

• In any way gives the transferor a right to reassume power directly or indirectly over the whole or
any part of the income or assets.

- 05.11.2024:
• Inclusion of income of spouse/ son’s wife (S. 64(1)):
- Class notes:
• S. 64(1)(ii):
- In computing the total income of any individual there shall be included all such income as arises
directly to the spouse of such individual by way of salary, commission, fees or any other form of
remuneration.

- The proviso to this section provides that where the spouse possesses technical or professional
qualifications & the income is solely attributable to the application of spouse’s technical or
professional knowledge & experience, then this clause shall not apply. “Professional qualification”
means fitness to do a job or undertake an occupation or vocation requiring intellectual skills that a
person should be able to make a living therefrom independently. Technical qualification may take
within its ambit everything connected with specialisation in a particular subject, be it science,
technology, commerce or business management.

- Explanation 1 to this section provides that “such remunerations shall be included in the total
income of the spouse having the larger income (excluding the said remuneration). Explanation 2
provides that an individual is deemed to have substantial interest in a concern, for example, if Mr. x
has substantial interest in a company & Mrs. X is employed as a welfare officer there, the
remuneration she draws is to be added as Mr. X’s income for the purposes of income tax but if Mrs.
X is a doctor & she is employed as a company doctor where she has to apply her medical
knowledge & skill, this being consideration for remuneration drawn by her for company, her
income would not be added into Mr. X’s income for the purpose of income tax.

• Section 64 (1)(iv), income to spouse from assets transferred:

- This Section provides that if a spouse transfers to the other spouse any asset, the income arising to
the transferee spouse out of such asset will be included in the transferor spouse’s total income.

- 06.11.2024:
• Clubbing minor’s income:
- Class notes:
• All income of a minor child as arises or accrues to him is to be included in the income of his parents.
However, income derived by the minor child from manual work or from any activity involving his/
her skills & talent, specialised knowledge, experience will not be included in parent’s income.

• The income of the minor child will be included in income of parent who’s total income is greater. If
the marriage of the parents does not subsist, the minor’s income will be included in the income of
 parent who maintains the child in the relevant previous year. Once clubbing of a minor is done with
the income of one parent, it will continue to be clubbed with that parent only in subsequent years
( unless assessing officer thinks otherwise).

• If a minor becomes orphan his income will have to be charged to tax without there being any
clubbing with any person’s income, even though he may have a guardian or other person who is
maintaining him.

• HUF’ Income (Section 64 (2)):

- ‘A’ sells his property to HUF, even though ‘A’ is a part of the HUF. The money received from sale
(Capital gain) will be separately taxed by’A’ & not clubbed.

- Where a member of the HUF has converted or transferred self acquired property for adequate
consideration into joint family property, income arising therefrom is taxable as income of transferor
member & not of family.

- 07.11.2024:
• Assessment:
- Here, it refers to the assessment that is being done by the income tax authorities.
- It is mandatory to file returns under Section 139 (return of income):
• Class notes:
- The procedure under the Act for making assessment of income begins with the filing of return of
income. The return of income “is a statement furnished by an Assessee stating the total amount of
income earned by him during the previous year. The Assessee is obliged to voluntarily file the
return of income without waiting for any notice from the authorities for filing of return. The return
can be submitted in paper format or computer format.

- The ITR (Income Tax Return) form summarises income earned in a Financial Year. It can be from
business, salary, pension, income from housing property or income from capital gains. It is
mandatory for individuals & entities earning income in India to file a return irrespective of the tax
being deduced at source (TDS).

- As per the Income Tax Act 1961, section 139 is formulated to deal with timely filings of different
types of return. If any person or non person entity did not file their tax returns within the specified
deadlines, section 139 will provide the guidelines to file the returns. There are several subsections
of Section 139 that are designed to deal with non submission of tax returns within the prescribed
time frame. Section 139 (1) requires that every person being a company or a firm or being a person
other than a company or a firm, if his total income or the total income of any other person in
respect of which he is assessable during the previous year exceeded the prescribed maximum, i.e.,
exemption limit under the Income tax act, shall furnish a return of his income.

