Income Tax – An

overview of History,
Constitution, treaty
and scheme
Senior Advocate Porus F. Kaka
Trustee – IBFD, Hon. President, IFA
Barrister, Field Court Tax Chambers - UK
  The emergence of Income tax from the Napoleonic Wars in UK
in 1798
 Post the War the tax was abolished, but it returned temporarily in
History of 1803 with two additions:
Income Tax — Taxation at source
— The division of income taxes into five ‘Schedules’ – A (income
from land and buildings), B (farming profits), C (public
annuities), D (self-employment and other items not covered by
A, B, C or E) and E (salaries, annuities and pensions).

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  Income Tax was a temporary tax which expired each year in April.
The UK Parliament had to reapply it with the annual Finance Act
 The Provisional Collection of Taxes Act 1913 ensures that taxes
can be demanded based on the Finance Bill, till the time the Act
History of is enacted

Income Tax  Similarity with Modern India

 The first Indian Income Tax was introduced in 1860 by Sir James
Wilson to help recoup the losses sustained by the Raj from the
Revolt of 1857
 This was followed with Acts of 1886, 1918, 1922, and finally 1961
 India too has enacted the Provisional Collection of Taxes Act 1913

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History of Tax Treaty (1/2)

 Earliest Treaty was adopted by Prussia around the start of the

Twentieth Century
 First Treaty was with Austria signed in 1899
 In 1920 League of Nations began to play a leadership role
 1928 published the first internationally important Model Tax
Conventions
 After World War I, Germany signed a treaty with Czechoslovakia in
1921 and with Austria in 1922
 The League of Nations began publication on tax treaties in 1923
 The OECD became the Organization for Economic Cooperation and
Development

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History of Tax Treaty (2/2)

 OECD first draft model treaty in 1963

 United Nations published a manual for the negotiations of bilateral tax
treaties between Developed and Developing Countries in 1979
 In 1980 United Nations published a manual for the negotiations of Bilateral
Tax Treaties between Developed and Developing Countries
 OECD made some amendments published in loose lease form in 1990’s
 UN Model Tax Convention 2001
 OECD started amending the publication every 2 to 3 years
 New UN Model on Tax Convention 2011
 OCED Model and Commentary 2017
 UN Model on Tax Convention 2017

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 3 elements of a tax
Welfare functions of  Tax Base
Basic features of Tax Why Tax?
the State  Rate of tax
 Tax payer

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Basic features of Tax

Evaluating the Tax Systems: Adam Smith in Wealth of Nations,1776)

Convenience Certainty Equity Economic Simplicity

Ease of Literal Progressive tax Efficiency Long term fiscal
Compliance and interpretation Tax should be policy
tax friendly transaction neutral
environment and not influence a
transaction in any
manner

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Levying Taxes – Constitutionality

 Art.265 – No tax shall be levied or collected except by authority of law Division of taxing powers
— Tax declared as ultra vires or unconstitutional by the Court whether paid under protest or not must be
refunded: S.T.O. v. Kahhaiya Lal Saraf (AIR 1959 SC 135); D. D. Basu on Constitution of India
 Union taxes can be classified into 3 categories
— Art.268: Levied by Union but collected by States
— Art.269: Levied and collected by Union but wholly assigned to the States
— Art.270: Levied and collected by Union and shared with the States
 State taxes – land revenue, agricultural income tax, excise duties on narcotics and alcohol, sales taxes
(Art.286, entry 92A)

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Levying Taxes – Constitutionality

 GST Framework: Art 366 (12A) - “goods and services tax” means any tax on supply of goods, or
services or both except taxes on the supply of the alcoholic liquor for human consumption
— Article 246A: (2) Parliament has exclusive power to make laws with respect to goods and services tax
where the supply of goods, or of services, or both takes place in the course of inter-State trade or
commerce
 Provisions for inter-state commerce [Part XIII of the Constitution]:
— Art.301: Subject to Part XIII, trade, commerce and intercourse throughout the territory of India shall
be free
— Is Tax a restriction on trade? – The entry tax debate.
— Jindal Stainless Steel v. Haryana (AIR 2016 SC 5617)

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Constitutional Provisions for tax treaties (1/2)

Directive Principles of Article 51: The State shall endeavour to— (c) foster respect for international law
State Policy and treaty obligations in the dealings of organized peoples with one another

