Taxation

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preliminary
income
at the outset it is essential to know the meaning of some important concepts. first of all we must know the
meaning of income as income-tax is a tax on income. section 2 (24) of the income-tax act, 1961, gives an inclusive
definition of "income". it is by no means comprehensive or exhaustive:
(24) "income" includes
(1) profits and gains;
(2) dividend;
(2)(a) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or
by an institution established wholly or partly for such purposes or by an association or institution referred to in
clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (4) or sub-clause (5) or by any
university or other educational institution referred to in sub-clause (in ad) or sub-clause (6) or by any hospital or
other institution referred to in sub-clause (3 ae) or sub-clause (6 a) of clause (23-c) of section 10 or by an electoral
trust);
explanation - for the purposes of this sub-clause, "trust" includes any other legal obligation;
(3) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;
(a) any special allowance or benefit, other than perquisite included under sub-clause (hi), specifically granted to
the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an
office or employment of profit;
(b) any allowance -granted to the assessee either to meet his personal expenses at the place where the duties
of an office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides
or to compensate him for the increased cost of living;
(4) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either
by a director or by a person who has a substantial interest in the company or by a relative of the director or such
person, and any sum paid by any such company in respect of any obligation which, but for such payment, would
have been payable by the director or other person aforesaid
(2) the value of any benefit or perquisite, whether convertible into money or not, obtained by any
representative assessee mentioned in clause
(3) or clause
(4) of sub-section 160 or by any person on whose behalf or for whose benefit any income is receivable by the
representative assessee (such person being hereafter in this sub clause referred to as the "beneficiary") and
any sum paid by the representative assessee in respect of any obligation which, but for such payment, would
have been payable by the beneficiary.
(5) any sum chargeable to income-tax under clauses (2) and (3) of section 28 or section 41 or section 59:
(a) any sum chargeable to income-tax under clause of section 28;
(b) any sum chargeable to income-tax under clause of section 28;
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(c) any sum chargeable to income-tax under clause of section 28;
(d) the value of any benefit or perquisite taxable under clause of section 28;
(e) any sum chargeable to income tax under clause of section 28;
(6) any capital gains chargeable under section 45;
(7) the profits and gains of any business of insurance carried on by a mutual insurance company or by a cooperative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by
virtue of provisions contained in the first schedule;
( a) the profits and gains of any business of banking (including providing credit facilities) carried on by a cooperative society with its members.
(8) omitted,
(9) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any
sort or from gambling or betting of any form or nature whatsoever;
explanation, for the purposes of this sub-clause (1) "lottery" includes winnings from prizes awarded to
any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or
arrangement by whatever name called;
(2) "card game and any other game of any sort" includes any game show, an entertainment programme
on television or electronic mode; in which people compete to win prizes or any other similar game;
(10) any sum received by the assessee from his employees as contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the employees' state insurance act, 1948 (34
of 1948) or any other fund for the welfare of such employees',
(11) any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy,
(12) any sum referred to in clause (5a) of section 28
(13) any sum referred to in clause (5) of sub-section (2) of section 56
(14) any sum referred to in clause (5) of sub-section (2) of section 56
(15) any sum of money or value of property referred to in clause (7) of sub-section (2) of section 56.
the word "income" includes not only those things which are included in section 2(24), but will also include,
within its import, such things as the word signifies according to its natural or literal meaning. the definition simply
gives some artificial categories to the natural connotation of income. on the other hand it enumerates items
some of which cannot ordinarily be considered as income but statutorily to be treated as such.
the ordinary, natural and grammatical meaning of the word "income" as "a thing that comes in" (see
oxford dictionary, vol. v p. 162). the privy council in commissioner of income tax verses shaw wallace and co.,
(1931) comp. cases 276, (p.c.), stated that the word "income" is a periodical monetary return 'coming in' with
some sort of regularity, or expected regularity from definite sources. but subsequently it was held that
recurring nature is not an absolute necessity in order that an item may be designated as "income" for the
purposes of the income-tax. the income-tax act, 1961 has very clearly endorsed this view in the definition of
'income' as given in section 2(24).
income earned by unlawful means is also assessable if it satisfies the prescribed conditions of receipt or
deemed receipt, accrual or deemed accrual as the case may be. however, any expense or loss incurred by an
assessee in carrying on such business is not deductible as per section 37(1) of income-tax act, 1961.
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it is not necessary that the income must be received in the form of money. receipts in kind or service having
money equivalent can also be income. the income arises either on receipt basis or accrual basis, but the
substance of the matter is income. if an assessee has earned an income but has not actually received it, it will
be treated as income of the assessee because he is entitled to receive it.
relief or reimbursement of expenses is not income. therefore, reimbursement of actual travelling expense to
an employee is not income.
a revenue receipt is always liable to tax whether it is received in installments or in lump sum. for instance, an
arrears of pay revision received in lump sum is income.
for the purposes of income-tax actual profit earned by a trader is taxable and not the maximum profit which
he could have earned. if there is no income, there cannot be a tax, even though an entry has been made in
accounts about a "hypothetical income". single transaction may result in income. losses represent minus income.
thus the following general principles emerge regarding the concept of income:
(1) regularity of income: income is a periodical monetary return coming with some sort of regularity, or
expected regularity, from definite sources. however, recurring nature is not an absolute necessity in order that an
item may be designated as "income" for the purposes of income-tax. thus income may not necessarily be
recurring in nature; though it is generally of that character.
(2) form of income: income may not be in the form of cash only. it may be in kind or service, i.e. in the form
of other property or right which has monetary value. when income is received in kind like perquisites, the value
of perquisites will be calculated as per rules prescribed in the income-tax act, 1961, and that value will be taken
as income.
(3) illegal income: income earned by unlawful means is also taxed just like any legal income. money embezzled
is also "income" under the income-tax act.
(4) application of income: where an income is applied to discharge an obligation after such income reaches
the assessee, it is an application of income and is taxable. however, where there is a diversion of income before it
reaches the assessee, it is not treated as income of the assessee.
(5) connection with outside agency: a person cannot have income without outside agency. a person cannot
make income out of oneself.
(6) disputed title: income-tax assessment cannot be held up or postponed merely because of existence of a
dispute regarding the title of income. the recipient is, therefore, chargeable to tax, though there may be rival
claims to the sources of income.
(7) personal gifts: gifts received by a person on one's birthday, marriage etc. is not the income of the
assessee. however, gift received from unrelated person on or after september 1, 2004 shall be chargeable to
income-tax if the sum of money received as gift exceeds rs. 25,000/- (rs. 50,000/- in aggregate w.e.f. assessment
year 2007-08).
(8) contingent income: contingent income i.e. an income which may or may not arise is not chargeable to
income tax until such contingency actually occurs and income accrues to the assessee.
(9) money received by a woman from husband for private or household expenses: money received by a woman
from her husband for her dress, jewellery etc. and the savings effected by a housewife out of money received from
her husband for kitchen or household expenses is not her income. any property acquired with such money or
savings would be the capital asset belonging to the woman [r.b.n.j. naidu verses c.i.t.]
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(10) lump sum receipt: a lump sum receipt is also income if it is in the nature of revenue receipt. for
example, if a person receives arrears of salary in a lump sum amount, it would be his income.
(11) compensation for death: any compensation for death on account of fatal accident or fatal injuries
sustained by the deceased would not be income [c.i.t. verses fletcher (1937)].
(12) compensation from insurance company: compensation received from a insurance company against
injuries sustained in a road accident is not income and therefore not chargeable to tax.
diversion of income and application of income
where by an obligation, income is diverted by an overriding title of another person to the income before it
reaches the assessee, it is diversion of income and not taxable. where the income is required to be applied to
discharge an obligation after such income reaches the assessee, it is an application of income and is taxable. in
order to decide whether a particular payment is a diversion of income or application of income, it has to be
determined whether it reaches the assessee as his own income or not. for example, a and b prepare an article for
publication in the economic times on the understanding that the remuneration will be shared by them equally. after
the publication of the article, a receives the entire remuneration of rupees. 2,500, half of which is later on paid by
a to b. the payment of rupees. 1,250, being 50% by a to b is diversion of income. the taxable income of a will be
rupees. 1,250 and the payment of rupees. 1,250 to b will not be treated an income of a as it is diverted by an overiding
title. any expenditure or investment by a out of this income of rupees. 1,250 will be an application of income.
assessee
an assessee is a person who is liable to pay tax or any other sum of money e.g. penalty, interest, etc. under the
income tax act, 1961. section 2(7) of the income-tax act, 1963 defines an assessee as follows:
"assessee" means a person by whom any tax or any other sum of money is payable under this act,
and includes
(a) every person in respect of whom any proceeding under this act has been taken for the
assessment of his income or assessment of fringe benefit or of the income of any other person in respect
of which he is assessable, or of the loss sustained by him or by such other person, or the amount of
refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this act;
(c) every person who is deemed to be an assessee in default under any provision of this act.
since an assessee is a person, it is important to note the definition of 'person' given in section 2(31)
of the income-tax act, 1961. according to section 2(31) ''person" includes (1) an individual,
(2') a hindu undivided family,
(3') a company,
(4) a firm,
(5) an association of persons or body of individuals, whether incorporated or not,
(6) a local authority, and
(7) every artificial juridical person, not falling within any of the preceding sub-clauses.
the following categories of person are included in the definition of assessee:
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first category-a person by whom any tax or any sum of money is payable under the act. for example, income of a
is rs. 100,000 for the assessment year 1999-2000. he files his tax return of income. he is an "assessee". Income of
b is rs. 40,000 for the assessment year 1999-2000. he does not file his return of income because his income is not
more than the amount of exempted slab. income-tax authorities do not take any action against him. he is not an
"assessee" because no tax or any other sum is due from him.
second category-every person in respect of whom any proceeding under the act has been taken (whether
or not he is liable for any tax, interest or penalty). proceeding may be taken (a) either for the assessment of his
income or the loss sustained by him, or (b) for the assessment of the income of any other person in respect
of which he is assessable, or (c) for the amount of refund due to him or to such other person, or (d) for
assessment of fringe benefits.
third category-every person is deemed to be an assessee under any provisions of the act. for example, a
representative assessee is deemed to be an assessee under section 160(2).
fourth category-every person who is deemed to be an assessee in default under any provisions of the act. for
example, any person who does not deduct tax at source or after deducting the tax does not pay the tax, is
deemed to be an assessee under section 201. similarly, if a person does not pay advance tax, he is deemed to be
an assessee in default under section 218.
it should be noted that hindu undivided family and a firm have been included in the definition of person
given above although they are not legal persons in the general law.
assessment year
"assessment year" means the period off twelve months commencing on the 1st day of april every year
[section 2(9)]. for example, the assessment year 1999-2000 means a period of 12 months starting from april 1,
1999 to march 31, 2000. income of previous year of an assessee is taxed during the next following assessment
year at the rates prescribed by the relevant finance act. according to section 3 "previous year' for the purposes of
the act, means the financial year immediately preceding the assessment year. in other words, the year in which
income is earned is known as previous year and the next year in which income is taxable is known as assessment
year. for example, income earned by an individual during the previous year 1998-99 is taxable in the
immediately following assessment year 1999-2000 at the rates applicable for the assessment year 1999-2000.
similarly, income earned during the previous year 1999-2000 is taxable in the assessment year 2000-2001 at the
rates applicable for the assessment year 2000-2001.
capital and revenue

the distinction between capital and revenue is very important for the purposes of income-tax. to
understand the distinction it will be better to study it under the following heads:
(1) capital receipts and revenue receipts,
(2) capital expenditure and revenue expenditure,
(3) capital losses and revenue losses.
capital receipt and revenue receipt
the distinction between capital receipt and revenue receipt is important because it is the revenue receipt
popularly known as income that is put to charge and not the capital receipt, unless it is specifically provided
under the act and that too at special rates. the income-tax act has not discussed the concept of capital and
revenue and therefore, we have to depend upon the accounting principles and pronouncements of the courts.
the distinction is well recognized and easily applied but at times there have been cases when the matter has
been debated where the dividing line was thin. it is difficult to lay down any single test or criterion and,
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therefore, the following broad principles may be laid down as guide for determining whether a particular
receipt is of capital nature or of revenue nature:
(1) a receipt on account of fixed assets or fixed capital is a capital receipt whereas a receipt on account of
floating or circulating capital is a revenue receipt. fixed capital is that which is retained in the business for the
purpose of earning profits, e.g. plant machinery, building, goodwill patents etc. circulating capital circulates in the
business such as stock-in trade, and due to this circulation the profit is earned.
(2) a receipt in substitution of source of income is a capital receipt whereas a receipt in substitution of income
alone is a revenue receipt. for example, compensation for loss of employment or agency is a capital receipt
(though taxable) whereas damage for breach of a business contract is a revenue receipt.
(3) an amount received for the surrender of certain rights under an agreement is a capital receipt
whereas the amount received by way of compensation for loss of future profits is a revenue receipt. for example,
pension is revenue receipt whereas a lump sum received in computation of pension is capital receipt (though
taxable).
(4) the nature of a receipt is determined exclusively by its character in the hands of the receiver and the
source of payment is immaterial.
(5) where an asset is held as an investment, the sale proceeds of such asset is capital receipt. but where
an asset is held as stock-in-trade, the sale proceeds of such asset is a revenue receipt. for example, profit on the
sale of shares to a dealer in shares is a revenue receipt.
(6) it is immaterial whether the amount is received in lump sum or in installments. for example, salary is
a revenue receipt whether it is received periodically every month or once a year.
(7) compensation received for immobilization, sterilization, destruction or loss of a capital asset is capital
receipt and compensation for injurious effect on a trading asset is a revenue receipt.
in c.i.t. verses the panbari tea co. ltd., the assessee company, by a registered lease deed, leased out two
tea estates along with machinery and buildings owned and held by it, to a firm for a period of ten years
commencing from january 1, 1950. the lease was executed in consideration of a sum of rupees. 2, 25,000/- as and by
way of premium and an annual rent of rupees. 54,000/- both payable by installments. the premium was made
payable as follows: rupees. 45,000/- at the time of execution of the lease deed and the balance of rupees.
1,80,000/- in sixteen half-yearly installments of rupees. 11,250/-. the lease deed also contained a clause under
which the less or had the option to terminate the lease and retain the premises in the circumstances mentioned
therein without prejudice to all his rights under the document. the supreme court held that the installment of
rupees. 11,250/- paid towards the premium in the relevant accounting year constituted a capital receipt although it
was payable in installments and thus not taxable. it was held to be the consideration paid by the tenant for being
let into possession. it can be neither rent nor revenue but it is a capital receipt in the hands of the landlord.
capital expenditure and revenue expenditure