- A company or a firm is under a statutory obligation to file return of income irrespective of any
income or loss. In certain situations, individuals or entities are not under compulsory requirement
to file the returns. Section 139 (1) lays down the due dates for filing returns of income:
 • 30.09 each year: All entities & persons who are required to undergo an audit of their accounting
books. Eg: Business entity (company), working partner employed with a firm who requires to
have an audit performed, self employed person or professional.

• 31.07 each year: All persons who do not require an audit to be performed for their books of
account are required to file their return by July 31st of every year. This includes:

- A person or employee who is paid salary.

- A freelancer or consultant.
- A person who is self employed or professional.
- 11.11.2024:
• When return of loss should be filed, Section 139 (1):
- Class notes:
• Section 139 (3) deals with tax return in case of loss incurred by any person. The most important
benefit of filing “loss return” is that the loss can be carried forward to the future years & can be set
off against income arising in the future years. This will reduce the taxable income of future years
leading to a reduction in the taxable payable in future year.

• The return of loss should be filed within the time allowed under Section 139 (1). A return of loss will
be treated as though it were a return under section 139 (1).

• Belated filing of return of income, Section 139 (4):

- Class notes:
• Any person who has not furnished a return within the prescribed time or within the time allowed
under the notice issued under Section 142 (1) shall file a belated return before the completion of his
assessment or before the expiry of one year from the end of the assessment year, whichever is earlier.
A return filed after this or after the completion of assessment is not a valid return in the eyes of law.

• Delay in filing the return of income may attract certain adverse consequences:
- Loss cannot be carried forward (other than loss under the head income from house property).
- Levy of interest under section 234A.
- Levy of fine under Section 234F.
- Exemptions or deductions under Section 10 & 80 are not available.
• Revised returns, Section 139 (5):
- Class notes:
• If any person has furnished a return under Section 139 (1) or 142 (1) & he discovers any omission or
wrong statement not made knowingly or deliberately, he may furnish a revised return at any time
before the assessment is made or before the expiry of one year from the end of relevant assessment
year, whichever is earlier.
• Incomplete or defective return, Section 139(9):
- Class notes:
• Where the assessing officer considers that the return of income furnished by the assessee is defective,
he may intimate the defect to the assessee & give him the opportunity to rectify the defect within a
period of 15 days. If the defect is not rectified within the said period, the return will be treated as an
invalid return & it will be treated as if the assessee has failed to furnish the return. The assessing
officer has the power to condone the delay & treat the return as valid return.

• Permanent Account Number (PAN), Section 139A:

- Class notes:
• PAN is provided to the assessee & it has to be quoted in all returns & correspondence with the
department. Section 139A provides that every person specified therein & who has not been allotted a
PAN shall apply to the assessing officer for allotment of PAN. In order to use PAN as Unique Entity
Number (UEN) for non individual entities, it is proposed that every person not being an individual
which enters into any financial transactions shall be required to apply to the assessing officer for
allotment of PAN.

• Inquiry before assessment, Section 142:

- Class notes:
• Section 142 deals with the following:
- Giving notice to the assessee to submit returns, produce documents, books of accounts etc.
- Making inquiry & giving opportunity to assessee.
- Giving direction to assessee to get the accounts audited.
• Section 142(1), inquiry notice before assessment:
- Class notes:
• Notice under section 142(1) is usually served to call upon documents & details from the taxpayers &
to take a particular case under assessment. This notice can also be sent to require him to file his return
where he has not furnished yet. The notice is issued when information is missing from the tax payer’s
end. The basic purpose is to inquire the details of the assessee. It is like a preliminary investigation.
Compliance with this notice under section 142 (1) is mandatory even if the taxpayer is of the opinion
that the accounts & documents requested are irrelevant. For the purpose of making assessment, the
assessing officer may serve a notice under Section 142(1) for the following purposes:

- Return of income,
- Documents & accounts,
- Furnishing information.
• The taxpayer would be given time for the submission of the inquired documents & proper chance of
being heard before concluding the process.
- 12.11.2024:
• Making inquiry, Section 142 (2) & (3):
- Class notes:
• For the purpose of obtaining full information in respect of the income or loss of any person, the
assessing officer may make such inquiry as he considers necessary. However, the assessee shall be
given an opportunity of being heard in respect of any material gathered on the basis of any inquiry or
audit under Section 142 (2A) & proposed to be utilised for the purpose of assessment.