No tax can be imposed

Article 265: No tax shall be levied or collected except by authority of law
without authority of law

Article 73: (1) Subject to the provisions of this Constitution, the executive power
Law in Article 265
of the Union shall extend…(b) to the exercise of such rights, authority and
means any act of
jurisdiction as are exercisable by the Government of India by virtue of any treaty
competent legislature
or agreement

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Constitutional Provisions for tax treaties (2/2)

Article 253: Notwithstanding anything in the foregoing provisions of this Chapter,

Legislation Giving Parliament has power to make any law for the whole or any part of the territory
Effect to International of India for implementing any treaty, agreement or convention with any other
Agreements country or countries or any decision made at any international conference,
association or other body

Section 90: (1) The Central Government may enter into an agreement with the
Government of any country…(a) for the granting of relief… or (b) for the
avoidance of double taxation… or (c) for exchange of information… or (d) for
recovery of income-tax … and may, by notification in the Official Gazette, make
Section 90 Income such provisions as may be necessary for implementing the agreement
Tax Act
(2) Where the Central Government has entered into [such] an
agreement…under sub-section (1)… then, in relation to the assessee to whom
such agreement applies, the provisions of this Act shall apply to the extent they
are more beneficial to that assessee

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Can a treaty have automatic effect in India?

 No
 India adopts the dualist approach where the Parliament must ratify
an international agreement for it to have legal effect
 Article 253 of Constitution: Legislation for giving effect to
international agreements
— Notwithstanding anything in the foregoing provisions of this
Chapter, Parliament has power to make any law for the whole or
any part of the territory of India for implementing any treaty,
agreement or convention with any other country or countries or
any decision made at any international conference, association
or other body

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 Maganbhai ishwarbhai Patel (1970) 3 SCC 400
 A treaty really concerns the political rather than the judicial wing of
the State
 Can only be implement if all the 3 branches of government – the
Constitutionality legislature, executive and the judiciary, possess the power to
implement it
of treaties
 If in convergence of the exercise of Executive power, rights of
citizens or others are contracted or infringed or laws modified, the
exercise of power must be supported by legislation; where there
are no such restrictions, infringement of the rights or modification
of the laws, the Executive is competent to exercise the power

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Constitutionality of tax treaties

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Azadi Bachao Andolan (252 ITR 471, Delhi high court)

Issue Held

 Whether Circular No. 789 dated 13.4.2000 with  Merely accepting the certificate of residence as
regard to the application of Indo-Mauritius substantial proof cannot be held conclusive
Double Taxation Avoidance Convention issued
 The ITO, a quasi-judicial authority must after
by the CBDT is ultra vires of S.90 and S.119 of
application of mind and looking at various facts
Income Tax Act, 1961?
come to the conclusion that the assessee is a
resident of Mauritius. Such authority cannot be
taken away by a circular
 Significant scope for Treaty Shopping, the
intention of the legislature could not be double
non-taxation

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Azadi Bachao Andolan ((2004) 10 SCC 1, Supreme Court)

Issue Held

 Whether the decision of the Delhi High Court  Yes

was bad in law
 Principles adopted in interpretation of Treaties
are not the same as those in interpretation of
Statutory Legislation
 Treaties are negotiated and entered into at a
political level and have several consideration as
their bases

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Azadi Bachao Andolan ((2004) 10 SCC 1, Supreme Court)

 Circular briefly defines Article 4 of the Indo – Mauritius DTAC and states
that FIIs and other investor funds incorporated in Mauritius are invariably
residents of the country and thus liable for taxation in Mauritius

 SC states that Circular No. 789 does not interfere with S. 90 and S. 119
and is well within the ambit of the Indian Income Tax Act

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Azadi Bachao Andolan ((2004) 10 SCC 1, Supreme Court)

 A State has the inherent power to enter into treaties with other States.

 Under Article 73, the Executive Power of the Union extends to all
matters on which the Parliament can make laws.

 The executive is competent to represent India and enter into a binding

Treaty with other States.

 However, the obligations under the treaty are not by itself binding on
Indian nationals. This requirement is only applicable when the justiciable
rights of citizens or others are affected.

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Legislative process of levying a tax

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Money Bills

Article 110. (1) For the purposes of this Chapter, a Bill shall be deemed to be a Money Bill if it contains
only provisions dealing with all or any of the following matters, namely
a) The imposition...of any tax
b) …the borrowing of money or the giving of any guarantee by the Government of India, or …with respect to
any financial obligations…undertaken by the Government of India
c) The custody of the Consolidated Fund
d) The appropriation of moneys out of the Consolidated Fund
e) The declaring of any expenditure to be expenditure charged on the Consolidated Fund of India...
f) The receipt of money on account of the Consolidated Fund of India or the public account of India or the
custody or issue of such money or the audit of the accounts of the Union or of a State; or
g) Any matter incidental to any of the matters specified in sub-clauses (a) to (f)

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Money Bills

 Money Bills in the Parliament:

 For all bills apart from Money Bills, both Houses of Parliament have equal say.
 But, Money Bills can only be introduced in the Lok Sabha
 Once passed in Lok Sabha, Rajya Sabha can merely recommend changes.
 These changes may or may not be adopted by the Lok Sabha. Rajya Sabha cannot debate the
Bill for more than 14 days. Article 109(2):
— After a Money Bill has been passed by the House of the People it shall be transmitted to the
Council of States for its recommendations and the Council of States shall within a period of
fourteen days from the date of its receipt of the Bill return the Bill to the House of the People
with its recommendations and the House of the People may thereupon either accept or reject
all or any of the recommendations of the Council of States.
 Speaker of the Lok Sabha classifies a Bill as Money Bill

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  Aadhar Bill was introduced as Money Bill. Only 7 of 59 sections
Aadhar controversy: referred to the Consolidated Fund of India

Puttaswamy v. UoI  Majority view: Sikri J: The Aadhar Bill had ‘substantial nexus’ with
the ‘appropriation of funds’ and is ‘directly connected’ with Article
110 of the Constitution
(2019) 1 SCC 1
 Concurring view: Bhushan J: The Aadhar Bill, particularly
section 7, met the requirements of Article 110(c) and 110(e),
dealing with the custody and expenditure charged on the
Consolidated fund of India

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 Judicial Review of Speaker’s certificate:
 Overruled Saeed Siddiqui v. Uttar Pradesh and Yogendra Kumar
v. Bihar; which stated that the decision of the Speaker is final and
the courts cannot interfere.
Aadhar controversy:
— Article 112 declares the decision of the Speaker as final.
Puttaswamy v. UoI
 Per Majority: Judicial Review would be admissible in case the
Speaker’s certificate suffers from illegality.
(2019) 1 SCC 1
 Per Bhushan J: [Finality of Speaker’s certificate] does not apply in
case of illegality of the decision. (para 892)
 Per Chandrachud J (dissenting): The principle which emerges
from these decisions is that the decision of the Speaker is
amenable to judicial review, if it suffers from illegality or from a
violation of constitutional provisions.

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 Concerns with the Majority view
Aadhar controversy:  The ‘substantial nexus’ test has potential to open floodgates. Any
Puttaswamy v. UoI mention of the Consolidated Fund of India does not warrant it be
classified as a money bill.
(2019) 1 SCC 1  The decision renders the ‘only’ in the header to Article 110 otiose.
The proposal was made to remove the ‘only’ in the Constituent
Assembly Debates. This proposal was rejected, meaning there is
a deliberate intention and meaning awarded to the term

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 Minority view: Chandrachud J: Held the bill was not a
Money Bill
 Chandrachud J traced the significance of a Two member house
Aadhar controversy: and the contributions of Rajya Sabha
Puttaswamy v. UoI
 Section 7 of the Aadhar Act does not declare a charge on the
Consolidated Fund of India and hence does not satisfy the
(2019) 1 SCC 1 provisions of 110
 In Pith and Substance, the Aadhar Act is not a money bill
 Referring to the Constituent Assembly debates on Money Bill and
the legislative history of the Aadhar Bill itself, Chandrachud J held
that this was not a Money Bill

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Income Tax Act

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Scheme of the Income Tax Act

 It is a Charge on Income of Persons as defined under the Act

 Income (Section 2(24)) under 5 heads (Section 14) charged on a Person (Section 2(31))

 A person is taxed as per his or her residence (Section 6) and the source of income

 Income may be deemed to be sourced in India (Section 9). A non resident may be deemed to be resident
(Section 6(1A))

 The income from the 5 heads constitutes total income (Chapter IV). The income may be set off (Chapter VI)
or deducted (Chapter VIA) or granted rebate (Chapter VIII)