the distinction between capital expenditure and revenue expenditure is important because revenue
expenditure is allowed to he deducted while computing income from business or profession and not capital
expenditure (unless specifically provided). the decided cases have, from time to time evolved various tests
for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. there is no all
embracing formula which can provide a ready solution to the problems. every case has to be decided on its own
facts, keeping in mind the broad picture of whole operation in respect of which the expenditure has been incurred.
the following tests are applied in determining whether a particular item of expenditure is of capital or revenue
nature:
(1) amount spent in acquiring and installing a capital asset for the enduring benefit of the business is a capital
expenditure whereas the amount spent for the purpose of stock-in-trade is of a revenue nature. assam bengal
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cement co. ltd. verses c.i.t., (1955) . however, there may be cases where expenditure, even if incurred for obtaining
advantage of enduring benefit, may nonetheless be on revenue account and the test of enduring nature may
break down. "it is not every advantage of enduring nature acquired by an assessee that brings the case within the
principle laid down in this test. what is material to consider is the nature of the advantage in the commercial
sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an
application of this test. if the advantage consists merely in facilitating the assessee's trading operations or
enabling the management and conduct of the assessee's business to be carried on more efficiently or more
profitably while leaving the fixed capital untouched, the expenditure would be revenue even though the
advantage may endure for an indefinite future. the test of enduring benefit is, therefore, not a certain or
conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and
circumstances of a given case (empire jute co. ltd verses c.i.t],). the word 'enduring' is not synonymous with
'everlasting'. acquiring monopoly rights for a period can also be capital expenditure. [assam bengal cement co.
verses c.i.t., .in fast changing scientific and technological atmosphere, the expenditure on "know how" may not be of
enduring nature. constant update of technology is essential to business today. by making that technical knowledge
available the supplier does not part with any asset of his own business, nor does the assessee acquire any asset or
advantage of enduring nature [c.i.t. verses ciba of india ltd.].
(2) expenditure made for increasing the efficiency or earning capacity of capital asset is a capital expenditure
whereas the expenditure made just to maintain the existing efficiency or the earning capacity is revenue expenditure.
(3) expenditure made for the start or extension of business or for substantial replacement of equipment is of
capital nature because it is incurred in setting up the profit-earning machinery.
(4) expenditure made to a source of income is a capital expenditure whereas expenditure made in order to earn
income is of revenue type.
(5) expenditure incurred by an assessee to free himself from a capital liability, for instance,
disadvantageous lease is a capital expenditure and amount spent in discharging himself from the recurring liability is
of revenue nature. a lump sum amount paid to a pensioner by the employer is revenue expenditure.
compensation paid to a contractor for termination of contract for termination of building is a capital expenditure,
and the compensation paid to the employee on account if termination of service is revenue expenditure.
(6) expenditure incurred for protecting the business is revenue expenditure. for example the amount spent
on propaganda campaign to oppose the threatened nationalization of industry is of revenue nature.
in assam bengal cement co. ltd. verses c.i.t., the supreme court laid down a simple test for determining
the nature of the expenditure. it observed:
"if the expenditure is made for acquiring or bringing into existence an asset or advantage for the ending benefit
of the business it is properly attributable to capital and is of the nature of capital expenditure. if, on the other
hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the
business or working it with a view to produce the profits it is revenue expenditure. if any such asset or advantage
for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether
the source of the payment was the capital or the income of the concern or whether the payment was made once
and for all or was made periodically. the aim and object of the expenditure would determine the character of
the expenditure whether it is a capital expenditure or revenue expenditure." the expenditure incurred by the
assessee who gives him a right to carry on a particular business will be capital expenditure.
the distinction between the two is important because it is only revenue or trading loss of business which is
deductible in computing the profits and rules of set off and any forward of losses are different. the nature of
loss depends upon the facts of the case. any loss which is not a revenue loss will be regarded as a capital loss.
a revenue loss is that which is not merely connected with the business but is incidental to the business itself.
a loss of some revenue receipt or loss of stock-in-trade or loss incurred in the course of the business and
incidental to it is a revenue loss. therefore, the loss of stock-in-trade by fire or by ravages by white ants or in
transit or by negligence or fraud by the employees will be a revenue loss. on the other hand loss on account of
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the fixed capital asset is a capital loss. for example, loss due to sale of shares held as investment will be a capital
loss whereas loss due to sale of shares by a dealer in shares will be a revenue loss.
in the case of loss of cash if the loss occurs in the course of the business and during business hours it will be
a revenue loss. but. if the loss occurs after the business hours or after it has reached the person entitled to their
custody and control and thereafter the money is lost by theft or embezzlement, it will be a capital loss. but the
present trend of the decisions is to allow the losses due to theft, enmbezzlement or fraud even if it takes place
after the business hours. but, where the money has reached its final destination or is sent to a bank on behalf
of the assessee is not allowed as revenue loss.
basis of charge
the following two sections deal with this aspect::
section. 4. charge of income tax
(1) where any central act enacts that income tax shall be charged for any assessment year at any rate or rates,
income tax at that rate or those rates shall be charged for that year in accordance with, and subject to the
provisions (including provisions for the levy of additional income tax) of this act in respect of the total income
of the previous year of every person.
provided that where by virtue of any provision of this act, income tax is to be charged in respect of the
income of a period other than the previous year income tax shall be charged accordingly.
(2) in respect of income chargeable under sub-section (1), income tax shall be deducted at the source or
paid in advance, where it is so deductible or payable under any^ pro vision of this act. section. 5. scope of total
income
(1) subject to the provisions of this act the total income of any previous year of a person who is a resident
includes all income from whatever source derived which
(a) is received or is deemed to be received in india in such year by or on behalf such person; or
(b) accrues or arises or is deemed to accrue or arise to him in india during such year; or
(c) accrues or arises to him outside india during such year;
provided that in the case of a person not ordinarily resident in india within the meaning of sub-section (6) of
section 6, the income which accrues or arises to him outside india shall not be so included unless it is derived from a
business controlled in or a profession set up in india.
(2) subject to the provisions of this act the total income of any previous year of a person who is non-resident
includes all income from whatever source derived which
(a) is received or is deemed to be received in india in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in india during such year.
explanation 1. income accruing or arising outside india shall not be deemed to be received in india within the
meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in
india.
explanation 2. for the removal of doubts, it is hereby declared that income which has been included in the
total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen shall
not again be so included on the basis that it is received or deemed to be received by him in india.
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income deemed to accrue or arise in india
certain income is deemed to accrue or arise in india under section 9, even though it may actually accrue or
arise outside india. the following income shall be deemed to accrue or arise in india:
1. income from business connection in india: according to section 9(l) (1) all income accruing or arising,
whether directly or indirectly, through or from any business connection in india is deemed to be earned in
india. business connections may be in several forms e.g. a branch office in india or an agent or an organization
of a non-resident in india. formation of a subsidiary company in india to carry on the business of the resident parent
company would also be a business connection in india. any profit of the non-resident which can be reasonably
attributable to such part of operations carried out in india through business connection in india are deemed to
be earned in india.
in c.i.t verses r.d. aggarwal & co., (1965), it was held that a business connection involves a relation between
a business carried out by a nonresident which directly or indirectly to the earning of those profits or gains. it
predicates an element of continuity between the business of the non-resident and activity in the taxable
territories, a stray or isolated transaction is normally not to be regarded as a business connection. some of the
instances of nonresident having business connection in india are: (a) maintaining a branch office for the purchase
or sale of goods or transacting other business; (b) appointing an agent in india for the systematic and regular
purchase of raw materials or other commodities or for sale of non-resident goods or for other business
purposes; (c) erecting a factory in india where the raw produce purchased is worked into a form suitable for
export abroad; (d) forming a local subsidiary company to sell the products of the non-resident parent company;
(e) having financial association between a resident and a non-resident company.
the following transactions are not to be regarded as business connection: (a) non-resident exporter selling
goods from abroad to indian importer on principal to principal basis; (b) non-resident company selling goods from
abroad to its subsidiary on a principal to principal basis and at arms length; (c) sale of plant and machinery to an
indian importer on installment basis on principal to principal basis; (d) foreign agent of indian exporters operating in
his own country and no part of his income arising in india; (e) non-resident person purchasing goods in india for
the purpose of manufacture or sales abroad even if having an office or agency in india for this purpose; (f)
sales by a non-resident to indian customers either directly or through agents in certain cases; (g) operations
confined to collection of news and views for transmission outside india by or on behalf of non-resident who is
engaged in the business of running news agency or publishing newspapers, magazines or journals; (h) operations
confined to shooting of cinematograph film in india in certain cases.
apportionment of income of a business, all the operations of which are not carried out in india. in hukam chand
mills ltd. verses c.i.t., it was held that the question as to what proportion of the profits of the sales arose or
accrued in india was essentially one of the fact depending upon the circumstances of the case.
2. income from any property, asset or source of income situated in india: all income accruing or arising,
whether directly or indirectly, through or from any property in india, or through or from any asset or sources of
income in india shall be deemed to accrue or arise in india. [section 9(1)(1)].
3. income from the transfer of any capital asset situated in india: income deemed to accrue or arise in
india where income accruing or arising, whether directly, through the transfer of a capital asset situate in
india and hence would be taxable. [section 9(l)(1)].
4. income which falls under the head 'salaries' if it is earned in india: income shall be deemed to accrue or
arise in india if the income which falls under the head "salaries" is earned in india. [section 9(l) (2)].
5. salary payable by the government to an indian citizen/national for services rendered outside india:
income chargeable under the head "salaries" payable by the government to a citizen of india for service outside
india shall be deemed to accrue or arise in india. [section 9(l) (3)].
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6. dividend paid by an indian company outside india: a dividend paid by an indian company outside india shall
be deemed to accrue or arise in india. [section 9(l) (4)]. however w.e.f. assessment year 2004-05 such dividend income
shall be exempted from tax.
7. interest payable outside india: income by way of interest payable in certain case shall be deemed to
accrue or arise in india. [section 9(l) (5)].
8. royalty payable outside india: income by way of royalty payable in certain cases shall be deemed to
accrue or arise in india. [section 9(l)(6)].
'accrue' means 'to arise or spring as a natural growth or result', to come by way of increase. 'arising' means
'coming into existence or notice or presenting itself. the two words together mean 'to become a present and
enforceable right' and 'to become a present right of demand. the word "accrue" connotes the idea of growth or
accumulation and the word "arise" connotes the growth or accumulation with a tangible shape so as to be
receivable.
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2
previous year
meaning of 'previous year' and 'assessment year'
the "assessment year" means the period of twelve months commencing on the 1st day of april every year. the
period is also known as financial year or income-tax year. this is the period for which tax is paid. income tax is
charged on the total income of the previous year at the rates of the relevant assessment year. therefore, the
income chargeable to tax in the assessment year is of the previous year. in other words the year for which tax is
paid is called 'assessment year' and the corresponding period for which income is assessed is called the 'previous
year' or 'business year' or 'accounting year'. therefore, the definition of the term previous year; is very important
as the income tax is levied for each 'assessment year.' on the total income of the 'previous year'.
from the assessment year 1988-89 all assesses are required to follow a uniform previous year for all
sources of income for the purposes of income-tax. section 3 has been substituted by the direct tax laws
(amendment) act 1987 with effect from 1st april, 1989, according to section 3 (1 ) previous year means the financial
year immediately preceding the assessment year. financial year means a period of twelve months, starting from
april 1 to 31st march of next year, immediately proceeding the assessment year. for example for the assessment
year 1989-90, the previous year will be 1st april, 1988 to 31st march, 1989.
previous year in case of newly set up business or profession: the proviso to section 3(1) provides that in a case
of a business or profession newly set up, a source of income newly coming into existence, in the said financial year,
the previous year shall be the period beginning with the date of setting up of the business or profession or, as
the case may be, the date on which the source of income newly comes into existence, and ending with the said
financial year. for example if a sets up a new business on 25th september, 1988 then the first previous year of
this business will be the period commencing from 25th september, 1988 to 31st march, 1989). the relevant
assessment year in this case will be 1989-90.
cases where income of previous year is assessed in the same year

the following are the exceptions to the general rule that income earned during "previous year" is charged
to tax in the following assessment year. in these cases the income is assessed in the year in which it is earned.
1. income of non-resident shipping companies (section 172). where a ship belonging to or chartered by a
non-resident, carries passengers, livestock, mail or goods shipped at a port in india, the ship is allowed to leave
the port only when the tax has been paid or satisfactory arrangements have been made for payment thereof.
2. persons leaving india (section 174), where it appears to the assessing officer that any individual may leave
india during the current assessment year or shortly after its expiry with no present intention of returning to
india, the total income of such individual for the period from the expiry of the "previous year" for that
assessment year up to the probable date of his departure from india is to be charged to tax in that assessment
year.
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3. bodies formed for short duration (section 174a). section 174a has been inserted from the assessment
year 2002-03. the section provides that where it appears to the assessing officer that any association of
persons or a body of individuals or an artificial judicial person, formed or established or incorporated for a
particular event or purpose is likely to be dissolved in the assessment year in which such association of persons
or a body of individuals or an artificial juridical person was formed or established or incorporated or immediately
after such assessment year, the total income of such association or body or juridical person for the period from the
expiry of the previous year for that assessment year upto the date of its dissolution shall be chargeable to tax in
that assessment year.
4. persons trying to alienate their assets (section 175). where it appears to the assessing officer during any
current assessment year that any person is likely to charge, sell, transfer, dispose of or otherwise part with any of
his assets with a view to avoiding payment of any liability under the act, the total income of such person for the
period from the expiry of the "previous year" for that assessment year to the date when the assessing officer
commences proceedings under this section is chargeable to tax in that assessment year,
5. discontinued business or profession (section 176(1)). where any business or profession is discontinued
in any assessment year, the income of the period from the expiry of the previous year for that assessment year
up to the date of such discontinuance may, at the direction of the assessing officer, be charged to tax in that
assessment year.
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3
residential status and tax incidence
need to determine residential status
income-tax is levied in any assessment year on the total income of the previous year unless it is otherwise
provided in the act. according to section 5 the incidence of tax depends upon and is determined with reference
to the residential status of an assessee in the previous year. for example, in the case of an individual ordinarily
resident in india the foreign income is liable to be included in the total income assessable. however, if the individual
is not ordinarily resident foreign income is not so included unless it is derived from a business controlled in, or a
profession set up in india. the residential status is to be determined every year as it may be different in
different years. in one year the assessee may be resident while in another year he may be non-resident basic
rules for determining residential status
an assessee cannot have different residential status for different previous years in relation to a particular
assessment year even if he has different previous years for different sources of income. this is provided by section
6(5) of the act which states that "if a person is resident in india in previous year, relevant to an assessment year in
respect of any source of income, he shall be deemed to be resident in india in the previous year relevant to
assessment year in respect of each of his other sources of income". residential status is to determined for each
category of persons separately. it may be noted that citizenship of a country and residential status of that country
are different concepts.
section 6 of the act divides taxable entities, on the basis of their residence, in the following three categories:
(1) persons who are "resident" in india.
(2) persons who are "not ordinarily resident" in india,
(3) persons who are "non-resident".
this division is applicable only in case of an individual and hindu undivided family. in all other cases there are only
two divisions: resident and non-resident.
for the purpose of determining the residence of a person, in the context of the income-tax act, 1961, the
categories of 'persons' have been grouped into four separate classes as under:
(1) an individual
(2) a hindu undivided family, firm or other association of persons;
(3) a company; and
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(4) every other person.
residential status of an individual
resident and ordinarily resident (section 6 (1)
basic conditions
an individual is said to be resident in india in any previous year, if
(a) he is in india in that year for a period or periods amounting in all to 182 days or more {section 6(1) (a)};
or
(b) he has been in india for a period or periods amounting in all to 365 days or more during the four years
preceding that year, i.e., the accounting year (previous year) and has been in india for 60 days or more in that year
(previous year) {section 6 (1) (c)}.
the explanation to section 6(1) provides that in the case of an individual being a citizen of india, who leaves
india in any previous year as a member of the crew of an indian ship or for the purposes of employment outside
india, in order to fulfill the aforesaid condition (b) regarding residence, the minimum period of stay in india has
to be 182 days instead of 60 days.
the explanation further provides that in the case of an individual being a citizen of india, or a person of
indian origin, who being outside india, comes on a visit to india in any previous year, in order to fulfill the
aforesaid condition (b) regarding residence the minimum period of stay in india has to be 182 days instead of 60
days.
additional conditions
in order to become "resident and ordinarily resident" in india an individual is to satisfy both the following
conditions besides satisfying any one of the above mentioned conditions {section 6 (6) (a)} :
(1) he has been resident in india in at lease 9 (2 from the assessment year 2004-05 onwards) out of
10 previous years preceding the relevant previous year. in other words he must have satisfied any one
or more of the above two conditions for two years out of the ten previous years immediately preceding
the relevant previous year. before assessment year 2004-05, this requirement was for 9 years out of 10
years.
(2) he has been in india for a period or periods amounting in all to 730 days or more during the seven years
preceding the relevant previous year.
thus an individual becomes resident and ordinarily resident in india if he satisfies at least one of the basic
conditions and the two additional conditions.
physical presence in indiaeach of the first two alternative conditions requires the presence of the
individual in india for sometime, whether 182 days or 60 days during the relevant previous year. but the
continuous stay of the individual or stay at one place is not essential. he may put up anywhere for any duration
during the previous year. it will be the total duration of his stay in india that will be taken into consideration
while deciding the issue. he may put up either in his own house or in rented house or in a hotel or with his
friend or anywhere he likes, but he must have been in india for the relevant period. the reason or motive for his
stay in india is immaterial and even involuntary or forced presence in india will be treated as presence for the
purposes of this section [moosa s. madhu verses c.i.t.
not ordinarily resident [section 6 (6) (a) j
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if an individual does not satisfy any of the basic conditions mentioned in section 6(1), he is said to be "nonresident". a person is said to be "not ordinarily resident" in india in any previous year if such person is an individual
who has been a non-resident in india in nine out of the ten previous years preceding that year, or has during
the seven years preceding that year been in india for a period of, or periods amounting in all to, seven hundred and
twenty-nine days or less.
thus if an individual satisfies any one of the basic conditions (as discussed above), prescribed in section 6(1)
but does not satisfy the two additional conditions, i.e., conditions (1) and (2) mentioned above, he is "not
ordinarily resident".
in other words an individual is a resident but not ordinarily resident in india in any of the following
circumstances:
(a) if he satisfies at least one of the basic conditions as mentioned in section 6(1) and none of the
additional conditions as mentioned in section 6(6) (a).
(b) if he satisfies at least one of the basic conditions as mentioned in section 6(1) and one of the two
additional conditions as mentioned in section 6(6) (a).
non-resident
an individual shall be a "non-resident" in india during the relevant previous year if he does not satisfy any of the
basic conditions prescribed for becoming resident under section 6 (1) as discussed above.
residential status of hindu undivided family, firm or other association of persons

resident {section 6 (2)}any person falling within the above mentioned group is "resident" in india in a previous
year unless the control and management of its affairs is situated wholly outside india during the said previous year.
thus even if a part of the control and management is situated in india during the previous year, it will be called
"resident" in india.
it was further pointed out that:
(1) normally a hindu undivided family will be taken to be resident in india unless the control and
management of its affairs is proved to be situated wholly outside india;
(2) the word "affairs" must mean affairs which are relevant for the purpose of the income-tax act and which
have some relation to income; and
(3) the word "wholly suggests that hindu undivided family may have more than one "residence" in the same
way as a corporation may have.
"resident and ordinarily resident" and "resident but not ordinarily resident" {section 6(6) (d)}
firms and other association of persons cannot be "not ordinarily resident".
as said earlier a hindu undivided family is said to be resident in india in any previous year in every case
except where the control and management of its affairs is situated wholly outside india. but in order to be
"resident and ordinarily resident" it must fulfill two more conditions, namely,
(1) that its karta or manager has been resident in india as individual {by fulfilling any one of the two basic
conditions prescribed under section 6 (1)} in 9 (2 from the assessment year 2004-05 onwards) out of 10 previous
years preceding the relevant previous year;
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(2) that the karta or manager has, during the 7 previous year preceding the relevant previous year been in
india for a period or periods amounting in all to 730 days or more.
if either of these two conditions or both the conditions are not fulfilled the hindu undivided family would be
regarded as "not ordinarily resident" in india.
non-resident {section 6(2)}
a hindu undivided family, firm or other association of persons shall &e non-resident where the control and
management of its affairs is situated wholly outside india.
residential status of a company resident [section 6(3)]
a company is said to be "resident" in india in any previous year if it satisfies any of the two alternative
conditions, viz:
(1) it is an indian company; or
(2) if during the relevant previous years the control and management of its affairs is situated wholly in india.
not ordinarily resident
a company does not fall in this category.
non-resident
if a company does not satisfy any of the aforesaid two alternative conditions of resident, it is said to be "nonresident" in india.
thus it is clear from the above mentioned conditions that if the assessee company is an indian company, it is
automatically resident. and only if it is any other company, it is resident if and only if, the control and management
of its affairs is situated wholly in india during the relevant previous year. whereas in the case of a hindu undivided
family, firm or other association of persons any measure of control and management in india would make them
resident. the expression "control and management" used in reference to a company has the same meaning as it
has in the case of hindu undivided family, or other association of persons.
residential status of "every other person"
every other person (for example, local authority, an artificial judicial person etc.) other than those described in
the preceding paragraphs is said to be "resident" in india in any previous year in every case, except where during
that year the control and management of his or its affairs is situated wholly outside india [section 6(4)]. in
case of such entities the status can only be of "resident" or "non-resident".
residential status in case of other source of income

section 6 (5) provides that if a person is resident in india in any previous year relevant to an assessment year
in respect of any source of income, he shall be deemed to be resident in india in the previous year relevant to the
assessment year in respect of each of his other sources of income.
relationship between residential status and incidence of income tax

under the act, incidence of tax on a taxpayer depends on his residential status and also on the place and
time of accrual or receipt of income. this is provided in section 5 of the income-tax act, 1961 which is explained
below:
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incidence of tax in the case of resident and ordinarily resident [section 5(1)] the total income of any previous year of
a person who is resident includes all income from whatever source derived which:
(a) is received or deemed to be received in india in such year by or on behalf of such persons; or
(b) accrues or arises or is deemed to accrue or arise to him in india during such year; or
(c) accrues or arises to him outside india during such year.
income is said to be received when it reaches the assessee; income is said to accrue or arise when the right
to receive the income becomes vested in the assessee, c.lt. verses ashok bhai chimantihai.
income accrued in india is chargeable to tax in all cases irrespective of residential status of the assessee.
certain incomes are deemed to accrue or arise in india under section 9 even though they may actually accrue or
arise outside india. for example, according to section 9(1) (1) where through or from any 'business connection'
in india income accrues or arises outside india to any person, it is deemed to accrue or arise in india. similarly
all income accruing or arising through or from any property in india, or through or from any asset or source of
income in india, or through transfer of a capital asset situate in india are deemed to accrue or arise in india.
incidence of tax in the case of a resident but not ordinarily resident [section 5(1)1
the liability to tax of a "resident but not ordinarily resident" is the same as in the case of a "resident and
ordinarily resident" but subject to one special exemption. a person who is not ordinarily resident is chargeable in
respect of all the three item of income mentioned above, but income which accrues or arises to him outside
india shall not be included in the total income of any previous year unless it is derived from a business controlled
in or profession set up in india. in other words, a resident but not ordinarily resident is assessable to tax in respect
of:
(a) income which is received or deemed to be received in india in the previous year by him or on his
behalf;
(b) income which accrues or arises or is deemed to accrue or arise to him in india during the previous year;
(c) income which accrues or arises to him outside india during the previous year from a business controlled in or
profession set up in india.
incidence of tax in the case of non-resident [section 5(2)]
the total income of any previous year of a person who is non-resident includes all income from whatever
source derived which:
(a) is received or is deemed to be received in india in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in india during such year.
thus, a non-resident is liable to tax in respect of income received or deemed to be received in india by or on his
behalf and accrues or arise or is deemed to accrue or arise in india during the previous year.
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4
agricultural income
definition
under the constitution parliament has no power to levy tax on agricultural income. only the state governments
are empowered to levy tax on agricultural income. therefore, according to section 10 (1) of the income-tax, act,
1961, agricultural income is exempt from central income-tax. but with effect from the assessment year 1974-73
agricultural income became a factor in the determination of tax on the non-agricultural income, it becomes necessary
therefore, to determine what is agricultural income. the definition is given in sub-clause (1) of section 2 of the act. it
is as follows:
"(1a) "agricultural income" means:
(a) any rent or revenue derived from land which is situated in india and is used for agricultural purposes;
(b) any income derived from such land by
(1) agriculture; or
(2)
the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a

cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to
market; or
(3) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him in respect
of which no process has been performed other than a process of the nature described in paragraph (2)
of this sub-clause;
(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any
such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the
produce of which any process mentioned in paragraphs (2) and (3) of sub-clause (b) is carried on: provided that
(1) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the
rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land,
requires as a dwelling house, or as a store-house, or other out-building, and
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(2) the land is either assessed to land revenue in india or is subject to a local rate assessed and collected by
officers of the government as such or where the land is not so assessed to land revenue or subject to a local rate,
it is not situated(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality,
municipal corporation, notified area committee, town area committee, town committee or by any other name)
or a cantonment board and which has a population of not less than ten thousand according to the last
preceding census of which the relevant figures have been published before the first day of the previous year; or
(b) in any area within such distance, not being more than eight kilometers, from the local limits of any
municipality or cantonment board referred to in item (a), as the central government may, having regard to the
extent of and scope for urbanization of that area and other relevant consideration, specify in this behalf by
notification in the official gazette.
explanation lfor the removal of doubts, it is hereby declared that revenue derived from land shall not include
and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a)
or hem (b) of sub-clause (in) of clause (14) of this section.
explanation 2.for the removal of doubts, it is hereby declared that income derived from any building or
land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting
for residential purpose or for the purpose of any business or profession) other than agriculture falling under subclause (a) or sub-clause (b) shall not be agricultural income."
explanation 3.for the purposes of this clause, any income derived from saplings or seedings grown in a
nursery shall be deemed to be agricultural income. explanation 1 and explanation 2 were inserted by the
finance act, 2000 (w.e.f. 1-4-2001 and explanation 3 was inserted by the finance act, 2008 w.e.f. 1-4-2009). basic
conditions thus the three basic conditions which must be satisfied before a particular item of income may be
treated as agricultural income are:
(1) that the income has relation to land;,
(2) that such land is situated in india; and
(3) that the land is used for agricultural purposes. land used for agricultural purposes
the supreme court explained the meaning of "agricultural" and "agricultural purposes" in c.lt. verses raja benoy
kumar sahas roy,. the relevant portion from judgment is reproduced below:
(1) "agricultural" in its primary sense denotes the cultivation of the field and is restricted to cultivation of the
land in the strict sense of the term, meaning thereby tilling of the land, sowing of seeds, planting and similar
operations on the land. these are the 'basic operations' requiring expenditure of human skill and labour on land
itself. these are absolutely necessary for the purpose of effectively raising produce.
(2) operations to be performed subsequently like "weeding" "digging" etc.
(3) "agriculture" comprises within its scope all produce "regardless of the nature". these produce may be
grain, vegetable or fruits including plantations and grass or pastures or articles of luxury such as betel,
coffee, tea, spices, tobacco or commercial crops like cotton, jute etc."
it was further observed that activities not involving any basic operation on the land would not constitute
agriculture merely because they have relation to or connected with the land e.g., breeding and rearing of
livestock, dairy-farming, butter and cheese making and poultry fanning, would not by themselves be agricultural
processes
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the subsequent operations are agricultural operations only when taken in conjunction with and as a
continuation of the basic operations. mere performance of the subsequent operations would not be enough to
characterize them as agricultural operations. therefore the income from the sale of forest trees of
spontaneous growth cannot be treated as agricultural income {c.lt, verses jyoiikana chaudhurani,.
in c.i.t verses kamahshya narain singh,, it was held that interest on arrears of agricultural rent cannot be
treated as agricultural income. interest on arrears of rent will not be "deprived from land as land is not the
immediate and effective source/
in bacha k guzdar verses c.lt, the supreme court decided that dividends received by a shareholder from a
company which derived its income partly from agricultural operations and partly from other operations would not
be agricultural income in the hands of the shareholder. it decided that the shareholder did not derive his dividends
from land, but that his income from dividends arose by virtue of his holding of shares in the company. the principle
established was that in order to determine the character of a certain income what one has to consider was
the immediate and effective source and not the remote or ultimate source.
kinds of agricultural income
from the definition of agricultural income as given in section 2(1) the categories of income, winch may be
included for the purpose of exemption as agricultural income, are as follows;
1. rent or revenue derived from land (section 2 (1) (a)}
rent or revenue derived from land, situated in india and used for agricultural purposes is agricultural income.
rent is the money, share of crops, or service or any other thing of value to be rendered periodically or on the
specified occasions by the tenant in consideration for the use of land. revenue is used in the wider sense as
return, yield or profit or income of any land or property and not in the sense of land revenue. salami or premium
is an example of revenue. the word 'derived' means arising or accruing. revenue can be derived from land only
if land is the immediate and effective source and not secondary or indirect source. interest on arrears of rent will
not be derived from land as land is not the immediate and effective source. salami or premium received by land
lord for giving the land on lease constitutes agricultural income. if agricultural land is requisitioned by the
government and issued for non-agricultural purposes, the rent compensation received by the owner from the
government is not agricultural income even through the land had always been used for agricultural purposes.
2. income derived from agriculture {section 2(1) (b) (1) 1}
any income from agriculture derived from land, situated in india and used for agriculture purposes, is
agricultural income. for example, the income from the sale of standing crop or raw produce after harvest
(without performing marketing process) is income derived from agriculture. temporary use of land for nonagricultural purposes will not alter the character of land as agricultural land, but a permanent abandonment will
do so.
in cwt verses officer-in-charge (court of wards) parigah, (1976) it was held that the land must not only be
capable of being used for agricultural purposes but it must have been actually used for such purposes at some
point of time. mere potential or possible use of the land for agricultural purposes is not sufficient to treat it as an
agricultural land. in c.i.t. verses gemini pictures circuit pvt. ltd., it was held that the land situated on the busiest
road of the city within limits of municipal corporation and surrounded on all sides by industrial and commercial
buildings was held to be not agricultural land. in the face of above circumstances, the mere fact that
vegetables were being raised at the time of sale does not change the nature and character of the land.
3. income derived from land by performing any process to render the produce fit to be taken to market
{section 2(l) (b) (2)}
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in sakar lal verses c.i.t., the gujarat high court explained the reason behind this provision and explanation of the
provision in the following words:
"a cultivator raises produce from the land with a view to selling it. if there is a market for the produce as grown
there is no difficulty; the cultivator can in such a case sell the produce with anything more and he need not
perform any process on the produce. but if there is no market for the produce as grown and it can be sold only
by performing some process in order to be able to sell the produce; otherwise the produce would not be
marketable and the raising of it would be futile. where such is the case, the legislature says that, though strictly the
agricultural operations cease when the produce is raised and removed from the soil, the performance of the
process should be regarded as a continuation of the agricultural operations since the process has to be performed
by the cultivator for the purpose of enabling him to sell the produce which he otherwise cannot. it iss because,
performance of the process is essential in order to render the produce marketable which it is otherwise not
that the law regards it as pan of the agricultural operations carried on by the cultivator. this reason also explains the
other requirements of the section, namely, that the process must be such as is ordinarily employed by the cultivator
to make the produce saleable. the performance of the process is assimilated to agriculture and must,
therefore, like agricultural operations in strict sense, be an operation which is ordinarily done by cultivators. if
some special or unusual process is employed by cultivators to render the produce marketable it cannot be
regarded as part of the agricultural operations and the exemption would not be available to the cultivator. it
would be clear from this discussion that there are two conditions which are required to be fulfilled before a
process performed by the assessee can be said to be a process within the meaning of section (2)(1)(b)(2)". the
high court further said:
"the first conditions are that the process must be necessary to render the produce fit to be taken to market
and that involves the proposition that there must be no market for the produce in its raw state. if there is
already a market for the produce in its raw state, then the process cannot be said to be a process employed to
render the produce fit to be taken to market or in other words, to make it marketable. that which is already
marketable does not need any process to render it marketable. the second condition is that the process must be
one which is ordinarily employed by a cultivator of the produce to render it marketable. but even if these two
conditions are satisfied, it is not sufficient to attract the applicability of section 2(1) (b) (2). there is an additional
requirement which must be satisfied and requirement springs directly from the language and the reason of the
enactment. it follows as necessary corollary from what is stated above that even where the produce is subjected
to a process ordinarily employed by cultivators to render it fit to be taken to a market, the produce must not
change its original character. the cultivator is permitted to subject the produce to a process in order to make it
marketable and what if ultimately marketed must, therefore, be that produce. the character of the produce
must not be altered as a result of the process, of course when we say this we must make it clear that there may be
changes brought about in the produce for the purpose of making the produce marketable, but these changes
must not amount to altering the original character of the produce". the facts of this case were as follows:
the assessee, an individual, obtained galka seeds from abroad and after preparing the lands for cultivation,
raised galkas on the lands. galkas grown by the assessee were not of indigenous kind but of a kind widely grown in
formosa, japan and other places. after the galkas were fully grown, they were removed from the plants and the
assessee then subjected them to a process for preparing what are called loofahs. the assessee could not market his
loofahs abroad as the loofahs prepared by him were of very small size in comparison with foreign loofahs and
suffered losses in the transaction.
the losses were claimed by the assessee as business losses arising out of non agricultural operation and
hence claimed deduction from income of the assessee from business. but the income tax officer as well as the
appellate assistant commissioner and the tribunal disallowed on the ground that they were agricultural losses.
the ito, aac and the tribunal came to the conclusion that the process employed by the assessee was a process
which came within section 2(1) (b) (2) and the losses suffered by the assessee were therefore agricultural
losses which were not liable to be deducted in computing the income of the assessee.
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the high court held that it was not enough for the tribunal to find that there was no market for galkas in india.
the tribunal should have also considered whether there was no market for galkas outside india and it was only if
the tribunal found that there was no market for golkas outside india, the tribunal could come to the conclusion
that the process employed for the purpose of converting galkas into loofahs was a process covered by section
2(1) (b) (2). the high court held that galkas as such being marketable outside india, the process employed on it for
preparation of loofahs is not agricultural process.
4. income derived from the sale of produce {section 2 (1) (b) (3)}
any income from the sale of produce of any land, situated in india and used for, agricultural purposes, to the
cultivator or receiver of rent-in-kind is agricultural income provided the produce is not subjected to any process
except marketing process ordinarily employed to render the produce fit for sale.
5. income from farm building i{section 2 (1) (c)}
the income from farm building will be exempt from tax as agricultural income if the following conditions
are satisfied:
(1) that the building is on or in the immediate vicinity of the land;
(2) that the building is, occupied and required, by the receiver of the rent or revenue or the cultivator or the
receiver of rent-in-kind, as a dwelling house or a store house or other outbuildings on account of his
connections with the land; and
(3) that the land is either assessed to land revenue in india or is subject to a local rate assessed and
collected by the officers of the government; or the land is not situated in any area which is comprised within
the jurisdiction of a municipality or a cantonment board having a population of 10,000 or more
inhabitants according to the last preceding census; or the land is not situated in any area within such
distance not being more than 8 kms, or such shorter distance, if any, notified by the central government
in respect of any urban area, from the local limits of any municipality or cantonment board having a
population of 10,000 or more inhabitants.
partially agricultural income (rule 7)

in the case of income which is partially agricultural income and partially income chargeable to tax under the
head "profits and gains of the business: in determining that part which is chargeable to income-tax the market
value of the agricultural produce which has been raised by the assessee and which has been utilized as a raw
material in such business shall be made in respect of any expenditure, by the assessee, as a cultivator.
income derived from the manufacture of tea

income derived from the sale of tea grown and manufactured by the seller in india shall be computed as if it were
income derived from business and 40% of such income shall be deemed to be income liable to tax.
burden of proof the assessee who claims the exemption has to prove that the income is agricultural income.
treatment of agricultural income from the assessment year 1974-75
an individual; hindu undivided family, unregistered firm, an association of persons or a body of individuals, an
artificial juristic persons (except company, registered firm, co-operative society, and local authority) the net
agricultural incomes included in the total income for the purposes of computation of tax, if non-agricultural
income exceeds the exemption limit. thus the non-agricultural income is taxed at higher rates.
non-agricultural income
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the following are not agricultural income:
(1) income from supply of water for irrigation purposes;
(2) income from land used for storing agricultural produce;
(3) remuneration received by the manager of an agriculture farm;
(4) income from forest trees of spontaneous growth;
(5) income from dairying;
(6) income from poultry farming, butter and cheese making;
(7) income from mining royalties;
(8) income from stone quarries;
(9) income from fisheries;
(10) income from land used for brick-making;
(11) income from the sale of silk cocoons produced by silk worms fed by mulberry leaves, (1981) 5 taxman 272;
(12)income from supply of water from a tank situated in the agricultural land, (1982) 133 itr 85.
5
heads of income-salaries
heads of income
section 14 of the act classifies income under the following heads for the purposes of computing the total
income:
(1) salaries
(2) income from house property
(3) profits and gains of business or profession
(4) capital gains
(5) income from other sources.
the first four heads are specific in content while the last i.e. "income from other sources" is the omnibus head
covering all other kinds of income from whatever source derived.
the income is to be taxed under the appropriate head of income and it is imperative on the part of the
department to charge the income under the specific head under which it falls since the law leaves no option. thus
income is to be taxed under the appropriate and specific head of income. in case an item appears to belong to two
or more heads, the assessee will have the right to claim that it should be assessed under the head most beneficial to
him [c.i. t. verses bosotto bros. ltd, (1940) (mad.)]. if an income falls under a specific head, the income will have
to be taxed under that head and there is no option either for the assessee or the revenue to vary the head in
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regard to such income [united commerce bank verses c.i.t., (1957))]. income cannot be assessed under a wrong head
merely because the assessee had returned it under a wrong head [bihar state co-op. bank ltd. verses c.i.t., (1960) ].
as aforesaid, there are five heads of income, but an assessee has to pay tax not by reference to income under
any particular head, but on "total income" which is the aggregate of the income and/or loss under all the
heads taken together subject to certain exceptions.
expenditure incurred in relation to income not includible in total income