• Giving directions for audit, Section 142 (2A) - (2D):

- Class notes:
• If at any stage of the proceedings the assessing officer having regard to the nature & complexity of
the accounts of the assessee is of the opinion that it is necessary to get the account audited with the
previous approval of Chief Commissioner or Commissioner & direct the assessee to get the account
audited by the Chartered Accountant nominated by the Chief Commissioner or Commissioner. The
assessing officer can ask for a fresh audit even if the accounts have already been audited under any
other law.

• Failure to comply with directions under Section 142 (2A) to get the books of account audited entails a
“best judgement assessment” under Section 144. It also attracts penalty & prosecution. These
provisions are attracted only if there is a default by the assessee. If the CA nominated by the
Commissioner refuses to audit the account, the assessee cannot be held responsible.

• The assessing officer can complete the assessment without passing a regular assessment order. The
assessment is completed on the basis of return submitted by the assessee. Intimation under Section
143(1) is sent to the taxpayer only in case any tax is found payable or refundable. The total income of
the assessee is computed under Section 143(1) after making the following adjustments to the total
income in the return:

- Any arithmetical error, or

- Any incorrect claim if such claim is apparent from any information in the return.
• Thus, three types of notices (letters of intimation) can be sent under Section 143(1):
- Intimation where the notice is simply to be considered as final assessment of the returns since the
AO has found the returns filed by the assessee matching with his computation.

- A refund notice where the officer’s computation shows amount excessively paid by the assessee.
- Demand notice where the officer’s computation shows shortfall in the tax payment. The notice asks
to pay up the tax within 30 days.

• Scrutiny assessment, Section 143 (2) & (3):

- Class notes:
• If one gets a notice under Section 143 (2), it means once return has been selected for detailed scrutiny
by the assessing officer. It enables the AO to make a regular assessment after a detailed inquiry. A
 notice issued under this section is the assessee’s second chance from the tax department, who upon
receiving the returns has found minor or major discrepancies in either under reporting of income or
over reporting of losses. Recipients of this notice may find themselves having to appear for a hearing
to defend themselves with supporting proofs. Failure to take this notice seriously will result in hefty
penalties & severe imprisonment.

• E-assessment, Section 143(3A):

- Class notes:
• The Finance Act 2018 has inserted a new sub-section 3A to Section 143 that the central govt. may
make a scheme for the purpose of making assessment so as to impart greater efficiency, transparency
& accountability by:

- Eliminating the interface between the AO & the assessee in the course of proceeding to the extent
technologically feasible.

- Optimising utilisation of the resources through economies of scale.

- Introducing a team based assessment with dynamic jurisdiction.
• As a part of e-governance initiative to facilitate conduct of assessment proceedings electronically,
income tax department has launched e-proceeding facility. Under this initiative, CBDT has made it
mandatory for the tax officers to take recourse of electronic communication for all limited &
complete scrutiny.

- 18.11.2024:
• Best judgement assessment, Section 144:
- Class notes:
• The assessing officer finalises the assessment to the best of his knowledge. It is also called ex-parte
assessment, though an opportunity of being heard is given to the assessee.

• Under Section 144, the assessing officer after taking into account all relevant material which he has
gathered is under an obligation to make an assessment of the total income or loss to the beat of his
judgement & determine the tax payable by the assessee in the following cases:

- Where any person fails to make the return under Section 139 (1) & has not made a return or a
revised return under Section 139 (4) or (5),

- Where any person fails to comply with all terms of a notice issued under Section 142 (1) or fails to
comply with the directions issued under Section 142 (2A) for getting the account audited,

- Where any person having made a return fails to comply with all the terms of a notice issued under
Section 143 (2) requiring his presence or production of evidence & documents.

• The best judgement assessment can only be made after giving the assessee an opportunity of being
heard. Such opportunity shall be given by issue of notice to the assessee to show cause why the
assessment should not be completed to the best of his judgement & that opportunity for hearing will
not be necessary.
 • Section 144 is not a punitive provision. The assessing officer should not be influenced by a desire to
punish the assessee for the default.