 Assessment (Chapter XIV), Collection (Chapter XVII), Refund (Chapter XIX) follow with the Income Tax
Authorities (Chapter XIII) and in Appeals (Chapter XX)

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Assessment

 Section 140A - Self Assessment

 Section 143 – Assessment
— 143 (1)- Summary Assessment  without calling the assessee. (1-year time limit)
— 143 (3) - Regular Assessment  limited scrutiny or complete scrutiny
» Finance Act 2018: Plans to make completely have faceless assessments
 Section 144 – Best judgement assessment. From Finance Act 2020, 144 assessment are covered
under e-assessment. Implementation by 1.4.2022
 Section 147 – Re-Assessment if AO has ‘reason to believe’ that income has escaped assessment
 Section 153A: Assessment in case of search or requisition
 Section 153C: Based on income under assessment of one person, assessment of income of
another person

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Assessment versus reference to DRP

 Fresh provisions for applicability of Section144C: Now any non-resident is covered that is not a company, or any
foreign company
 Vijay Televisions v. DRP (Mad HC; TS-469-HC-2018(MAD)-TP): Where there is an omission to follow mandatory
procedure, such omission cannot be termed as a mere procedural irregularity and it cannot be cured.
— The Delhi High Court in ESPN Star Sports Mauritius v. UoI [2016] 388 ITR 383, the Andhra Pradesh High Court in
Zuari Cement Ltd. v. ACIT case (WP(C) No.5557/2012) as well as the Bombay High Court in International Air
Transport Association v. Dy. CIT [2016] 241 Taxman 249; came to the same conclusion.
 The process before DRP is a continuation of Assessment Proceedings – Vodafone India Services Pvt. Ltd. (Bom HC;
361 ITR 531).
 Regular Assessment under 143(2):
— Notice under 143(2) must be given within 6 months.
— ACIT v. Hotel Blue Moon: Kapadia and Dattu JJ (SC; 321 ITR 362): If for any reason the return filed by the assessee
is repudiated, the AO must have necessarily issued a notice

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Special Assessment provisions – Search

 Post a Search, an Appraisal Report created under section 132

— Inventory of documents and books of accounts are compiled
 AO under section 153A must issue a notice for re-assessment of previous 6 assessment years based on
the findings from the search
— Notice can be issued for periods beyond 6 years upto 10 years if
» Income escaped is more than 50 lakh rupees in one year in the four years beyond the 6th year. It
forms a part of an asset and relates to that particular year
 Assessment under 153A can be made only against a person on whom search is initiated under section
132 – Jindal Stainless v. ACIT, (2009) 122 TTJ 902 (Del HC)

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Anti-Avoidance provisions – GAAR

 Section 96 (1) of the ITA proposes a two-pronged requirement for an agreement to be impermissible:
1. The "main purpose or one of the main purposes" of the arrangement must be to obtain a tax benefit (the
"main purposes" test); and
2. The arrangement must fulfil one or more of the four conditions specified in clauses (a) to (d) (the "tainted
elements" test)
 The onus to establish both prongs of the test in Section 96 shall lie on the Revenue.
 Concerns with GAAR:
— Uncertainty?
— Purposive Interpretation of Tax Statutes?
— Unfettered Discretion to Commissioners?
— Chilling Effect?

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Anti-Avoidance provisions – SAAR

Examples of SAAR

Areas covered Section under the Act

Deeming certain payments by closely held companies by way of loans and 2(22)(e)
advances to specified shareholders/other specified entities as dividends

Provision targeting transfer of income without transfer of assets 60

Provision in respect of revocable transfer of assets 61

Provisions relating to clubbing of income which prevent shifting of income from 64

one person to another for tax reasons

Provisions targeting avoidance of income tax by transactions resulting in transfer 93

of income of non-residents

Provisions targeting avoidance of tax by certain transactions in securities, such 94

as dividend stripping

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Chapter XXC – Transactions dealing with immovable property

 Keeping in mind the stakes in transactions involving immovable property and identifying it as a potential
leakage of income, the government introduced Chapter XXC
 Chapter XXC was the successor to Chapter XXA
 The Chapter provides for the purchase of immovable property by the Central Government
— A transfer of immovable property, if situated in a notified city or and
— If consideration noted under the contract for such transaction exceeded the prescribed limit
— The Central government could intervene to purchase the immovable property

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Thank you

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