section 14a(1) provides that for the purposes of computing the total income, no deduction shall be allowed in
respect of expenditure incurred by the assessee in relation to income which does not form part of the total
income under the income-tax act.
section 14a(2) provides that the assessing officer shall determine the amount of expenditure incurred in relation
to such income which does not form part of the total income under this act in accordance with such method as
may be prescribed, if the assessing officer, having regard to the accounts of the assessee, is not satisfied with the
correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form
part of the total income under this act,
section 14a(3) provides that the provisions of sub-section (2) shall also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him in relation to income which does not form part
of the total income under this act
heads of income and sources of income
the expressions "heads of income" and "sources of income" do not have the same meaning. heads of income
have been enumerated above. source of income means that from which income originates. there may be more
than one source of income for the same head of income [shri sobhag mat lodha verses, c.j. t. (1967) (all)] for example,
under the head 'salaries' the different sources of income may be wages, pension, gratuity, fees, commissions,
perquisites or profits in lieu of or in addition to salary or wages.
salaries (section 15-17)
chargeability (section 15.)
according to section 15 of the act the following incomes shall be chargeable to income-tax under the head
"salaries" :
"(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or
not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer,
though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer, if not charged to income-tax for any earlier previous year".
to avoid the same income being taxed again and for the removal of doubts the explanation 1 to section 15
provides where any salary paid in advance is included in the total income of any person for any previous year, it
shall not be included again in the total income of the person when the salary becomes due.
the explanation 2 provides that "any salary, bonus, commission or remuneration, by whatever name called, due
to, or received by, a partner of a firm from the firm shall not he regarded as "salary" for the purposes of this
section"
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salary due to or received by the assessee or by a third party on his behalf from the present or past employee
is also chargeable under the head "salaries".
however, the amount or loan advanced by the employer is not chargeable to income tax.
the term "salary" is used in section 15 in the broadest possible sense to include not only the salaries which
are due and paid to the employee, but every amount which is paid, (whether due or not) and amount due (whether
paid or not).
for charging the income under the head "salaries" there must exist the relationship of employee and
employer between the payee and the payer. an employee is a person employed by another to work for him on the
conditions that he is to be subject to the control and directions of his employer in respect of the manner in which
his work is to be done. every servant is an employee; but an agent may or may not be employee. in c.it. verses
lady navaljhi tata, (1947) 15 itr 8, it was held that a director of a company, though holding an office, is not an
employee unless there is a contract to that effect. an agent is usually not an employee. perquisites or profits or any
remuneration received from persons other than the employer, would be taxable under the head 'income from other
sources' even if they accrue to the employee by reason of his employment. for example remuneration received by a
lecturer of a college for acting as an examiner in a university.
meaning of salary? (section 17(1)}
according to section 17(1) "salary" includes
(1) wages;
(2) any annuity or pension;
(3) any gratuity;
(4) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
(5) any advance of salary;
(a) any payment received by an employee in respect of any period of leave not availed of by him;
(6) the annual accretion to the balance at the credit of an employee participating in a recognized provident
fund to the extent to which it is chargeable to tax (under rule 6 part a of the fourth schedule); and
(7) the aggregate of all sums that are comprised in the transferred balance of an employee participating in a
recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) of rule 11 of part a of the
fourth schedule.
(8) the contribution made by the central government or any other employer in the previous year to the account
of an employee under a pension scheme referred to in section 80 ccd.
the above amounts may be paid by the employer either voluntarily or under a contractual obligation. thus the
salary for the notice period payable by the employer is also taxable. salary and wages signify payments for services
rendered to an employee. bonus is taxable on receipt basis if bonus is received in arrears, the assessee can claim relief
under section 89(1). overtime payments are taxable. annuity is a sum or grant paid every year. annuity paid by the
employer is included in salary and if paid by other outside agencies is taxed under "income from other sources".
pension is a periodic payment made by the employer to the employee after his retirement. a lump sum received
in commutation of pension or in substitution thereof is taxed under the head "salaries" to the extent it is not
exempted under section 10. it should be noted that family pension received after the death of an employee is taxable
under section 56 under the head "income from other sources" in the hands of the recipient.
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gratuity is paid to an employee for long and meritorious services rendered by him to an employer. it is not paid
to an employee gratuitously or merely as a gift. gratuity is as much taxable as a contractual salary subject to
section 10. it is exempt upto a certain extent under section 10. gratuity received by an employee is taxable
under the head "salary" whereas gratuity received by the legal heir of the premium paid by the employer on an
accident policy taken the employee is not a perquisite. any fees and commissions payable by the employer to the
employee is taxable as salary. fees and commission are chargeable as salary irrespective of the fact that they are
paid in addition to or in lieu of salary. however, if fees or commission is paid to a person who is not an employee is
not taxable under the head "salary". in all india reporter verses ramchandra (1961)it was held that compensation
awarded by the court for wrongful termination of service is not 'salary'. in n. sciandra c.lt. (1979), it was held that
rent-free accommodation provided to a foreign technician is not a perquisite as he continued to be the employee
of a foreign company.
advance salary is taxable or receipt basis irrespective of incidence of tax. arrear salary is taxable on receipt
basis, if the same has not been subjected to tax on due basis. however relief can be claimed in this case under
section 89.
leave salary received by a central/state government employee in respect of period of earned leave at his
credit at the time of retirement/superannuation, is exempt from tax. but in the case of non-government employee
(including an employee of a local authority or public sector undertaking) leave salary is exempt from tax fully or
partially in some cases. salary in lieu of notice period is taxable under section 15 on receipt basis as held in
verses d. talwar verses c.lt. salary paid to a partner is an appropriation of profit and is not chargeable under the
head "salaries" but is chargeable under the head profits and gains of business profession".
retrenchment compensation received by a workman under the industrial disputes act, 1947, or any other acts
or contract of service, or award etc. is exempt from tax to a certain extent.
perquisites {section {17 (2)}
perquisites are taxable under the head "salaries" only if the following conditions are satisfied:
(a) they are allowed by an employer to his employee.
(b) they are allowed during the continuance of employment.
(c) they are directly dependent upon service.
(d) they are resulting in the nature of personal advantage to the employee.
(e) they are derived by virtue of employer's authority.
even a casual and non-recurring receipt can be perquisite if the aforesaid conditions are satisfied. a combined
reading of sections 15 and 17 suggest that salary would include perquisites.
thus following perquisites are taxable in the hands of an employee:
(1) rent-free accommodation. value of rent-free accommodation provided to the assessee by his employer
[section 17(2)]] such accomdation may be furnished or unfurnished. however, rent-free official residence provided to
a judge of the supreme court or a high court is not taxable. similarly, rent-free official residence provided to an official
of parliament, or to a union minister or to a leader of opposition in parliament is not taxable.
(2) accommodation at concessional rate. value of any concession in rent in respect of accommodation
provided to the assessee by his employer [section 17(2)]. with a view to provide a classification as to what
constitutes concession in the matter of rent, the finance act 2007 has inserted four explanation to section
17(2)(ii). so as to provide that concession in the matter of rent shall be deemed to have been provided in the cases
mentioned in the four explanations.
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(3) notified benefits and amenities. value of any benefit or amenity granted or provided free of cost or at
concessional rates in certain specified cases [section 17(2)].
(4) employee's obligation met by employer. amount paid by an assessee in respect of any obligation which
otherwise would have been payable by the assessee [section 17(2)]. for example, if a domestic servant is
engaged by an employee and salary of the servant is paid or reimbursed by the employer. in cit verses lala shri dhar,
(1972) 84 itr 192 (del.) it was held that payment made by company as per resolution of the board of directors to
purchase personal accident insurance in respect of an employee is not covered by section 17(2)(iii).
(5) amount payable by employer to effect an insurance on the life of the employee. amount payable by an
employer, directly or indirectly, to effect an assurance on the life of the assessee or to effect a contract for an
annuity other than payments made to a recognized provident fund or approved superannuation fund or deposit
linked insurance fund established under the coal mines provident fund act or employees provident fund act.
(6) the value of any specified security or sweat equity shares. the value of any specified security or sweat equity
shares allotted or transferred by the employer or former employer, free of cost or at concessionable rate to the
assessee is taxable as a prequisite.
(7) the employer's contribution to the superannuation fund exceeding rupees. one lakh. the amount of any
contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it
exceeds one lakh rupees is taxable as a prequisite.
(8) value of any other prescribed fringe benefit. the value of any other fringe benefit or amenity as may be
prescribed.
tax-free perquisites (for all employees)
(1) food and beverages provided to employees: any food or beverages provided by the employer to his
employees in the office or factory or through paid non-transferable vouchers and usable only at eating joints if
value thereof in either case does not exceed a certain amount per meal, is tax free perquisite.
(2) loans to employees: value of benefit to the assessee resulting from interest-free loan or loan at
concessional rate shall be nil if the amount of loan is petty, not exceeding in the aggregate to an employee is rs.
20,000/-. similarly loans made available not reimbursed for medical treatment in respect of diseases specified in rule
3a of the income-tax rules shall be nil.
(3) rent free house or conveyance facility: rent free official residence and conveyance facilities provided to
a judge of the supreme court or high court is not a 'taxable perquisite. similarly rent free furnished residence
(including maintenance thereof) provided to an officer of parliament, a union minister, or leader of opposition in
parliament, is not a taxable perquisite.
(4) perquisites provided outside india: perquisites provided by the government of india to its employees,
who are citizens of india for rendering services outside india is not a taxable perquisite [section 10(7)].
(5) accommodation in a remote area: the accommodation provided by an employer shall be tax free perquisite
if the accommodation is provided to an employee at certain sites being of temporary nature and located not
less than eight kilo metres away from the local limit of any municipality or cantonment board or is located in a
remote area.
(6) educational facility to children of the employee: where educational institution is owned and maintained by
the employer and free educational facilities are provided to the children of the employee or where such educational
facilities are provided in any institution by reason of his being in employment of the employer, there shall be no
perquisite value if the cost of such education or value of such benefit per child does not exceed rupees. 1000/- per
month.
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(7) computer and laptos: the value of perquisite shall be nil where computers or laptops are given to the
employee for use, belonging to the employer or hired by him.
(8) leave travel concession: the employee is entitled to exemption under section 10(5) in respect of the value
of travel concession or assistance received by him or due to him from his employer or former employer for himself
and his family subject to certain conditions.
(9) tax paid by the employer on non-monetary perquisites: tax paid by the employer on non-monetary
perquisites of the employee shall be exempt in the hands of the employee as per section 10(10cc).
(10) first-aid medical facility: any expenditure incurred or payment made to provide first aid facilities in the
hospital or dispensary run by the employer is not liable as a perquisite.
(11) medical reimbursement: any sum paid by the employer in respect of any expenditure incurred by the
employee on his medical treatment or treatment of any member of his family subject to certain conditions, in the
previous year is not liable to tax as a perquisite.
(12) recreational facilities: any recreational facility provided to a group of employees (not being restricted to
a select few) by the employer is not liable to tax as a perquisite.
(13) training of employees: any expenditure incurred by the employer, for providing training to the employees
or by way of payment of fees of refresher courses attended by the employees, is not liable to tax as a perquisite.
(14) use of health club, sports and similar facilities: use of health club, sports and similar facilities provided
by the employer to his employees is not liable to tax as a perquisite.
(15) expenses on telephone: expenses on telephone, including a mobile phone, actually incurred on
behalf of the employer is not liable to tax as a perquisite.
(16) employer's contribution to superannuation fund: employer's contribution to superannuation fund
of the employee or payment made by the employer for staff group insurance scheme of the employees not liable
to tax as a perquisite. in this case, the employer's contribution to superannuation fund exceeding rupees. 1,
00,000/- per employee shall be liable to tax as a prequisite.
(17) other perquisites: ah other perquisites in respect of which no valuation rules have been prescribed shall be
tax free.
profits in lieu of salary {section 17 (3)}
the definition of "profits in lieu of salary" as given in section 17 (3) is reproduced below:
"(3) "profits in lieu of salary" includes
(1) the amount of any compensation due to or received by an assessee from his employer or former
employer at or in connection with the termination of his employment or the modification of the terms and
conditions relating thereto;
(2) any payment (other than any payment referred to in clause (jo), clause (10 a), clause (job), clause (11), clause
(12), or clause (13) or clause (13a) of section 10, due to or received by an assessee from an employer or a former
employer or from provident or other fund, to the extent to which it does not consist of contributions by the assessee or
interest on such contributions or any sum. received under a keyman insurance policy including the sum allocated
by way of bonus on such policy. "
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explanation. for the purposes of this sub-clause, the expression keyman insurance policy" shall have the same
meaning assigned to it in clause (10d) of section 10.
(3) any amount due to or received whether in lump sum or otherwise, by any assessee from any person
(a) before his joining any employment with that person; or
(b) after cessation of his employment with that person. thus the "profit in lieu of salary"
includes the following:
(1) compensation on termination of employment: the amount of any compensation due to or received
by an assessee from his employer at or in connection with the termination of his employment or the
modification of the terms and conditions relating there will be profits in lieu of salary [section 17(3)(1)]. the
termination may be due to retirement, premature termination, and resignation or otherwise.
(2) payment from an unrecognized provident fund or an unrecognized superannuation fund: any payment
due to or received by an assessee from an unrecognized provident fund or an unrecognized superannuation fund to
the extent to which such payment does not consists of contributions by the employee or interest on such
employer's contribution, will be regarded as profits in lieu of salary [section 17(3) (2)]. thus, the employer's
contribution and interest thereon is taxed as profit in lieu of salary.
(3) payment under keyman insurance policy: any payment due to or received by an employee under a
keyman insurance policy including the sum allocated by way of bonus on such policy will be regarded profits
in lieu of salary [section 17(3) (2)].
(4) any amount due or received before joining or after cessation of employment: any amount due to or
received whether in lump sum or otherwise by an assessee from any person(a) before joining any employment
with that person; (b) after cessation of his employment with that person [section 17(2)(3)].
compensation for loss of employment though a capital receipt is taxable as profits in lieu of salary. any other
payment received from the present or past employee is also taxable as profits in lieu of salary:
the following payments made under clauses 10, 10a, 10b, 11, 12 and 13 a of section 10 will not be included in
"profits in lieu of salary:
1. death cum-retirement gratuity to the extent provided in section 10(10).
2. certain amounts received in commutation of pension {section 10 (10a)
3. compensation received on retrenchment, closure or transfer of an undertaking to the extent provided
in {section 10 (10b)}
4. any payment from a provident fund established under the provident fund act, 1925 {section 10 (11)}
5. the payment of accumulated balance due and becoming payable to an employee participating in a
recognized provident fund, to the extent provided in rule 8 of part a of the fourth schedule {section 10(12)}.
6. cash house rent allowance, wholly or in part in certain circumstances as provided in section 10(13 a).
transferred balance
if an employee is a member of an unrecognized provident fund which is given recognition by the
commissioner of income-tax for the first time, the balance standing to the credit of an employee in unrecognized
provident fund is transferred to recognized provident fund.
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6
income from house property
chargeability (section 22)
according to section 22 of the act "the annual value of property consisting of any buildings or lands
appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may
occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to
income-tax, shall be chargeable to income tax under the head "income from house property". ingredients of
section 22
income is taxable under the head "income from house property", if the following conditions are satisfied:
l property should consist of any buildings or lands appurtenant thereto.
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2. the assessee should be the owner of such property,
3. the property should not be used for the purposes of the business or profession of the assessee which is
chargeable to tax,
4. the charge under the head is on ''annual value" of the property.
1. property must consist of any buildings or lands appurtenant thereto: under the head ''income from house
property" the tax is payable on buildings and lands appurtenant thereto. thus the land which is not appurtenant
(attached or connected to any building) is excluded. income derived merely from such land will be taxable as
"income from other sources" unless it is agricultural income. the term "building' means a structure possessing
annual value. therefore, it would include building shops, godowns, docks, wharfs, bridges and the like. property
situated outside india also comes within the preview of this section if the owner is a resident in india.
according to webster's new international dictionary 'building' means "that which is built; specifically, as
new generally used, a fabric, or edifice, framed or constructed, designed to stand more or less permanently, and
covering a space of land, for use as a dwelling house, store house, factory, shelter for beasts or some other
useful purpose. building in this sense does not include a mere wall, fence, monument, hoarding or similar
structure, though designed for permanent use where it stands; not a steam boat, ship or other vessel of
navigation."
from the definition of the word 'building' in webster's new international dictionary it does not appear that
the existence of a roof is always necessary for a structure to be regarded as a building. residential buildings
ordinarily have roofs but there can be a non-residential building for which a roof is not necessary. a large
stadium or an open air swimming pool constructed at a considerable expense would be a building as it is a
permanent, structure and designed for a useful purpose. the question as to what is "building" must always be
a question of degreea question depending upon facts and circumstances of each case [ghanshiam das verses
debt prasad, ].
the expression "building" includes the ground upon which the wall stands and the ground within those walls
[d.g. gouse & co. verses state of kerala,].
2. the assessee should be the owner of the property: it is only the owner of house property who is liable to pay
tax under this head of income. the word 'ownership' in its broad sense, signifies any person having any estate or
interest in the land no matter how slight. if the assessee is not the owner of a house property he is not
assessable under this head. for example, income from subletting will be chargeable under the residuary head, that
is, "income from other sources." owner of a building standing on leased land will be the owner for the purposes of
this section.
the term owner includes a legal owner such as a trustee, an executor, and an official assignee or official
receiver, in whom such property is vested by the insolvency act. it includes a person whose power of alienation is
restricted, such as a person who may not alienate except with the consent of a third person, or a person who is
bound to allow right of residence to third parties in the premises free from rent. for the purposes of section
22, owner may be an individual, firm, company, co-operative society, or association of persons. annual value of
property is assessed to tax under section 22 in the hands of the owner even if he is not in receipt of income or
even if income is received by some other person.
deemed owner
thus the charge under this head is on the legal owner of house property. there are, however, certain
exceptions to this rule incorporated by section 27 where the charge of tax is on a deemed owner and not on a
legal owner. these cases are as follows:
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(1) an individual who transfers, otherwise than for adequate consideration, any house property to his or her
spouse, not being a transfer in connection with an agreement to live apart, or to a minor child, not being a
married daughter, shall be deemed to be the owner of house property so transferred. [section
(2) the holder of an impartible estate shall be deemed to be an individual owner of all the properties
comprised in the estate. [section 27(2)]
(3) a member of a co-operative society to whom a building or part thereof is allotted or leased under a house
building scheme of the society shall be deemed to be the owner of that building or part thereof, [section
27(3)]
(4) a person who is allowed to take or retain possession of any building or part thereof in part performance
of a contract of the nature referred to in section 53 a of the transfer of property act, 1882 shall be deemed to
be the owner of that building' or part thereof. [section 27(3-a)] for example, if a person has acquired a
property under a "power of attorney transaction" by satisfying the conditions of section 53 a of the transfer of
property act, then he is deemed to be the owner of the property, although he may not be the "registered
owner" of the property.
(5) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a
period not exceeding one year) in or with respect to any building or part thereof by virtue of any such
transaction as is referred to in clause (f) of section 269 ua, shall be deemed to be the owner of that building or
part thereof. [section 27(3-b)] for instance, where a property is leased for a period of 12 years more, the lessee is
deemed to be the owner of the property.
the test of ownership or deemed ownership is required to be satisfied in the previous year and not in the
assessment year. as said earlier, it is the owner of house property, who is liable to pay tax under this head of income.
therefore, before a person is asked to pay tax it is decided by the assessing officer as to who is the owner of the
property subject to the right of appeal. the assessment proceeding cannot be held up on account of dispute
relating to the ownership of property. the person who receives income shall be asked to pay tax.
where the house property is owned by two or more person and their respective shares are definite and
ascertainable, such persons shall not in respect of such property be assessed as an association of persons but the
shares of each person in the income from the property as computed in accordance with the provisions be
included in the total income (section 26).
3. property is not used for assessee's own business or profession: if the property, or a portion of it is occupied
by the assessee for the purposes of his own business or profession and the profits of such annual business or
profession are assessable to tax, the annual value in respect of such property or portion of it is not taxable under
this section. therefore, where the profits of such business are not chargeable to tax the annual value of such
house property shall be computed and charged.
the rule that income from ownership of house property is taxable under the head "income from house
property" has the following two exceptions:
(1) letting is subservient to the main business: if the letting is only incidental and subservient to the main
business of the assessee, rental income is not taxable under the head "income from house property" but is
chargeable as business income as held in c.i.t, verses delhi cloth and general mills co. ltd., (1969) 59 itr 152
(punjab).
(2) hiring of complex: in some cases, income is received not only from letting out of property but also from
incidental services and facilities, for example, a furnished paying guest accommodation, a well equipped theatre, a
safe deposit vault. in such cases income cannot be said to be derived from mere ownership of property but
because of services rendered and facilities provided. in such cases income may be assessed as business income or
income from other sources depending on the facts and circumstances. further, if the owner of a house property
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gets a composite rent for the property as well as for services rendered to the tenants, composite rent is to be
split up and the sum which is attributable to the use of property is to be assessed in the form of annual value
under section 22 and amount which is charged to tax under the head "profits and gain of business or
profession" or under the head "income from other services".
4. annual value: the assessee has to pay tax on the annual value of the house property. it is not the rent
received which is put to charge but the annual value of the house property which is important for the purposes of
section 22.
according to section 23 ( l ) '( a s it stood earlier) "the annual value of any property shall be deemed to be the
sum for which the property might reasonably be expected to let from year to year." but the definition of annual
value was modified by taxation laws (amendment) act, 1975 by adding another clause which is reproduced later
on this page.
thus it has been expressly provided that the tax shall be payable by the assessee in respect of the bona
fide annual value irrespective of the question whether he receives that or not. it is significant to note that the
word used is 'might' and not 'can5 or 'is'. reading sections 22 and 23 together, it is clear that the income from
property is thus an artificially defined income and the liability arises from the fact that the assessee is the owner
of the property. it is further provided in the section that if the owner occupies the property he has to pay tax
calculated in the manner provided therein. therefore, by reason of the fact that the property is not let out the
assessee does not escape taxation. in c.lt, verses beman behari saha (1968)61 itr 815 (cal.) the calcutta high
court observed that "even where a property is not let and even where it does not produce any income, the
income-tax officer is to proceed on the basis of a notional income, which the property might reasonably be
expected to yield from year to year,"
the annual value of house property is ascertained by taking into consideration all relevant facts such as
demand for houses in the locality, rent paid for similar houses in the same locality, the type of building, cost of
construction, valuation by the municipality, or any other authority, the pugree or premium, if any, paid by the
tenant, statutory limitation of rent by rent control act, actual rent received and so on.
"annual value" shall be deemed to be
(a) the sum for which property might reasonably be expected to let from year to year, or
(b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in
excess of the sum referred to in (a) the amount so received or receivable.
act 14 of 2001 (w.e.f. 1-4-2002) again modified the definition of annual value by adding clause (c) as
follows:
"23 annual value how determined(1) for the purposes of section 22, the annual value of any property
shall be deemed to be
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) -where the property or any part of the property is let and the actual rent received or receivable by the
owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable;
or
(c) where the property or any part of the property is let and was vacant during like whole or any part of the
previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof
is less than the sum referred to in clause (a), the amount so received or receivable:
provided that the taxes levied by any local authority in respect of the property shall be deducted
(irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to
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the method of accounting regularly employed by him) in determining the annual value of the property of that
previous year in which such taxes are actually paid by him.
explanation.for the purposes of clause (b) or clause (c) of this subsection, the amount of actual rent
received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the
amount of rent which the owner cannot realize.
(2) where the property consists of a house or part of a house which
(a) is in the occupation of the owner for the purposes of his own residence; or
(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business
or profession carried on at any other place, he has to reside at that other place in a building not belonging to him.
the annual value of such house or part of the house shall be taken to be nil.
(3) the provisions of sub-section (2) shall not apply if
(a) the house or part of the house is actually let during the whole or any part of the previous year; or
(b) any other benefit there from is derived by the owner. (4) where the property referred to in sub-section (2)
consists of more than one house
(a) the provisions of that sub-section shall apply only in respect of one of such homes, which the assessee
may, at his option, specify in ms behalf;
(b) the annual value of the house or houses, other than the house in respect of which the assessee has exercised
an option under clause (a), shall be determined under sub-section (i) as if such house or houses had been let. "
section 23 deal with the annual value of house property. after computation of annual value, deductions
prescribed under section 24 are required to be allowed so as to arrive at the taxable income from house
property.
types of house properties and their treatment
all the building properties are divided into the following three categories for the purpose of ascertaining the
annual value and income from house property:
(1) let-out house property [section 23(1)];
(2) self-occupied house property or unoccupied house property [section 23(2) (a) and (b)]; and
(3) deemed let-out house property [section 23(4)].
(1) let-out house property [section 23(1)]. in this case gross annual value is determined as follows:
step 1. calculate reasonable expected rent of the property. reasonable expected rent of the property is
deemed to be the sum for which the property might reasonable be expected to let-out from year to year. in
majority of the cases, the reasonable expected rent can be determined by comparing the fair rent with the
municipal valuation. higher of the two is considered as the reasonable expected rent. however, where the
property is subject to standard rent, the municipal valuation/fair rent cannot exceed the standard rent.
step 2. find out rent actually received or receivable.
step 3. compare reasonable expected rent with the actual rent received or receivable. if actual rent is more
than the reasonable expected rent then the actual rent would be gross annual value. if actual rent is less than the
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reasonable expected rent due to the fact that the property remained vacant, the rent actually received or
receivable is taken on the gross annual value. if actual rent is less than the reasonable expected rent because of
any other factors, then reasonable expected rent is taken as the gross annual value.
explanation to sub-section (1) of section 23 provides that for the purposes of clause (b) or clause (c) of this
sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules
as may be made in this behalf, the amount of rent which the owner cannot realize.
(2) self-occupied house property or unoccupied house property [section 23(2), (3) and (4)]: where the
property consists of a house or part of a house which(a) is in the occupation of the owner for the purpose of his
own residence; or (b) cannot actually be occupied by the owner by reason of the fact that owing to his
employment, business or profession carried on at any other place, he has to reside at that place in a building
not belonging to him, the annual value of such house or part of the house shall be taken as nil. section 23(3)
provides that for the applicability of section 23(2) it is necessary that the house or part of the house is neither
actually let during the whole or any part of the previous year and nor any other benefit there from is derived
by the owner.
section 23(4)(a) provides that where the property referred to in sub-section (2) consists of more than one
house, the provision of that sub-section shall apply only in respect of one of such houses, which the assessee
may, at his option, specify in this behalf.
(3) deemed let-out house property [section 23(4) (b)|: where the property referred to in sub-section (2)
consists of more than one house, the annual value of the house or houses, other than the house in respect of
which the assessee has exercised an option under section 23(4) (a) shall be determined under sub-section (1)
of section 23 as if such house or houses had been let. exemptions and reliefs
a. the income from house property given below is not chargeable to tax and is excluded from the total
income:
1. income from property "in the immediate vicinity of agricultural land" which is used as a dwelling house or
a store house or other out building by the cultivator [section 2 (1-a) (c)].
2. income from property held for charitable or religious purpose (section 11).
3. property used for own business or profession (section 22).
4. annual value of any one place of an ex-ruler [section 10 (19a)].
5. income from house property belonging to:
(a) local authority [section 10(20)];
(b) approved scientific research association [section 10(21)];
(c) registered trade unions [section 10(24)];
(d) political party (section 13a).
6. income from own house meant for self occupying purpose but on account of his employment,
business or profession carried on at another place, he could not use it for his residence and no other benefit is
derived by him from this house [section 23(2)(b)].
7. income from self-occupied house property.
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b. income derived by a co-operative society from the following house property though included in total
income is, however, available for deduction from gross total income.
1. letting of godowns [section 80 p (2) (c)].
2. income from any other property [80 p (2) (b)].
deductions in computing income from house property (section 24 and 25) according to section 24, "income
chargeable under the head" "income from house property" shall be computed after making the following
deductions, namely
(a) a sum equal to thirty per cent of the annual value;
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed
capital, the amount of any interest payable on such capital:
provided that in respect of property referred to in sub-section (2) of section 23; the amount of deduction shall
not exceed thirty thousand rupees:
provided further that where the property referred to in the first proviso is acquired or constructed with capital
borrowed on or after the 1st day of april, 1999 and such acquisition or construction is completed within three years
from the end of the financial year in which capital was borrowed the amount of deduction under this clause
shall not exceed one lakh fifty thousand rupees.
explanationwhere the property has been acquired or constructed with borrowed capital, the interest, if
any, payable on such capital for the period prior to the previous year in which the property has been acquired
or constructed, as reduced by any part thereof allowed as a deduction under any other provision of this act,
shall be deducted under this clause in equal instalments for the said previous year and for each of the four
immediately succeeding previous years;
provided also that no deduction shall be made under the second proviso unless the assessee furnishes a
certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of
interest payable by the assessee for the purpose of such acquisition or construction of the property?, or, conversion
of the whole or any part of the capital borrowed which remains to be repaid as a new loan.
explanation.for the purposes of this proviso, the expression "new loan" means the whole or any part of a
loan taken by the assessee subsequent to the capital borrowed for the purpose of repayment of such capital. "
section 25 provides that any interest chargeable under this act which is payable outside india (not being
interest on a loan issued for public subscription before the 1st day of april, 1938), on which tax has not been paid or
deducted under chapter xvii-b and in respect of which there is no person in india who may be treated as an agent
under section 163 shall not be deducted in computing the income chargeable under the head "income from
house property".
unrealized rent received subsequently to be charged to income tax

section 25-aa provides: "where the assessee cannot realize rent from a property let to a tenant and
subsequently the assessee has realized any amount in respect of such rent, the amount so realized shall be
deemed to be income chargeable under the head "income from house property'' and accordingly charged to
income tax as the income of that previous year in which such rent is realized whether or not the assessee is the
owner of that property in that previous year. "
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7
meaning of business {section 2 (13)}
the term "business" has been defined in section 2(13) of the income-tax act 1961 but the definition is
merely an inclusive one. according to the definition "business" includes "any trade, commerce, or manufacture
or any adventure or concern in the nature of trade, commerce or manufacture". the word business in section
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2(13) has a very broad meaning. the definition is not exhaustive. it covers every facet of an occupation carried on
by a person with a view to earning profits. business arises out of commercial transactions between two a more
persons. business cannot be carried on with oneself. business includes trade, commerce and manufacture. it also
includes an adventure or concern in the nature of trade, commerce and manufacture. trade, commerce, or
manufacture "is easy to understand but considerable difficulty arises in interpreting adventure or concern in the
nature of trade, commerce or manufacture".
in view of section 2(13) business, inter alia, includes trade. in state of punjab verses bajaj electricals ltd.,
(1968) 70 itr 730 (sc), it was held that trade in its primary meaning is the exchange of goods for goods or goods for
money and in its secondary meaning it is repeated activity in the nature of business carried on with a profit
motive, the activity being manual or mercantile as distinguished from liberal arts or learned profession or
agriculture. business includes commerce. in w.l knopp verses c.i.t. (1948) 16 itr 398 (mad) it was held that if a
person purchases goods with a view to selling them at a profit, it is an ordinary case of trade. if such transactions
are repeated on a large scale, it is called commerce. business includes manufacture. manufacture is the making of an
article material by physical labour or applied power. in north bengal stores ltd. verses board of revenue,
(1938-50) 1 stc 157 (cal), it was held that "the essence of manufacturing is that something is produced or
brought into existence which is different from that out of which it is made, in the sense that the thing produced is
by itself commercial commodity which is capable as such of being sold or supplied. it does not mean that the
materials with which the thing is manufactured must necessarily lose their identity or be transformed in their
basic or essential properties."
thus, an adventure in the nature of trade, commerce or manufacture need not be business itself. any activity
akin to business may be in the nature of an adventure in the nature of trade, business or manufacture. a single
transaction may constitute an adventure in the nature of trade, business or manufacture. whether a transaction
is in the nature of trade, business or manufacture depends on the facts and circumstances of each case. an adventure
in the nature of trade need not be allied to the already existing business of the assessee.
deciding factors: in deciding the character of such transactions the following points are taken into
consideration.
1. intention to resell': where the purchase of an article is made solely with an intention to resell at d profit and
purchaser has no intention of holding the property for himself, the transaction will be an adventure in the nature
of trade. but where the purchase is made without intention to resell at a profit, a resale under changed
circumstances will be only a realization of capital investment. for example in janki ram bahadur verses. c.lt. (1965) 57
l.t.r. 21 (sc), it was found that the assessee himself engaged in the business of pressing jute, had purchased a jute
press and sold the same at a profit within a year of such purchase. the supreme court held that the transaction
was not in the nature of trade.
2. the quantity of the commodity: where the quantity purchased is so large that it cannot be used or
consumed by the assessee within a reasonable time. in order to sell the commodity the purchaser must necessarily
have recourse to some organization and activity of the kind that is required in trade, and it does not give the
purchaser a price of possession. it would raise a strong presumption that the transaction is an adventure in the
nature of trade.
3. transaction allied to business: where the transaction is allied to or related to the business usually
carried on by the assessee though not a part of it, the transaction may be an adventure in the nature of trade.
4. alteration in the commodity by the purchaser: where the thing purchased is such as must be subjected
to processing for the purpose of making it marketable or the purchaser by an act subsequent to the purchase
improves -the quality or the commodity purchased, it may be inferred that the transaction is an adventure in the
nature of trade.
onus of proof: where a transaction is not in line of the business of the assessee but is an isolated
transaction, it is for the department to prove that the transaction is an adventure in the nature of trade.
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meaning of profession (section 2(36)}
according to section 2 (36) "profession" includes vocation. thus, section 2(36) does not state what profession
means; it only states that profession includes vocation. according oxford dictionary, profession means "a vocation or
calling, esp. one that involves some branch of advanced learning or science". profession means an occupation
requiring either purely intellectual skill or if any manual skill, as in painting and sculpture or surgery, which is
controlled by the intellectual skill of the person. examples of profession are medicine, law, auditing,
engineering, architecture, painting, sculpture etc. vocation means the work in which a person is more or less
regularly employed usually, but not necessarily, for earning livelihood and which requires some special fitness or
sense of duty. vocation is analogous to calling, meaning the way in which a man passes his life. it is the activity
upon which a person spends major portion of his time. for example, writing of books and contributing of
articles to periodicals and magazines constitute the vocation of an assessee.
the distinction between business, profession and vocation is not important as the rules for assessment are the
same.
income taxable under business or profession (section 28)

according to section 28 the following incomes are chargeable to income-tax under the head 'profits and gains
of business or profession".
1. profits and gains of business and profession {section 28(1)}. under clause (1) the profits and gains of any
business or profession which was carried on by the assessee at any time during the previous year are
chargeable to income-tax under this head.
the income-tax is not concerned with the legality or illegality of the business and once it is found that there is
business, legal or illegal, the profits and gains of that business shall be chargeable to tax. the expression "carried
on by the assessee" means that the activities which constitute business should be those of the assessee. this also
means that taxability under this clause does not depend upon the ownership of the business or profession. the
expression "at any time during the previous year" suggests that the business must have been carried on for some
time during the previous year and not necessarily for whole of the previous year or till the end of the previous
year.
2. compensation or other payments due to or received by any person specified in section 28 (2). clause (2)
of section 28 takes within the fold of business income, "any compensation or other payment due to or received
by
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of
an indian company, at or in connection with the termination of his management or the modification of the
terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in
india of any other company at or in connection with the termination of his office or the modification of the
terms and conditions relating thereto;
(c) any person, by whatever name called, holding an agency, in india for my part of the activities relating to
the business of any other person, at or in connection with the termination of the agency or the modification of
the terms and conditions relating thereto;
(d) any person, for or in connection with the vesting in the government, or in any corporation owned or
controlled by the government under any law for the time being in force, of the management of any property or
business."
thus certain compensation receipts are also chargeable under the head "profits and gains of business or
profession". the compensation receipts mentioned are those for the loss of office or cessation of the business.
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3. income of trade or professional association from specific services {section 28 (3)} under section 28
income derived by a trade, professional or similar association from specific services performed for its members is
taxable. thus here again by fiction of law the surplus in the hands of a mutual association has been made taxable in
certain circumstances.
the association, here, means an association formed by businessman for protection or advancement of
their common interests. this clause taxes the income derived only from specific services rendered to the
members of the association. the expression "specific services" means conferring on the members some tangible
benefit which would not be available to them unless they paid specific fees charged for such benefit. income not
arising from specific services is not taxable like entrance fees or member's periodic contribution.
4. profits on sale of a licence (section 28 (3a): the profits on sale of a licence granted under the imports
(control) order, 1955, made under the imports and exports (control) act, 1947 are taxable as income.
5. cash assistance (section 28 (3b)}: cash assistance (by whatever name called) received or receivable by
any person against exports under any scheme of the government of india is taxable as income.
6. duty of customs or excise: repaid or repayable (section 28 (3c)} any duty of customs or excise repaid or
repayable as drawback to any person against exports under the customs and central excise duties drawback rules,
1971 is taxable as income.
7. value of any benefit or perquisite (section 28 (4)}: the value of any benefit or perquisite, whether convertible
into money or not, arising from business or the exercise of a profession is chargeable to income-tax under the
held "profits and gains of business or profession". for example gift to a doctor by a patient in addition to the
doctor's fees for curing the patient is taxable as a revenue receipt in the hands of the doctor.
8. interest, salary etc. received by a partner {28 (5)} any interest, salary, bonus, commission or remuneration, by
whatever name called, due to, or received by, a partner of a firm from such firm shall be chargeable to income-tax.
however where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part
thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall
be adjusted to the extent of the amount not so allowed to be deducted.
9. sum received or receivable under an agreement {section 28 (5a)}any sum, whether received or receivable, under
an agreement for(a) not carrying out any activity in relation to any business; or (b) not sharing any know how,
patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or processing of goods or provision for services,
shall be chargeable to income-tax. however sub-clause (a) clause shall not apply to (1) any sum, whether
received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any
article or thing or right to carry on any business, which is chargeable under the head "capital gains";
(2) any sum received as compensation, from the multilateral fund of the montreal protocol on substances that
deplete the ozone layer under the united nations environment programme, in accordance with i he terms of
agreement entered into with the government of india.
explanation to the section provides as follows:
(1) 'agreement' includes any arrangement or understanding or action in concert
(a) whether or not such arrangement, understanding or action is formal or in writing; or
(b)
whether or not such arrangement, understanding or action is intended to be enforceable by legal

proceedings;
(2) 'service' means service of any description which is made available to potential users and includes the
provision of services in connection with business of any industrial or commercial nature such as accounting,
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banking, communication, conveying of news or information, advertising, entertainment, amusement, education,
financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other
energy, boarding and lodging."
10. sum received under a key man insurance policy {section 28 (6)}. any sum received under a keynian
insurance policy including the sum allocated by way of bonus on such policy is chargeable to income tax. key man
insurance policy, as per section 10 (10-d) means a life insurance policy taken by a person on the life of another
person who is or was the employee of the first mentioned person or is or was connected in any manner
whatsoever with the business of the first mentioned person.
11. sum received or receivable on account of any capital asset {section 28 (7)}. any sum, whether received or
receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument)
being demolished, destroyed or transferred, if the whole of the expenditure on such capital asset has been
allowed as a deduction under section 35 ad, is chargeable to income tax.
12. speculation business (explanation 2 to section 28): according to explanation 2 to section 28 if the
assessee carries on speculative transaction of such a nature as to constitute a business, such "speculation
business" shall be deemed to be distinct and separate from any other business. according to section 73 speculative
loss can be set off only against speculative profit and not against profits from any other business.
for the purposes of this act the expression "speculative transaction" has been defined by section 43 (5) as
"a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is
periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips ".
section 37 provides for deduction in respect of residuary business expenses. the deduction under section
37(1) is available in respect of any expenditure which is neither an expenditure described in sections 30 to
36 and section sow nor expenditure in the nature of capital expenditure nor personal expenses of the assessee.
section 37(1) is a residuary section. in order to claim deduction under this section, the following conditions
should be satisfied:
1. the expenditure should not be of the nature described under sections 30 to 36.
2. it should not be in the nature of capital expenditure.
3. it should not be personal expenditure of the assessee.
4. it should have been incurred in the previous year.
5. it should be in respect of business carried on by the assessee.
6. it should have been expended wholly and exclusively for the purposes of such business. the expression
"for the purposes of the business" is wider in scope than the expression "for the purposes of earnings profits". if
a payment is made or expenditure is incurred for the purposes of the trade of the assessee, it is deductible even if
it may bring benefit to a third party [gi.t. verses chandulal keshavlal & co. (1960) (sc)]. the expression "wholly
and exclusively" used in section 37 does not mean "necessary". ordinarily, it is for the assessee to decide whether
any expenditure should be incurred in the course of his business.
where a penalty is imposed for the contravention of any statutory provision, it cannot be said to be commercial
loss falling on the assessee as a trader.
1 it should not have been incurred for the purpose which is an offence or is prohibited by any law.
if an assessee is penalized under one act, he cannot claim that the amount is deductible against his income
under another act, because that will frustrate the entire object of imposition of penalty.
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principles for deductions under different heads:
(1) if income of an assessee is derived from various heads of income, he is entitled to claim deduction
permissible under the respective heads whether or not computation under each head results in taxable income.
(2) if income of an assessee arises under any of the heads of income but from different items, and income
from one or more items alone is taxable but income from the other is exempt under the income-tax act, the entire
permissible expenditure in earning the income from that heads is deductible.
(3) when an assessee is carrying on business in various ventures and some among them yield taxable
income and others do not, the question of allow ability of the expenditure under section 37 of the act will
depend upon:
(a) fulfilment of requirements of that provision; and (b) on the fact whether all the ventures carried on by him
constituted one indivisble business or not;
if they do, the entire expenditure will be permissible deduction, but if they do not, the principle of
apportionment of expenditure will apply.
distinction between capital expenditure and revenue expenditure

the income-tax act, 1961 has not defined the expressions "capital expenditure" and "revenue
expenditure". for computing the taxable income of the assessee the revenue expenditure is deducted there from
and not the capital expenditure. therefore, the difference between the two is of utmost importance. the following
tests may be applied in this connection:
(1) test of enduring benefit: viscount cave lc in artherton verses. british insulated and helby cables, (1924)
10 tc 155 (hl), formulated this test and it has been accepted by the supreme court in various cases such as
assam bengal cement co. ltd. verses c.i.t., (1955) 27 itr 34 (sc), lb. sugar factory and oil mills verses c.i.t, (1980) 125
itr 273 (sc), and empire jute co. verses c.i.t, (1980) 124 itr 1 (sc). the test is as follows:
"when an expenditure is made, not only once and 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 (in the absence of special circumstances
leading to the opposite conclusion), for treating such expenditure as properly attributable not to revenue but to
capital". as regards this test, the following cases should be noted:
(a) in empire jute co. verses c.lt. (1980) 124 itr 1 (sc), the supreme court observed that if the advantage
consists merely in facilitating the assessee's business to be carried on more efficiently or more profitably while
leaving the fixed capital untouched the expenditure would be on revenue account even though the advantage
may endure for an indefinite future. the test of enduring benefit is not free from difficulties. there may be cases
where expenditure, even if incurred for obtaining an advantage of enduring benefit, may none the less, be on
revenue account and the test of enduring benefit may break down.
(b) in lb. sugar factories and oil mills ltd verses c.lt., (1980) 125 itr 293 (sc), it was observed that
expenditure on creation of a capital asset is capital expenditure only when the capital asset belongs to the
assessee.
(c) in alembic chemical works co. ltd. verses c.lt. (1989) 177 itr 377 (sc), it was observed that in the fast
changing scientific and technological environment, the expenditure on know how may not be of enduring
nature.
(d) in c.lt. verses general insurance corporation 2007 (1) scj 800, it was held that issue of bonus shares does
not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same.
issuance of bonus shares by capitalization of reserves is merely a reallocation of the company's fund. if that
be so, then it cannot be said that the company has acquired a benefit or advantage of enduring nature. the
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total funds available with the company remain the same. therefore, it was held that the expenditure on issue of
bonus shares is revenue expenditure.
in assam bengal cement co. verses c.l t., (1955) 27 itr 34 sc, it was observed that the word 'enduring' is not
synonymous with the word 'everlasting'. the test of enduring benefit is, therefore, not a certain or conclusive
test; and it cannot be applied blindly and mechanically without regard to the particular facts and
circumstances of a given case. if the advantage consists merely in faciliting the assessee's trading operations or
enabling the management to carry on his business more efficiently, while leaving the fixed capital untouched, then
the expenditure would be of revenue account.
(2) test of fixed or circulating capital: expenditure which acquires a capital asset is capital expenditure, if it
acquires stock-in-trade, then it is revenue expenditure. lord haldane, in john verses moore, (1921) 2 ac 13(ml),
observed as follows:
"fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital (stockin-trade) is what he makes profit by parting with it and letting it change masters."
for example, expenditure on purchase and installation of plant and machinery is a capital asset, while the
expenditure on the purchase of raw materials is a revenue expenditure. it should foe noted that a capital asset in
the hands of one person may be stock-in-trade in the hands of another. thus expenditure on purchase of a car
by a business entity which does not deal in cars is a capital expenditure, while purchase of cars for the purpose
of sale by a car dealer is a revenue expenditure.
in c.lt. verses jalan trading co. (p) ltd., (1985) 155 itr 537 (sc), it was observed by the supreme court that these
tests are mutually exclusive and have to be applied to the facts of each particular case in the manner indicated
therein.
in bikaner gypsums ltd verses c.i.t., (1991) 87 itr 39 (sc), expenditure made for removal of restriction,
obstruction or disability within an area in respect of which assessee having existing right was held to be
revenue expenditure.
in arvind mills ltd. verses c.i.t., (1992) 197 itr 422 (sc), it was held that in order to constitute revenue
expenditure it should have a direct nexus with the day to day running of business of the assessee, in this case
the betterment charges paid by the assessee company under town planning scheme framed under section 66 of
the bombay town planning act was held capital expenditure and hence not deductible.
few instances of capital expenditure
1. annual payments made by the lessee of limestone quarries to the government who were the less or
in consideration of the latter's entering into certain governments which ensured to the lessee elimination of
competition during the period of the lease was held to the capital expenditure [assam bengal cement co. ltd. verses
c.lt.
2. payment in addition to the stipulated royalty only with a view to obtaining the renewal or extension of lease
agreement was held to be capital expenditure as there was no legal obligation to pay those amounts under the
original agreement [h. dear & co. (?) ltd. verses c.lt.
3. payment of percentage of profit, for acquiring rights under sole selling agency was held to be capital
expenditure [c.lt. verses jalan trading co. (p) ltd. (1985) 155 itr 536 (sc)]
4. compensation payable for breach of contract to acquire capital assets was held to be capital expenditure
[swadeshi cotton mills co. ltd. verses c.lt.
5. cost of shifting a plant to another place was held to be capital expenditure [sultanpur sugar works
ltd. verses c.lt.
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6. quarry lease rent paid by assessee for acquiring right to excavate granite on lease for ten years was held to be
capital expenditure [enterprising enterprises verses c.lt
7. expenditure incurred in by a company in raising new shares is a capital expenditure [shree digvijay cement co.
ltd. verses c.lt. (1982) 138 itr 45 (gujarat)]. the expenditure incurred for payment of legal charges to solicitors for
issue of prospectus for offering redeemable preference shares to the public and payment of underwriting
commission and brokerage for issue of those shares was held to be capital expenditure [hindustan gas and
industries ltd. verses c.lt. (1979) 117 itr 549 (cal); c.lt. verses kisenchandchellaram (india) (p) ltd. (1981) 130 itr 385
(mad); bombay burmah trading corporation ltd. verses c.lt. (1983) 12 taxman 178 (bom). registration fee paid to
increase in authorized capital is capital expenditure bharat carbon & ribbon mfg. co. ltd. verses c.i.t! (1891) 127 itr
(delhi); punjab state industrial development corp. verses c.lt. (1991) 10 scc 184. however in c.lt. verses general
insurance co. (2006) 286 itr 232 (sc) it was held that expenditure on issue of bonus shares is revenue expenditure.
the issue of bonus shares by capitalization of reserves is merely a reallocation of the company's funds. there is no
inflow of fresh funds or increase in the capital employed, which remains the same. therefore, it cannot be held
that the company has acquired a benefit or advantage of enduring nature. the total funds available with the
company will not result in any change in the capital structure of the company. issue of bonus shares does not
result in the expansion in capital base of the company.
in madras industrial investment corporation ltd. verses c.lt. (1997) itr 802 (sc) it was held that when a company
issues debentures at a discount, it incurs a liability to pay a longer amount what it has borrowed at a future
date, the payment is to secure a benefit be spread over a number of years. the assessee can claim a deduction
only in respect of the proportionate part of discount in an assessment year.
8. expenditure in acquiring goodwill whether it is paid in lump sum at one time or in instalments distributed
over a definite period is capital expenditure [mehra khanna & co. verses c.lt. (2001) 115 taxman 117 (delhi)]
9. expenses incurred before the commencement of business cannot be considered revenue expenditure
under section 37(1) of the income-tax act, 1961. [c.lt. verses mohan steel ltd. (2004) 191 ctr (all) 279].
10. payment made to take over the business of another company to ward off competition was held to be
capital expenditure [ vinod kothari consultants ltd. verses c.lt. (2004) 91 1td 153 (kol) (tm)]. similarly, payment made
to ward off business competition for a long period of ten years was held to be capital expenditure [montgomery
watson consultants india (p) ltd. verses c.lt. (2004) 90 itd 324 (mum)].
11. payment made for acquiring a leasehold right in a property is a capital expenditure [c.lt. verses tata
honeys ell ltd. (2005) 93 itd 507 (pune)].
few instances of revenue expenditure
1. contribution made by sugar mill under a statutory obligation towards construction of government
owned orders, which would facilitate supply of sugarcane to factories was held to be revenue expenditure
[lakshmi sugar mills co. (p) ltd. verses c.lt. (1971) 82 itr 376 (sc)]
2. replacement of carpets, napkins, towels, etc. in a hotel business is a revenue expenditure as these
articles need to be replaced very frequently [c.lt. verses piem hotels ltd. (2005) 1 sot 383 (mumb)].
3. guarantee commission paid to banks and insurance companies by the assessee for guaranteeing the
deferred payment of price of machinery purchased by him was held to be revenue expenditure and, therefore,
deductible under section 37(1) of the income-tax act, 1961 [c.lt. verses siwakami mills ltd. (1997) 11 scc 283].
4. expenditure incurred by the assessee-company on construction of railway siding, which belonged to the
government, for easy movement of raw materials and finished goods is allowable or revenue expenditure [c.i.t.
verses tata sponge iron ltd. (2004) 90 itd 138 (ctk)].
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5. expenditure on issue of bonus shares is a revenue expenditure [c.i.t. verses general insurance corporation
(2006) 156 taxman 96 (sc)].
6. payment made in lump sum by an assessee-company doing entertainment business to a film star by virtue of
an agreement for obtaining his services for 120 days a year for next ten years was held to be revenue expenditure
[amitabh bachchan corporation ltd. verses c.i.t. (2006) 9 sot 208 (mum)].
7. expenditure incurred on sale promotion and holding seminars for a new model is a revenue expenditure
[honda siel cars india ltd. verses c.i.t. (2006) 157 taxman 76 1tat delhi bench].
8. expenditure incurred on up gradation of computers by changing certain parts thereby enhancing
configuration of computers for improving their efficiency without making any structural alterations is not of enduring
nature and, therefore, is a revenue expenditure [c.i.t verses southern roadways ltd. (2007) 158 taxman (mad.)].
9. staff welfare expenses are of revenue nature [c.i.t. verses wolken (p) ltd. co. (2003) 131 taxman 84 (raj)].
10. expenditure incurred in protecting one's title to an existing business is a revenue expenditure [raja
raghumal prasad v. c.i.t. (1933) 1 itr 113 (pc)] the expenses incurred in perfecting a defective title is of capital
nature.
11. expenditure incurred after the commencement of business on raising debenture loan is an admissible
deduction [premier automobiles ltd. verses c.i.t. (1971) 80 itr 415 (bom)] however, if expenditure is incurred on
raising debenture loan before the commencement of business, then it is of capital nature. in madras industrial
investment corporation ltd. verses c.i.t. (1997) itr 802 (sc) it was held that the assessee company claim for
deduction only proportionate deduction of discount on issue of debentures in an assessment year. similarly in
universal cable ltd. verses c.i.t., (2000) 243 itr 371 (cal) it was held that premium payable on redemption of
debentures issued during the year has to be spread over the period of debentures.
in c.i. t. verses elecon engg. co., (2010) 4 scc 482 : (2010) 322 itr 20, it was held that exchange differences are
required to be capitalized if liabilities are incurred for acquiring a fixed asset. the purpose of loan whether to finance
fixed asset or working capital is of prima facie significance to ascertain amenability of said amount for capitalization.
hence roll over charges paid/received towards liabilities relating to acquisition of fixed assets should be
debited/credited to the asset. the said roollerover charges cannot be construed as interest on capital borrowed for
the purposes of business so as to be deductible under section 36(l)(iii) of the it act, 1961. hence capitalization of the
amount was proper under the facts and circumstances of the case. however, rollover charges not relating to fixed
assets should be charged to the profit and loss account.
conclusion
in abdul kayoom verses c.i.t. (1962) 44 itr 687 (sc) hidayutullah j. observed:
(a) none of the test laid down in various authorities is exhaustive or universal.
(b) each case depends on its own facts. to decide which side of the line a case falls, its broad resemblance
to another case is not at all decisive.
(c) to arrive at correct decision, regard must be had to (1) the nature of the business of the assessee; (2)
nature of expenditure made by the assessee; (3) nature of right/advantage acquired by the expenditure; and
(4) its relation to capital structure.
deduction in respect of bad debt [section 36(l)(7) and 36(2)]
according to the provisions of section 36(1) (7) and 36(2) the following conditions must be satisfied for the
allowance of a claim for 'bad debt':
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1. a bad-debt presupposes the existence of a debt and if there was never a relationship of debtor and creditor no
allowance can be claimed for bad debts. unless there was an admitted debt owing to the assessee no deduction can be
claimed.
2. the debt which is claimed as bad must be in respect of the business and arising out of the operation of the
business carried on by the assessee in the relevant accounting year. no deduction is allowed for a bad debt of a
business which has been discontinued before the commencement of the accounting year. [indian aluminium co. ltd
verses c.i.t., (1971) 79 itr 514 (sc]
3. the debt must have been taken into account in computing the income of the assessee or represent money
lent in the ordinary course of the business of banking or money lending which is carried on by the assessee.
4. the debt must have become bad or irrecoverable during the relevant accounting year. the assessee will
not be able to claim allowance of debt as bad simply by writing it off in books if it has not actually become
irrecoverable [vithaldas verses c.i.t. (1981) 130 itr 95 (gujarat.)].
5. the debt must have been written off as irrecoverable in accounts of the assessee for the relevant accounting
year. in vijay bank verses c.i.t., (2010) 5 scc 416, it was held that closure of individual account of each debtor in
books of assessee is not necessary; reduction in loans and advances account or debtors on asset side of balance
sheet to the extent of provision for bad and doubtful debts is sufficient to constitute actual write-off entitling
to deduction under section 36(l)(vii). moreover, the assessee has instituted recovery suits in courts against its
debtors. if individual accounts are to be closed, then the debtor/ defendant in each of those suits would rely
upon the bank statement and contended that no amount is due and payable in which event the suit would be
dismissed. the assessing officer is sufficiently empowered to tax such subsequent repayments under section 41(4) of
the act.
6. if the amount of final recovery and the amount allowed as bad debt in respect of a debt falls short of the
amount of such debt, such deficiency is further deductible in the year of final recovery [section 36(2) (2)]. on the
other hand, if the amount of final recovery and the amount allowed as bad debt exceed the amount of such
debt, such excess is chargeable as profit of the relevant accounting year in which such recovery is made
[section 41(4)].
7. the deduction relating to a bad debt in the case of a bank to which clause (7a) applies shall be limited
to the amount by which such bad debt exceeds the credit balance in the provision for bad and doubtful debts
account made under clause (7a). the bad debts to the extent of provision for bad and doubtful debts shall be
debited to the provision for doubtful debts account in the previous year.
8. the debt should be of revenue nature and not of capital nature [a. verses thomas & co. verses c.i.t.
(1963) 48 itr 67 (sc)].
in b.d. bharucha verses c.i.t., (1967) 3 scr 238, the appellant was an individual having income from house
property, government securities, cinema exhibition and financing film producers and distributers. the appellant
advanced certain sum to a firm of film distributors. after some time it was agreed between the two that in lieu of
interest the distributors will share with the appellant profit and loss of the distribution, exploitation and
exhibition of the picture shabab in the bombay circuit. the film proved to the unsuccessful. the appellant found
that there was a balance of rs. 80,759 which was irrecoverable from the distributors and accordingly wrote it off
as bad debt in the ledger account. the appellant was held entitled to claim the amount of rs. 8,759 as a bad
debt and the loss suffered by the appellant was held not a loss of capital but a revenue loss.
chargeability of amounts received after the cessation of profession where cost basis of accounting was
followed.
section 176(4) of the income-tax act 1961 provides that 'where any profession is discontinued in any year
on account of the cessation of the profession by, or the retirement or death of, the person carrying on the
profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and
charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of
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the aforesaid person had it been received before such discontinuance." thus if the assessee had been engaged in
profession, receipts are chargeable no matter when such receipts occur.
it is worthy to note here that under the act of 1922 receipts in a profession after the discontinuance of the
profession were exempt from taxation if the assessee kept his accounts on the cash basis and if such receipts
occurred in a year in which no professional activities had been carried on by the assessee. this was laid down by
the supreme court in nalinikant amhalal mody verses c.i.t. (1966) 61 l.t.r. 428 (sc).
in the above case the assessee was an advocate of the high court of bombay and was practicing his profession
there till march 1, 1957, when he was elevated to the bench of that court. he thin ceased to carry on his profession
and has not resumed it since. as an advocate he had been assessed to income-tax on his professional income, his
accounting year for the assessment being the calendar year. when he was elevated to the bench various fees for
professional work done by him were outstanding in the years 1958 and 1959 during no part of which he had carried
on any profession, he received certain moneys on account of these outstanding fees. his accounts had always been
kept on the cash basis. the question was, whether he was liable to pay income tax on the receipts. in the course of
the judgment the supreme court observed as follows: "the receipts in the present case are the outstanding
dues of professional work done. they were clearly the fruits of the assessee's professional activity. they were the
profits and gains of a profession. they would fall under the fourth head, viz, "profits and gains of business,
profession or vocation". they were however not, chargeable to tax under that head because under the
corresponding section, i.e., section 10 an income received by an assessee who kept his accounts on the cash basis in
an accounting year in which the profession had not been carried on at all is not chargeable and the income in the
present case was so received. this is reasonably clear and not in dispute: see c.i.t verses express newspaper ltd.
madras, "can the receipts then be income falling under the residuary head of income and charged to tax as such? as
to the general principles, we first observe that as the heads of income are mutual exclusive, if the receipts can
be brought under the fourth head, they cannot be brought under the residuary head. it is said by the revenue
that as the receipts cannot be brought to tax under the fourth head they cannot fall under that head and must
therefore, fall under the residuary head. this argument assumes, in our view, without justification, that an income
falling under one head has to be put under another head if it is not chargeable under the computing section
corresponding to the former head. if the contention of the revenue is right, the position would appear to be
that professional income of the assessee who keeps his accounts on the cash basis would fall under the fourth
head if it was received in a year in which the profession was being carried on, but it would take a different
character and fall under the residuary head if received in a year in which the profession was not being carried on.
we are unable to agree that this is a natural reading of the provisions regarding the heads of income in the act.
whether an income falls under one head or another has to be decided according to the common notions of
practical men, for the act does not provide any guidance in the matter. the question under which head an
income comes cannot depend on when it was received. if it was the fruit of professional activity it has always to
be brought under the fourth head irrespective of the time when it was -received. there is neither authority nor
principle for the proposition that an income arising from a particular head ceases to arise from that head
because it is received at a certain time. the time of the receipt of the income has nothing to do with question
under which particular head of income it should be assessed".
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capital gains
chargeability
the fourth head of income under the income tax act, 1961 is "capital gains". sections 45 to 55-a provide for
computation of the amount of capital gains that would be subject to the levy of tax. section 45(1) of the act
provides that any profits or gains arising from the transfer of a capital asset effected in the previous year, shall,
save as otherwise provided in sections 54, 54-b, 54~d, 54-e, 54-ea, 54-eb, 54-f, 54-g and 54-h, be chargeable to
income tax under the head (t capital gains'1 and shall be deemed to be the income of the previous year in which
the transfer took place. thus, capital gains is chargeable to tax on accrual basis. the date of receipt and the method
of accounting are irrelevant considerations.
capital gains tax liability arises if the following conditions are satisfied:
(1) there should be a capital asset.
(2) the capital asset is transferred by the assessee
(3) the transfer of capital asset takes place during the previous year.
(4) any profit or gain arises from transfer of capital asset.
(5) such profit or gain is not exempt from tax.
section 45 is a charging section. for the purposes of imposing the charge, the parliament has enacted detailed
provisions in order to compute the profits or gains under this head. no existing principle or provision at
variance with them can be applied for determining the chargeable profits and gains. all transactions
encompassed by section 45 must fall under the governance of its computation provision. a transaction to which
those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge
[c.lt. verses b.c. sriniva setty (1981)].
capital gain is chargeable to tax on accrual basis, the date of receipt of capital gain and the method of
accounting is immaterial
profit or sale of land after plotting it out to secure better price cannot be taxed as profit from an adventure
in the nature of trade. in other words it is not business income. it shall be taxed under the head 'capital gains'
section 45 (1-a) provides that "notwithstanding anything contained in sub-section (1), where any person
receives at any time during any previous year any money or other assets under an insurance from an insurer on
account of damage to, or destruction of, any capital asset, as a result of
(1) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(2) riot or civil disturbance; or
(3) accidental fire or explosion; or
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(4) action by an enemy or action taken in combating an enemy (whether with or without a declaration of
war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income tax
under the head 'capital gains' and shall be deemed to be the income of such person of the previous year in
which such money or other asset was received and for the purposes of section 48, value of any money or the fair
market value of other assets on the date of such receipt shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of such capital asset.
explanationfor the purposes of this sub-section, the expression 'insurer' shall have the meaning assigned to
it in clause (9) of section 2 of the insurance act, 1938".
section 45 (2) provides that the profits or gains arising from the transfer by way of conversion by the owner of
a capital asset into, or its treatment by him as, stock-in-trade of a business carried on by him shall be chargeable to
income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him
and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment
shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the
capital assets.
section 45 (2-a) provides that where any person has had at any time during previous year any beneficial interest
in any securities, then, any profits or gains arising from transfer made by the depository or participant of such
beneficial interest in respect of securities shall be chargeable to income tax as the income of the beneficial owner
of the previous year in which such transfer took place and shall not be regarded as income of the depository who
is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10 of the depositories
act, 1996. for the purposes of (1) section 48; and (2) proviso to clause (42-a) of section 2, the cost of acquisition
and the period of holding of any secruities shall be determined on the basis of the first-in-first out method.
explanationfor the purposes of this sub-section, the expressions "beneficial owner", "depository" and
"security" shall have the meanings assigned to them in clauses (a), (e) and (1) of sub-section (1) of section (2) of
the depositories act, 1996.
section 45 (3) provides that the profits and gains arising from the transfer of a capital assets by a person to a
firm or other association of persons or body of individuals (not being a company or a co-operative society) in
which he is or becomes a partner or member, by way of capital contribution or otherwise shall be chargeable
to tax as his income of the previous year in which such transfer takes place. for the purposes of section 48, the
amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be
deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
section 45(4) provides that the profits or gains arising from the transfer of a capital asset by way of
distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not
being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm,
association or body, of the previous year in which the said transfer takes place. for the purposes of section 48, the
fair market value of the asset on the date of such transfer shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer.
according to section 45(5) additional compensation is made taxable in the year of receipt instead of the year of
the transfer of the capital asset. section 45(5) provides:
"notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a
capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for
which was determined or approved by the central government or the reserve bank of india, and the compensation
or the consideration for such transfer is enhanced or further enhanced by any court, tribunal or other authority,
the capital gain shall be dealt with in the following manner, namely
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(a) the capital gain computed with reference to the compensation awarded in the first instance or, as the
case may be, the consideration determined or approved in the first instance by the central government or the
reserve bank of india shall be chargeable as income under the head "capital gains" of the previous year in which
such compensation or part thereof, or such consideration or part thereof, was first received; and
(b) the amount by which the compensation or consideration is enhanced or further enhanced by the court,
tribunal or other authority shall be deemed to be income chargeable under the head "capital gains" of the
previous year in which such amount is received by the assessee.
(c) where in the assessment for any year, the capital gain arising from the transfer of a capital asset is
computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced
compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is
reduced by any court, tribunal or other authority, such assessed capital gain of that year shall be recomputed by
taking the compensation or consideration as so reduced by such court, tribunal or other authority to be the full
value of the consideration.
explanationfor the purposes of this sub-section
(1) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be
taken to be nil;
(2) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st
day of april, 1988;
(3) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced
compensation or consideration is received by any other person, the amount referred to in clause (b) shall be
deemed to be the income, chargeable to tax under the head "capital gains", of such other person.'*
section 45(6) provides that notwithstanding anything contained in subsection 1, the difference between the
repurchase price of the units of an equity-linked savings scheme of a mutual fund under section 80-ccb and the
capital value of such units shall be deemed to be the capital gains arising to the assessee in the previous year in
which such repurchase takes place or the plan is terminated and shall be taxed accordingly.
explanation-for the purposes of this sub-section, "capital value of such units" means any amount invested by
the assessee in the units referred to in subsection (2) of section 80 ccb.
from the charging section it is clear that the income to be taken as "capital gains", must arise from the
transfer of a capital asset and therefore the meaning of the term 'transfer' and 'capita! asset' have to be
understood in the context of the act.
where in relation to original shares held by the assessee in company, bonus shares are issued by the company,
in computing the capital gains arising from the transfer of original shares, issue of bonus shares should be taken into
account for the purpose of averaging and reducing the cost of acquisition of those original shares. the
relevant assessment year was prior to insertion of sub-clause (3a) to section 55(2)(a). [sumanth raman jam
(master) verses c.lt. (2001) 248 itr 818 (sc)]. it may be noted that section 55(2) was amended by the finance act,
1995 w.e.f. 1.4.1996 by inserting sub-clause (3a) to clause (aa) of section 55(2). as per this sub-clause the cost of
acquisition of bonus shares shall be taken as nil and cost of acquisition of original shares shall be the amount
actually paid to acquire the original shares.
where the assessee had mortgaged his immovable property to the excise department as security for "kist"
due to the state, the state government sold the immovable property in an auction and after deducting the
amount due, paid the balance due to the assessee, it was held that capital gains had to be computed on the full
price. [c.lt. verses attili n. rao air 2002 sc 388].
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where, in computing the compensation for acquisition of a portion of land the injurious effect on the
unacquired portion is taken into account, as provided under the land acquisition act, it is the full consideration
awarded that is to be taken into account for the purposes of capital gains. [mahalakshmi (p) ltd. verses c.lt.
(2002)].
tenancy right is a capital asset surrender of which is a transfer and the consideration received thereof is a
capital receipt. it may be noted that the law prior to assessment year 1995-96 was that if the cost of acquisition
cannot in fact be determined the transfer of such asset would not attract capital gains tax. [c.lt. verses p. sandu
brothers chembur (p) ltd.].
capital asset {section 2(14)}
capital asset means property of any kind held by an assessee, whether or not connected with his business or
profession, but does not include
(1) any stock-in trade, consumable stores or raw materials held for the purposes of the assessee's
business or profession;
(2) personal effects, that is to say, movable property (including wearing apparel and furniture) held for
personal use by the assessee or any member of his family dependent on him, but excludes
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art. explanationfor the purposes of this sub-clause "jewellery" includes
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or
more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or
not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked
or sewn into any wearing apparel;
(3) agricultural land in india provided it is not situate
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as municipality,
municipal corporation, notified area committee, town area committee, town committee, or by any other name) or
cantonment board and which has a population of not less than 10,000 according to the last preceding census; or
(b) in any area within such distance, not being more than eight kilometers, from the local limits of any
municipality or cantonment board referred to in item (a), as the central government may specify by notification
in the official gazette;
(4) 6 1/2% gold bonds, 1977 or 7% gold bonds 1980 or national defense gold bonds 1980, issued by the central
government;
(5) special bearer bonds, 1991, issued by the central government.
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(6) (w.e.f. 1-4-2000) gold deposit bonds issued under gold deposit scheme, 1999 notified by the central
government.
capital asset, for the purpose of the income tax, includes all kinds of property movable or immovable,
tangible or intangible, fixed or circulating incorporated rights, and chose in action except those referred
above. the purchased goodwill of business, a partner's share in a firm, right to subscribe for products, shade
trees, patents, trade marks, actionable claims, leasehold mines, dealership rights have been held to be capital
assets. in ahmed g.h. arif verses c.w.t. (1970) 76 itr 471 (sc), it was held that the term property is of widest
import and subject to any limitation which the context may require, it signifies every possible interest which a
person can clearly hold and enjoy. in c.i.t. verses b.c. srinivasa setty, (1981) 128 itr (sc) it was held that goodwill
which is build up is not a capital asset under the income-tax act. in c.i.t. verses nanubai j. desai, 1994 supp(3) scc
754, a partner retired from a partnership firm. he received a certain amount towards self-generated goodwill. it was
held that the amount was not liable to capital gains. from the assessment year 1988-89, gains arising from sale of
self-generated goodwill was made taxable and for this purpose its cost of acquisition or cost af improvement, as
provided in section 55, is be taken to be nil. with effect from assessment year 1995-96, the same treatment applies
in the case of transfer of tenancy tights, stage carriage permits and loom hours.
any stock-in-trade, consumable stores or raw materials held for the purpose of business or profession is not a
capital asset because any surplus arising on sale or transfer of stock-in-trade, consumable stores or raw materials is
chargeable to tax as business income under section 28.
amendment by the finance act, 2007: with a view to widening the scope of 'capital asset', the definition
of personal effects given in section 2(14) clause (2) has been amended with effect from assessment year 200809 so as to also exclude from the meaning of personal effects archaeological collections, drawings, paintings,
sculpture, or any work of art. jewellery was already excluded from the definition of personal effects. in other words,
jewellery is treated as a capital asset even though it is meant for personal use of the assessee. therefore, transfer of
such personal effect will attract capital gains tax w.e.f. assessment year 2008-09. capital gain on immovable
property and jewellery was taxable upto the assessment year 2007-08 and it will be taxable from assessment
year 2008-09 onwards also. capital gains on personal effects being archaeological collections, drawings,
paintings, sculptures, or any other work of art was not taxable upto assessment year 2007-08. but it will be taxable
from the assessment year 2008-09, capital gain on any other personal effects being movable property was neither
taxable earlier nor it will be taxable from assessment year 2008-09.
cost of acquisition
cost of acquisition of a capital asset is the value for which it was acquired by the assessee. it includes the
expenses of capital nature incurred for completing or acquiring the title to the property [section 55(2)].
interest on money borrowed to purchase the asset will form part of the cost of asset. but, interest payable on
provident fund loan is not deductible expense as the interest so payable is credited to the provident fund
account of the assessee. [vashisht bhargava verses lt.o. (1975)].
the cost of acquisition in different cases is explained below:
(1) cost of acquisition of goodwill of a business or a trade mark or brand name associated with
business or right to manufacture, produce or process any article or things or right to carry on any business,
tenancy rights, stage carriage permits or loom hours [section 55(2)(a)]. it shall be as follows:
(1) in case such asset is purchased, it shall be the amount of purchase price.
(2) in any other case not being a case falling under case (3) below, it shall be taken as nil as it is self-generated.
(3) if case falls under sub-clauses (1) to (4) of section 49(1), it shall be the cost to the previous owner if the
previous owner paid for it but where it was self-generated by the previous owner, it shall be taken as nil.
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(2) cost of acquisition of right shares [section 55(2)(aa)] where an assessee, by virtue of holding shares or any
other security, becomes entitled to subscribe to any additional shares (or any other security) then: (1) cost of
acquisition of the original shares shall be the amount actually paid for acquiring the original shares; (2) the cost of
acquisition of the right shares, when the assessee renounces his right to subscribe additional shares in favour of any
other person, shall be taken to be nil; (3) the cost of acquisition of the right shares, when the assessee subscribes
to the right shares as the basis of the said entitlement shall be the amount paid for (4) the cost of acquisition of
shares in whose favour the right to subscribe is renounced, shall be the amount paid by him to the company for
acquiring the shares plus the amount paid by him to the person renouncing such right.
it may be noted that the expression "financial asset" has been used for a share or any other security.
in navin jindal verses cit, it was held that for determining whether the gain/loss of renunciation of right
to subscribe is a short-term or long-term gain/loss, the crucial date is the date on which such right to subscribe
for additional shares/debentures comes into existence and the date of renunciation of such right. hence,
where assessee renounced that right in favour of a third party for money in assessment year and consequently
suffered loss of a higher amount due to diminution of value of his .original shares, net loss so suffered, held, was
short-term capital loss and not long-term capital loss. hence, assessee rightly applied deduction under section
48(2), it act, 1961 to amount of long-term gains earned during the year and then from the remainder deducted
the said short-term loss. department erred in deducting the said short-term loss from long-term gains and then
applying section 48(2) to the remainder.
3. cost of acquisition of bonus shares or any other financial asset allotted without payment [section 55(2)(aa)].
section 55(2)(b)(aa)(3a) inserted by the finance act, 1995 w.e.f. 1.4.1996 provides that the cost of acquisition in
relation to a financial asset allotted to the assessee without any payment and on the basis of holding of any other
share or other security, shall be taken as nil in the case of such assessee. therefore, the cost of bonus shares or any
other security shall be taken to be nil and the entire sale consideration received on transfer of the bonus shares
shall be treated as capital gains. it should be noted that the cost of acquisition of original shares shall be the
amount actually paid to acquire the original shares.
4. cost of acquisition of a share or shares allotted to a shareholders of a recognized stock exchange in india
under a scheme of demutualization [section 55(2)(ab)]. in relation to a capital asset, being equity share or shares
allotted to a shareholder of a recognized stock exchange in india under a scheme for demutualization or
corporatization approved by the sebi, cost of acquisition shall be the cost of acquisition of his original
membership of the exchange. the proviso to this clause states that the cost of a capital asset, being trading or
clearing rights of the recognized stock exchange acquired by a shareholder who has been allotted equity share or
shares under such scheme of demutualization or corporatization, shall be deemed to be nil.
5. cost of acquisition of any other capital assets acquired before 1.4.1981 [section 55(2)(b)]. in relation to a
capital asset, where the capital asset became the property of the assessee before 1.4.1981, the cost of acquisition
means the cost of acquisition of the asset to the assessee or the fair market value of the asset on 1.4.1981, at
the option of the assessee.
(b) in relation to a capital asset, where the capital asset became the property of the assessee by any of the
modes specified in section 49(1) and the capital asset became the property of the previous owner before
1.4.1981, the cost of acquisition means the cost of capital asset to the previous owner or the fair market value
of the asset on 1.4..1981, at the option of the assessee. section 49(1) provides as follows:
where the capital asset became the property of the assessee
(1) on any distribution of assets on the total or partial partition of a hindu undivided family;
(2) under a gift or will;
(3) (a) by succession, inheritance or devolution, or
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(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of
persons, where such dissolution had taken place at any time before the 1st day of april, 1987, or
(c) on any distribution of assets on the liquidation of a company, or
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in clause (4) or clause (5) or clause (6) or clause (6a) or clause
(6aa) or clause (6ca) or clause (6cb) or clause (13b) of section 47;
(4) such assessee being a hindu undivided family, by the mode referred to in sub-section (2) of section 64 at
anytime after 31.12.1969, the cost of acquisition shall be deemed to be the cost for which the previous owner of
the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the
previous owner or the assessee, as the case may be.
previous owner means the previous owner who actually paid for the asset.
section 55(3) provides that where the cost for which the previous owner acquired the property cannot be
ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the
capital asset became the property of the previous owner.
(c) in relation to a capital asset, where the capital asset became the property of the assessee on the
distribution of the capital assets of a company on its liquidation and the assessee has been assessed to
income-tax under the head "'capital gains" in respect of that asset under section 46, the cost of acquisition means
the fair market value of the asset on the date of distribution.
according to section 2(22b), fair market value in relation to the capital market means (1) the price which
the capital asset would ordinarily fetch if sold in the open market on the relevant-date; and (2) where the price
referred to in is not ascertainable, such price may be determined in accordance with the rules made under the
income-tax act.
6. cost of shares of amalgamated company [section 49(2)]. where a shareholder of an amalgamating (i.e.
transferor) company gets the shares of an amalgamated (i.e. transferee) company in lieu of the shares held in
the amalgamating company, the cost of acquisition of such shares of the amalgamated company shall be deemed to
be the cost of acquisition to him of the shares of the amalgamating company.
7. cost of acquisition of depressible assets (section 50). the excess of the full value of the consideration over
the following shall be the short term capital gain:
(1) expenditure incurred wholly and exclusively in connection with such transfer;
(2) the written down value of the block of assets at the beginning of the previous year;
(3) the actual cost of any asset falling within the block from the transfer of short term capital assets.
8. cost of acquisition of specified security or sweat equity [section 49(1) 2aaj. where the capital gain arises
from the transfer of a specified security or sweat equity shares referred to in section 17(2)(6), the cost of
acquisition of such security or shares shall be the fair market value which has been taken into account for the
purposes of section 17(2)(6). the said sub-clause (vi) provides that "fair market value" means the value
determined in accordance with the method as may be prescribed.
9. cost of acquisition of capital asset, being rights of partner of llp [section 49(2aaa)]. where the capital
asset, being rights of a partner referred to in section 42 of the limited liability partnership act, 2008, became
the property of the assessee on conversion as referred to in clause (13 b) of section 47, the cost of acquisition of
the asset shall be deemed to be the cost of acquisition to him on the share or shares in the company
immediately before its conversion.
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10. cost of acquisition of a property subject to income tax under section 56(2)(7). where the capital gain
arises from transfer of a property, the value of which has been subject to income-tax under clause (7) of sub-section (2)
of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into
account for the purposes of the said sub-clause (7).
indexed cost of improvement [explanation (4) to section 48]
"indexed cost of any improvement" means an amount which bears to the cost of improvement the same
proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index
for the year in which the improvement to the asset took place.
the cost of improvement only after 1.4.1981 by the assessee will be indexed.
however, where the asset is acquired by the assessee from the previous owner in any mode given under
section 49(1), the expenses on improvement incurred by the previous owner after 1.4.1981 will also be indexed.
in this the following formula will be used to calculate indexed cost of improvement:
capital expenditure cost inflation index of indexed cost of on improvement the year of transfer
improvement cost inflation index in which the improvement was made by the assessee or by the
previous owner
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9
income from other sources
chargeability
"income form other sources" is the residuary head of income and income of every kind, which is not to be
excluded from the total income under the act, shall be chargeable to income-tax under this head if it is not
chargeable to income-tax under any of the preceding heads [section 56(1)]. thus the residuary head does not
come
into
operation
until
the
preceding
heads
are
excluded.
where a particular item of income is to be computed under a particular head of income as required under the
act, that item of income must be assessed as income falling under that particular head. income under this
head is to be computed in accordance with the method regularly employed by the assessee, provided the
method is such that the income can be properly deduced there from.(section 145). if books of accounts are
maintained on mercantile system, the income is to be computed on actual basis and on the other hand, if
books of accounts are maintained on cash system, the income is chargeable on receipt basis and expenditure
will be allowed on payment basis.
|
for charging income-tax under the head "income from other sources" the following conditions must be
satisfied:
1. there is income within the meaning of section 2(24) of the act.
2. the income is not exempt from tax under the provisions (section 10 to 13 a) of the act.
3. the income is not chargeable to tax under any first four heads viz. "salaries", "income from house
property", "profits and gains of business or profession" and "capital gains". income from other sources is,
therefore, residuary head of income.
the residuary head of income can be resorted to only if none of the specific heads is applicable to the
income in question and it comes into operation only after the preceding heads are excluded [s.g. mercantile
corporation (p) ltd. verses c.i.t.
section 56 (2) specifically provides for inclusion of some incomes under this head but it will certainly not
curtail the scope of the section in any way on account of the use of the words 'without prejudice to the
generality of the provisions. thus the list is not exhaustive. according to section 56 (2), under the head "income
from other sources" the following kinds of income shall be chargeable to income-tax:
(1) dividends [section 56(2) (1)];
(2) any winnings from lotteries, crossword puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature whatsoever [section
56(2)(1b)];
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(3) any sum received by the assessee from his employees as contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the employees' state insurance act, 1948 or
any other fund for the welfare of such employees [section 56(2)(1c)];
(4) income by way of interest on securities, if the income is not chargeable to income tax under the head
"profits and gains of business or profession." [section 56(2)(1d)];
(5) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not
chargeable to income-tax under the head "profits and gains of business or profession" [section 56(2)(2)];
(6) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the
letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income
from such letting, if it is not chargeable to income-tax under the head "profits and gains of business or
profession". [section 56(2)(3)];
(7) any sum received under a keyman insurance policy, including the sum allocated by way of bonus on
such policy, if such income is not taxable under the heads "salaries" and "profits and gains of business or
profession" [section 56(2)(4)];
(8) where any sum of money exceeding twenty-five thousand rupees is received without consideration by
an individual or hindu undivided family from any person on or after the 1st day of september 2004 but before
1st day of april, 2006, the whole of such sum. [section 56(2) (5)];
(9) any sum of money the aggregate value of which exceeds fifty thousand rupees, is received without
consideration, by an individual or a hindu undivided family, in any previous year from any person or persons on or
after 1st day of april 2006 but before the 1st day of october, 2009, the whole of the aggregate value of such sum
[section 56(2) (a) (6)].
according to clause (7) and clause (8) of sub-section (2) of section 56 [inserted by the finance act (no. 2) 2009],
the following incomes shall also be chargeable to income-tax under the head "income from other sources":
(1) where an individual or an a or a hindu undivided family receives, in any previous year, from any person
on or after 1st of october, 2009, any immovable property without consideration, the stamp duty value of which
exceeds fifty thousand rupees, the stamp duty value of such property [section 56(2)(b)(7)|, where any
immovable property is received for a consideration which is less than the stamp duty value of the property by an
amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration
[section 56(2)(b)(7)]. where any property, other than immovable property is received without consideration, the
aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market
value of such property [section 56(2)(c)(7)]. where any property, other than immovable property, is received for
a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty
thousand rupees, the aggregate fair market value of such property as exceeds such consideration.
however, section 56(2)(7) will not apply to any sum of money or property received(a) from any relative; or (b)
on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance; or (d) in
contemplation of death of the payer or donor, as the case may be; (e) from any local authority; (f) from any fund or
foundation or university or other educational institution or hospital or any trust or institution referred to in section
10(23c) or (g) from any trust or institution registered under section 12aa.
however, section 56(2)(5) and section 56(2)(6) will not be applicable to any sum of money received(a) from
any relative; or (b) on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance;
or (d) in contemplation of death of the payer.; (e) from any local authority as defined in the explanation to
clause (20) of section 10; or (f) from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred to in clause (23c) of section 10; or (g)
from any trust or institution registered under section 12aa. relative of an individual here means(1) spouse of the
individual; (2) brother or sister of the individual; (3) brother or sister of the spouse of the individual; (4) brother or
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sister of either of the parents of the individual; (5) individual; (6) any lineal ascendant or descendant of the
spouse of the individual; (7) spouse of the person referred to in clauses (2) to (6).
(2) income by way of interest received on compensation or an enhanced compensation referred to in clause
(b) of section 145a [section 56(2)(8)].
according to clause (7a) of sub-section (2) of section 56 [inserted by the finance act, 2010], the following
income shall also be chargeable to income-tax under the head "income from other sources":
where a firm or a company not being a company in which the public are substantially interested, receives, in
any previous year, from any person or persons, on or after the 1st day of june, 2010, any property, being shares of a
company not being a company in which the public are substantially interested,
(1) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of
the aggregate fair market value of such property;
(2) for a consideration which is less than the aggregate, fair market value of the property by an amount exceeding
fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration.
the proviso to this clause states that this clause shall not apply to any such property received by way of a
transaction not regarded as transfer under clause (6a) or clause (6e) or clause (6cb) or clause (6d) or clause (7) of
section 47.
besides the aforesaid incomes, the following incomes are also chargeable under this head because they are not covered
under any other head:
(1) director's fees
(2) examination fee received by a lecturer from a university.
(3) income derived by sub-letting a house by a tenant
(4) income from undisclosed sources [cj.t. verses g. hyatt (1971) .
(5) interest on own contribution to unrecognized provident fund,
(6) interest on loans, deposits or current account,
(7) interest on investment of assets during liquidation proceeding,
(8) interest on foreign government securities
(9) income from vacant plot of land.
(10) ground rent,
(11) insurance commission,
(12) mining rent and royalties,
(13) income from forest produce
(14) income received by a non-professional writer from a newspaper for writing a story.
(15) annuity payable under will, trust, settlement or any other legal obligation.
(16) annuity payable under insurance policy,
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(17) casual income in excess of rs. 5000.
(18) salary of a m.p., m.l.a. or m.l.c.
(19) income received from units of u.t.i.
(20) family pension received by the widow and heirs of deceased employees,
(21) money received by an assessee from a business/profession discontinued prior to the commencement of the
previous year. [roma bose verses i. to. (1974)
(22) interest on investment, of salary funds, earned before commencement of business [tutrcorin alkali
chemicals and fertilisers ltd. verses c.i.t. (1937)
(23) tax payable on the assessee's salary paid by the indian concern by virute of its contractual obligation, the
assessee a foreign national not being an employee of the indian concern.[emile webber verses c.i.t.
(24) compensation received for use of business assets. [sultan brothers (p) ltd. verses c.i.t. (1964).
(25) annuity payable to the lender of a trade mark [c.i.t verses. lal chand jain (1968) 69 itr 65 (delhi)]
deductions
section 57 deals with deduction to be made in the income under this head. the deductions are:
(1) in case of dividends, other than dividends referred to in section 115-o, or interest on securities, any
reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of
realizing such dividend or interest on behalf of the assessee.
(1a) in case of income of the nature referred to section 2(24) (x), if such sum is credited by the assessee to
the employee's account in the relevant fund or funds on or before the due date.
(2) in case of income from machinery, plant, furniture, buildings, etc. being let on hire, the following
deductions are allowed on the same pattern as is done in the case of "income from business or profession",
e.g., (a) current repairs of buildings, (b) insurance premium paid against risk of damage or destruction of the
premises, (c) repairs and insurance of machinery, plant or furniture and (d) depreciation on buildings,
machinery, plant or furniture.
(2a) in the case of income in the nature of family pension, a deduction of a sum equal to 33 1/3% of such
income or rs. 15,000, whichever is less.
(3) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and
exclusively for the purpose of making or earning such income.
(4) in the case of income by way of interest received on compensation or enhanced compensation referred to
in clause (8) of sub-section (2) of section 56, a deduction a sum equal to fifty per cent of such income and no
deduction shall be allowed under any other clause of this section.
section 58(1) provides that the following amounts shall not be deductible in computing the income chargeable
under the head "income from other sources" namely:
(a) in the case of any assessee. (1) any personal expenses of the assessee.
(1-a) any expenditure of the nature referred to in sub-section (12) of section 40-a.
(2) any interest which is chargeable under the income-tax act which is payable outside india unless the tax from
it has been deducted at source.
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(3) any payment which is chargeable under the head "salaries", if it is payable outside india, unless tax has been
paid thereon or deducted there from.
section 58(2) provides that any amount specified by section 40a is not deductible while calculating income
under the head "income from other sources".
section 58(3) provides that in case of foreign companies expenditure in respect of royalties and technical
service fees as specified in section 44d is not deductible,
section 58(4) provides that in the case of an assessee having income chargable under the head "income
from other sources", no deduction in respect of any expenditure or allowance in connection with such income shall
be allowed under any provision: of this act in computing the income by way of any winnings from lotteries, crossword
puzzles, races including horse races, card games and other games of any sort or firm, gambling or betting of any
form or nature, whatsoever. however it will not apply in computing the income of an assessee, being the owner of
horses maintained by him for running in horse races, from the activity of owning and maintaining such horses,
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10
income of other persons included in assessee's total income
income-tax is levied on an assessee generally in respect of his own income. however, in some cases the incometax law deviates from this general principle and the assessee may also be assessed in respect of income of some other
persons. sections 60 to 65 of the income-tax act, 1961 have been enacted to counteract growing tendency on the
part of the tax payers to endeavor to avoid or reduce the tax liability in such a way that the income should no longer be
received by him and at the same time he may retain powers over or interest in the property or its income. thus the
object of clubbing of income is to prevent a person from escaping or reducing his tax liability by transfer of income
generating or by transfer of income to persons who do not have taxable income.
circumstances in which an item of income earned or received by a person is included in the total income of
another person
the circumstances in which a particular item of income is earned or received by a certain person, it becomes
includable in the total income of another person are discussed below:1. transfer of income where there is no transfer of assets (section 60)
according to section 60 if a person transfers to another person certain income but does not transfer the asset which
produced the said income, such income will not be assessed in the hands of the transferee but it will be included in
the total income of the transferor. thus when income alone is transferred without transfer of the asset giving rise to such
income, it is deemed to be the income of the transferor. section 60 is applicable irrespective of whether the transfer of
income is revocable or not and whether it has been effected before or after the commencement of this act. "transfer"
for this purpose includes any settlement, trust, covenant, agreement or arrangement. cases falling under section 60 do
not have any exception.
2. revocable transfer of assets (section 61)
according to section 61 all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to
income-tax as the income of the transferor and shall be included in his total income. "revocable transfer" for this
purpose has been defined in section 63 to mean:
(1) a transfer containing any provisions for the retransfer directly or indirectly of the whole or any part
of the income or assets to the transferor, or
(2) a transfer which in any way gives the transferor a right to re-assume power directly or indirectly over the
whole or any part of the income or assets.
exception (section 62): section 61 does not apply to any income arising to any person by virtue of transfer if the
following conditions are satisfied:
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where the transfer is by way of trust and it is not revocable during the lifetime of the beneficiary and in the
case of any other transfer, which is not revocable during the life-time of transferee; or if the transfer was made
before first april, 1961, which is not revocable for a period exceeding six years: provided that the transferor
derives no direct or indirect benefit from such income in either case.
3. income of individual to include income of spouse, minor child, etc. [section 64(1)] income of spouse and
son's wife
in computing the total income of any individual, the following incomes are to be included:
(a) remuneration to the spouse from a concern in which individual has substantial interests [section 64(1)
(ii)j. from the assessment year 1976-77, in computing the total income of an individual there shall be included all such
income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or other
form of remuneration whether in cash or kind from a concern in which such individual has a substantial interest.
the proviso to section 4(1 )(ii) provides that this rule does not apply where the spouse of the said individual possesses
technical or professional qualification and the income to the spouse is solely attributable to the possession of his/her
technical or professional knowledge or experience. [see batta kalyani verses cit (1985) 154 59 (ap) and jm mokashi
verses cit, (1994) 207 itr 252 (bom)].
where both husband and wife have substantial interest in a concern and both are in receipt of income by way of
salary, commission, remnneration etc. from the said concern, such income will be included in the case of the
husband or wife, whose total income, excluding income received from the concern, is greater (explanation 1 to
section 64).
an individual is deemed to have substantial interest in a concern: (1) in a case where the concern is a company, he by
himself or along with his relatives beneficially holds equity shares carrying not less than 20% voting power;
(2) in any other case, he by himself or together with his relatives is entitled to 20% of the profits of such
concern (explanation 2).
(b) income to spouse from the assets transferred [section 64(1) (4)|. where certain assets are transferred by an
individual to the other spouse, otherwise than for adequate consideration or in connection with an agreement to live
apart, then the income arising to the transferee, directly, out of such transferred assets shall be included in the total
income of the individual [subject to the provisions of section 27 clause (1)]. for the application of this clause there
must exist a relationship of husband and wife on the date of transfer (philip john flasket thomas verses c.i.t).
(c) income from assets transferred to the son's wife [section 64(1) (6)|. in computing the total income of an
individual there shall be included all such income as arises to the son's wife of such individual from the assets
transferred directly or indirectly at any time on or after june, 1973 by the individual to the daughter-in-law otherwise
than for adequate consideration.
(d) income arising from assets transferred for the benefit of spouse [section 64(1) (7)]. in computing the total income
of any individual there shall be included all such income as arises to any person or association of persons from all
assets transferred directly or indirectly otherwise than for adequate consideration to the person or association of
persons by such individual to the extent to which the income from such assets is for the immediate or deferred benefit of
his or her spouse.
(e) income arising from the assets transferred for the benefit of his son's wife [section 64(1) (8)]. in computing
the total income of any individual there shall be included all such incomes as arises to any person or association
persons from assets transferred directly or indirectly on or after first day of june, 1973, otherwise than for
adequate consideration to the person or association of persons by such individual to the extent to which the income
from such assets is for the immediate or deferred benefit of his son's wife. this provision is effective from the assessment
year 1985-86.
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in smt. mohini thapar verses c.i.t., it has been held that not merely the income that arises directly from the asset
transferred but also that arises indirectly from the asset transferred is to be included in the income of the transferor. in
this case mr. thapar made certain cash gifts to his wife. the wife invested the money in shares and interest yielding
securities. the incomes from these investments were included in the income of mr. thapar by the assessing officer. this was
upheld by the supreme court.
explanation 3 to section 64 provides that for the purposes of clauses (iv) and (vi), where the assets transferred by
an individual to his spouse or son's wife are invested by the transferee,
(1) in any business, (not being in the nature of capital contribution in a firm), proportionate income arising
to the transferee attributable to the investment; and
(2) in the nature of capital contribution in a firm, any interest receivable by the transferee attributable to
such investment, shall be included in the total income of the individual.
for this purpose, the proportion shall be with reference to the value of investment aforesaid as on the first day of the
previous year to the total investment in the business by the transferee as on that day.
transfer of house property. if the asset transferred by an individual otherwise than for adequate consideration to
the spouse or minor child is a house property, the provisions of section 27 shall apply. in such a case the transferor shall
be deemed to be the owner and income shall be accordingly computed under the head 'income from house property'.
however the purpose of deeming as a owner is only for a limited purpose of charging income from house property. in
sevanthilal verses c.i.t], (1967) 68 itr 503, the supreme court held that capital gain arising on the sale of gifted asset
shall be treated as income arising from such asset. therefore, capital gain on the sale of transferred house property
can be clubbed.
income of a minor child [section 64(1-a)]
in computing the total income of any individual, there shall be included all such incomes as arises or accrues to
his minor child [section 64(1 -a)]. the proviso to the sub-section provides that the following incomes of the minor child
will not be included in the income of his or her parent:
(a) income on account of manual work done by the minor child, or
(b) income due to activity involving of his skill, talent or specialized knowledge and experience.
the explanation provides that the income of the minor child will be included,
(a) where the marriage of his parents subsists, in the income of that parent whose total income is greater, or
(b) where the marriage of his parents does not subsist, in the income of that parent who maintains the
minor child in the previous year
if the income of a minor child is once included in the total income of either parent, any such income arising in
any succeeding year will not be included in the total income of the other parent, unless the assessing officer is satisfied,
after giving that parent an opportunity of being heard, that it is necessary so to do.
according to section 64( 1 -a) the clubbing provision will not apply in the case of income of minor child suffering from
any disability as specified in section sou. section 10(32) provides that in the case of an assessee whose total income
the minor child's income is to be included under section 64(1-a), exemption is given up to rs. 1500 (not exceeding the
income clubbed) in respect of each such minor child.
"child" in relation to an individual, includes a step-child and an adopted child of that individual [section 2 (15b)].
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in c.l t. verses shri prem bhai parekh (1970) 77 itr 27 (sc), the assessee gifted a sum of rs. 75,000 to each of his four
sons, on his retirement from a firm. the firm was reconstituted. the major son became a partner and three minor
sons were admitted to the benefits of the firm. the income arising to the minors by virtue of their admission to the
benefits of the firm was sought to be included in the total income of the assessee. the court held that there was no
nexus between the transfer of assets and the income in question; the connection between the gift mentioned earlier
and the income in question is remote one.
income of huf [section 64(2)] clubbing of income before partition: where a member of a hindu undivided family has
converted or transferred self acquired property for otherwise than for adequate consideration into joint family
property or thrown into the common stock of the family, income arising there from is taxable as the income of the
transferor member.
clubbing of income after partition: if the converted property is subsequently partitioned among the members of
the family, the income derived from such converted property as is received by the spouse of the transferor will be
taxable as the income of the transferor
important points and case law
it should be noted that income from transferred asset is clubbed but income earned on investments made out of
clubbed income shall not be clubbed. in c.i. t. verses m.s.s. raj an, (2001) 252 itr 126 (mad), the assessee transferred a
flat to his wife. the wife earned rental income from the flat. such rental income was clubbed with the income of the
assessee. the wife invested the rental income in fixed deposits and earned interest income. it was held that such
interest income cannot be clubbed with the income of the husband. the intention of the legislature is to club income
on asset transferred without adequate consideration and not income on income,
in thulsidas kilachand verses. c.i.t., (1961) 42 itr 1 (sc), it was held that natural love and affection would not be
adequate consideration for the purposes of section 64(1).
in seventhilal maneklal sheth verses c.i. t., (1982) 68 itr 503 (sc), the supreme court held that the capital gain
arising on sale of the asset transferred shall be treated as income arising from asset transferred for the purposes of
section 64(1). therefore such income shall be clubbed with the income of the transferor of the asset.
in vinod kumar rotilal . c7.1, (1973) 100 itr 564 (gujarat), it was held that in case of income from assets
transferred to the spouse, the relationship of husband and wife should subsist both at the time of transfer of asset
and at the time of accrual of income.
in cj.t. verses .j.m. gotla, (i983) 156 itr 323 (sc), the supreme court held that income for clubbing purposes includes
losses. it was further held in the former case that the clubbed income retains the same head under which it is earned.
similar was the decision in c.i.t verses doraiswamy chetty, (1989).
in damodar k. shah verses c.i.t, (2001) 119 taxman (gujarat), it was held that time lag between transfer of asset and
actual income derived does not affect clubbing of income, i.e., income can be clubbed. in this case the assessee made
payments of premium on policy taken in the name of his wife. the maturity proceeds were invested and income
earned thereon in the name of his wife. such income was clubbed in the hands of the husband.
PREPARED BY

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RADHIKA SETH, PLEASE VOTE , BALLOT No. 2

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capital and revenue

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capital expenditure and revenue expenditure

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cases where income of previous year is assessed in the same year

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not ordinarily resident [section 6 (6) (a) j

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residential status of hindu undivided family, firm or other association of persons

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residential status in case of other source of income

relationship between residential status and incidence of income tax

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the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a

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partially agricultural income (rule 7)

income derived from the manufacture of tea

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expenditure incurred in relation to income not includible in total income

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unrealized rent received subsequently to be charged to income tax

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income taxable under business or profession (section 28)

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whether or not such arrangement, understanding or action is intended to be enforceable by legal

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distinction between capital expenditure and revenue expenditure

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