- Analysis of Section 144:

• Class notes:
- Conditions precedent in Section 144 are alternative & not cumulative:
• The assessing officer can make an assessment to the best of his judgement in three situations
mentioned in Section 144. The Supreme Court in CIT vs Segu Buchiah Setty (1970) has held
that these conditions are alternative & not cumulative. Thus, the presence of even one of the
defaults (though there may be more) requires the assessing officer to proceed to a best
judgement assessment. Thus, best judgement assessment is mandatory for any one of the
defaults under Section 144.

• Where in response to a combined notice for personal appearance as well as production of

account books, the assessee appeared in person but did not produce any account books, it was
held that income tax officer would be justified in making a best judgment assessment
(Sivaswami Chettiar vs CIT).

- Opportunity to be heard:
• The opportunity given to the assessee to be heard must be real & reasonable. If an assessee who
is asked to furnish certain particulars or submit explanations within a specified time, prays for
further time stating his difficulties or reasons, his prayer should be considered judiciously.
Sometimes, proceedings for assessment for a number of years are taken up together & the
assessee is asked to appear & produce evidence in support of his returns. It might not be possible
for the assessee to submit such evidences spontaneously or at such short notice & may pray for
further time to do so. Such prayers cannot be rejected without considering the grounds given by
the assessee merely because the assessing officer is hard pressed for time & has to complete the
assessment by a specified date. Such a rejection would amount to denial of reasonable
opportunity of hearing to the assessee.

• An assessment made under Section 144 can by no means be equated to ex-parte proceedings in a
civil court. (Dhanalakshmi Pictures vs CIT, 1983).

- 19.11.2024:
- Best judgment should be fair:
• When the officer makes assessment to the best of his judgement, he must not act vindictively or
with a view to punish the assessee for non compliance. He must make what he honestly believes
to be a fair estimate of the proper figure of assessment & for this purpose, he must take into
consideration local knowledge & repute in regard to the assessee’s circumstances & all other
matters which he thinks will assist him in arriving at a fair & proper estimate. There must be
something more than bare suspicion to support the assessment. It is now well settled that the
assessing officer while making a best judgment assessment should make an intelligent, well
grounded estimate. Such estimate must be based on adequate & relevant material. The
expression “to the best of judgement” means “according to rules of reason & justice, & not
 according to his private opinion or suspicion”. Judgement does not depend upon the arbitrariness
of a judge, but depends on settled & invariable principles of justice. Best judgement assessment
must have reasonable nexus to the available material & circumstances of each case. (This
observation has been laid down in State of Kerala vs C. Velukutty, 1966)

- Invalid assessment:
• A best judgement assessment made pursuant to the assessee’s failure to produce account books
over which the assessee neither possession nor control is invalid. In order to commit the default,
it is necessary that there must be a failure to produce books or documents or evidence on which
the assessee relied in support of his return. Therefore, where the assessee had not relied on any
such books, documents or evidence, there could not be a consequent failure to produce them, so
as to justify a best judgement assessment in his case. Where the assessee had furnished
appropriate figure in his return of income without any further details, it was held that the best
judgement assessment made by ignoring such a return was invalid.

- Court’s interference when required:

• The assessing authority while making the best judgement assessment should arrive at its
conclusion without bias & on a rational basis. If the estimate made by the authority is a bona-
fide estimate & is based on a rational basis, the fact that there is no good proof in support of that
estimate is immaterial. Prima facie the assessing authority is the best judge of the situation. It
cannot be disturbed even when the court may think that it is not most appropriate judgement.

• Before the assessing officer can assume jurisdiction under Section 144, he must record the
finding in the first instance that there has been non-compliance with any of the various notices
mentioned in the Section. If in a particular case, the assessing officer makes a best judgment
assessment on a wrong finding as to a jurisdictional fact, that is, non-compliance with any of the
notices mentioned in Section 144, the High Court, in exercise of its jurisdiction under Article
226 of the Constitution is competent to inquire into the correctness of such a finding on a
jurisdictional fact. (Mohini Debi Malpani vs ITO).

- 20.11.2024:
• Liability in special cases: