Course Code: LAW121

Course Title: law of Taxation

Module 2: Module 2- THE INDIAN INCOME TAX ACT, 1961
1. Definition of Assessee, Previous Year, Assessment Year, basis of charge (Receipt,
Accrual and Arisal)
2. Definition of Income including Agricultural Income and Casual Income
3. Exemption from taxation
4. Taxability under’ specific heads’: Income from salaries, Income from house property,
Income from business or profession, Income from ‘capital gains’, Income from other
sources
5. Clubbing of income
6. Treatment of losses – set-off- carry forward of loss
7. Procedure for assessment: Deduction – Assessment of special class
8. Wealth Tax Act: Definition of person, meaning of wealth, net wealth, exempted
wealth, net wealth, valuation date, procedure for assessment.

AN OVERVIEW OF FINANCE BILL

The Income tax Act contains the provisions for determination of taxable income, determination
of tax liability, procedure for assessment, appeal, penalties and prosecutions. It also lays down
the powers and duties of various income tax authorities. The income tax law in India consists
of the following components:

Components of Income Tax Law

Income Tax Act, 1961 This Act came into force on 1st April, 1962 and contains sections
1 to 298, wherein each section may have sub- sections, clauses or
sub-clauses and may also have Provisos and Explanations.
Annual Finance Act Every year Budget is presented before the parliament by the
finance minister. One of the important components of the Budget
is the Finance Bill. This Bill contains various amendments in the
Income- Tax Act and other tax laws to prescribe the additions and
deletions therein. When the Finance Bill is approved by both the
houses of parliament and receives the assent of President, it
becomes the Finance Act.

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 Income Tax Rules, For implementation of the Act and for administration of the direct
1962 taxes, Central Board of Direct Taxes (CBDT) is empowered to
frame these rules from time to time. These rules are collectively
called as the Income-tax Rules, 1962.
Notifications Notifications are issued either by Central Government or by
CBDT to take care the procedural aspects of the Act from time to
time. These notifications are binding on everyone, i.e., on Income
Tax Authorities as well as on the assessees.
Circulars/ Circulars and clarifications are issued by the CBDT to clarify the
Clarifications doubts regarding the scope and meaning of certain provisions of
the law and primarily to provide guidance to the Income Tax
officers. These circulars are binding on the Income Tax
Authorities but not on the assessee however an assessee can take
benefit of these circulars.
Judicial Decisions Decisions pronounced by Supreme Court become Judicial
(Case Laws) Precedent and are binding on all the courts, Appellate Tribunal,
Income Tax Authorities and on assesses. Further, High Court
decisions are binding on assesses and Income Tax Authorities
which come under its jurisdiction unless it is overruled by a higher
authority. The decision of a High Court can not bind other High
Court.

Finance Bill as part of the Union Budget is presented usually in the month of February every
year and this bill contains amendments in direct as well as indirect taxes. It is presented in the
Parliament by the Union Finance Minister. The finance bill is passed by both the houses of
Parliament after it is being tabled and necessary recommendation / amendments have been
made in it. Once the bill has been passed by the Parliament, it goes to the Hon’ble President of
India for presidency assent. After President’s assent, the finance bill becomes the Finance Act.

The Finance Bill is presented contains detailing the imposition, abolition, remission, alteration
or regulation of taxes proposed in the Budget. It is through the Finance Act that amendments
are made to the various Acts like Income Tax Act 1961, Customs Act, 1962 etc. In short,
Finance Bill can be considered as an umbrella Act. When the proposals are introduced to the

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Parliament it is called as a Finance Bill. Once it is passed by the Parliament and assented to by
the President, Finance Bill becomes the Finance Act for that year.

The effective date of applicability of provisions of the Finance Act is usually mentioned in the
notification in the official gazette or in the Act itself. Generally, the amendments by the Finance
Act are made applicable from the first day of the next financial year. Likewise, amendments
by Finance Act, 2021 are effective from 1st April, 2021. Regarding indirect taxes, the ad
valorem tax rates (tax rates based on value) are effective from the midnight of the date of
presentation of the Union Budget.

IMPORTANT DEFINITIONS

All incomes are categorized under five Heads of Income under the Income tax Law. There is a
charging section under each head of income which defines the scope of income chargeable
under that particular head. Accordingly, income earned is classified under the following heads:

1. Income under the head salary

2. Income under the head House Property
3. Income under the head Profits and Gains from Business and Profession (PGBP)
4. Income under the head Capital Gains
5. Income under the head Other Sources

Every person, whose total Income of the previous year exceeds the maximum amount which is
not chargeable to tax, is an assessee and such total income shall be chargeable to Income Tax
at the rates prescribed in the Act for that relevant assessment year. However, this Total income
shall be determined on the basis of the residential status of an assessee.

Therefore, for the purposes of levy income tax, one must have an understanding of the various
concepts or definitions such as previous year, assessment year, Income, total income, person,
assessee, residential status etc. These as explained as under:

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Person [Section 2(31)]

Income-tax is charged in respect of the total income of the previous year of every person.
Hence, it is important to know the definition of the word person. As per section 2(31), Person
includes:

Individual: An individual is a natural human being; i.e.; male, female, minor or a person of
sound or unsound mind.

HUF: Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of
the Income-tax Act, 1961 and is considered as separate entity for the purpose of assessment
under the Act. Under Hindu Law, an HUF is a family which consists of all persons lineally
descended from a common ancestor and includes their wives and unmarried daughters. An
HUF cannot be created under a contract, it is created automatically in a Hindu Family. Jain and
Sikh families even though are not governed by the Hindu Law, but they are treated as HUF
under the Act.

Company: Section 2(17) of the Income tax Act, 1961 defines the term company to mean:

i. any Indian company, or

ii. anybody corporate incorporated by or under the laws of a country outside India, i.e., a foreign

company, or

iii. any institution, association or body which is or was assessable or was assessed as a company
for any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable

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or was assessed under this Act as a company for any assessment year commencing on or before
the 1st day of April, 1970, or

iv. any institution, association or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by general or special order of the CBDT to be a company only for
such assessment year or assessment years as may be specified by the order of CBDT.

Firm: It includes a partnership firm whether registered or not and shall include a Limited
Liability Partnership as defined in the Limited Liability Partnership Act, 2008.

Association of Person ‘AOP’: Two or more persons join in for a common purpose or common
action to produce income, profits or gains. It may consist of individuals, HUF, companies,
firms, etc. as members of AOP. The object of the formation of AOP must be to produce income.
It is not enough that the persons receive the income jointly.

Body of Individuals ‘BOI’: BOI denote the status of persons who are assessable in like
manner and to the same extent as the beneficiaries individually.

Association of Person ‘AOP’ Body of Individual ‘BOI’

An association implies a voluntary getting Body of individuals would be just a body
together for a definite purpose without an intention to get-together
Members of an association of persons can be Members of body of individuals can be
individual or non-individuals (i.e. artificial individuals only
persons)
The object of the formation of AOP must be The object of the formation of BOI is not to
to produce income. produce income. It is formed for the social
welfare.

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A Local Authority: It means a municipal committee, district board, body of port
commissioners, or other authority legally entitled to or entrusted by the Government with the
control and management of a Municipal or local fund.

Every artificial / juridical person not falling within any of the above categories: This is a
residuary clause. If the assessee does not fall in any of the first six categories, he is assessed
under this clause. Generally, a statutory corporation, deity or charitable institution or an
endowment for charitable or religious purposes falls under artificial juridical person.

Assessee [Section 2(7)]

“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 benefits or of the income of any other person
in respect of which he is assessable, or of the loss sustained by him or by such other person, or
of the amount of refund due to him or to such other person;

(b) every person who is deemed to be an assessee under any provision of this Act;

(c) every person who is deemed to be an assessee in default under any provision of this Act.

Accordingly, assessee can be categorized as under:

Assessee Example
Normal Assessee: An individual who is Mr. A is a salaried individual who has been
liable to pay taxes for the income earned paying taxes on time on his income.
during a financial year is known as a normal
assessee.
Representative Assessee: There may be a Mr. X. He has been residing abroad for the
case in which a person is liable to pay taxes past 7 years. However, he receives rent for
for the income or losses incurred by a third two house properties he owns in India. He
party. Such a person is known as a takes the help of a relative, Mr. Y, to file taxes
representative assessee. in India. In this case, Mr. Y acts as a
representative assessee. If the assessing
officer plans to investigate the tax filing, Mr.
Y will be asked to provide the necessary

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 documents as he is the guardian of the
property and represents Mr. X.
Deemed Assessee: An individual might be Deemed assessees can be:
assigned the responsibility of paying taxes by ▪ The eldest son or a legal heir of a
the legal authorities and such individuals are deceased person who has expired
called deemed assessees. without writing a will.
▪ The executor or a legal heir of the
property of a deceased person who
has passed on his property to the
executor in writing.
▪ The guardian of a lunatic, an idiot, or
a minor.
▪ The agent of a non-resident Indian
receiving income from India.
Assessee in Default: Assessee-in default is a An employer is supposed to deduct taxes
person who has failed to fulfil his statutory from the salary of his employees before
obligations as per the income tax act such as disbursing the salary. He is, then, required to
not paying taxes to the government or not file pay the deducted taxes to the government by
his income tax return. the specified due date. If the employer fails
to deposit the tax deducted, he will be
considered as an assessee-in-default.

Assessment Year [Section 2(9)]

“Assessment year” means the period of twelve months commencing on 1st April every year.
Therefore, the period beginning on 1st April of one year and ending on 31st March of the next
year. Income of previous year of an assessee is taxed during the following assessment year at
the rates prescribed by the relevant Finance Act.

Exception to the General Rule: In the following situation, the Income of previous year of an
assessee is assessed in the previous year itself:

1. Income of Non-Resident from Shipping: [Section 172]- A non-resident who is carrying on

a shipping business and earns income at any port in India, shall be charged to tax before the
ship is allowed to leave Indian Port. Hence income is deemed and computed at a presumptive

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rate of 7.5% of the amount of the fare/ freight charged by the non-resident ship from the Indian
port.

2. Income of persons leaving India either permanently or for long duration: [Section 174]-
When it appears to the Assessing Officer (A.O.) that an individual may leave India and has no
intentions of returning back during an assessment year, then the income is charged to tax during
the same Assessment year.

3. Income of bodies formed for short duration: [Section 174A]- When it appears to the
Assessing Officer (A.O.) that any organization is formed for a particular event and is likely to
be dissolved during the current assessment year.

4. Income of person trying to transfer his assets with a view to avoid tax: [Section 175]-
When it appears to the Assessing Officer (A.O.) that during the current assessment year any
person is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets to
avoid payment of any liability under this Act, the total income of such person for the period
from the expiry of the previous year to the date, when the Assessing Officer commences
proceedings under this section is chargeable to tax in that assessment year.

5. Income of discontinued business: [Section 176]- Where any business or profession is

discontinued in any assessment year, the income of the period from the expiry of the previous
year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be
charged to tax in that assessment year.

Previous Year [Section 3]

Income tax is payable on the income which is earned during the Previous Year and it is assessed
in the immediately succeeding financial year which is called an Assessment Year.

All assesses are required to follow a uniform previous year, i.e., The Financial Year (1st April
to 31st March) as their Previous year. Although assessee may maintain books of accounts on
calendar year basis (1st January to 31st December) but his previous year for income tax
purposes shall be the Financial year.

Each financial year is both, a previous year as well as an assessment year. It is the previous
year for the income earned during the financial year and assessment year for the income earned
during the preceding previous year.

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In case of newly set up business or profession or a source of income newly coming into
existence, the first previous year will be the period commencing from the date of setting up of
business/profession or as the case may be, the date on which the source of income newly comes
into existence and ending on the immediately following March, 31.

Income [Section 2(24)]

“Income is the consumption and savings opportunity gained by an entity within a specific
timeframe, which is generally expressed in monetary terms. However, for households and
individuals, “income is the sum of all the wages, salaries, profit, interests payments, rents,
and other forms of earnings received in a given period of time.”

In general terms, Income is a periodical monetary return with some sort of regularity. However,
the Income Tax Act, even certain income which does not arise regularly are treated as income
for tax purposes e.g. Winnings from lotteries, crossword puzzles.

The definition of Income as given in Section 2(24) of the Act starts with the word includes
therefore the list is inclusive not exhaustive. The definition enumerates certain items, including
those which cannot ordinarily be considered as income but are treated statutorily as such.

As per section 2(24), the term income includes:

[Link] Income Taxable Head

1 Profits and gains PGBP
2 Dividend Other Sources
3 Voluntary contributions Generally, exempt under
Section 11 and 12
4 The value of any perquisite or profit in lieu of salary Salary
5 Any special allowance or benefit specifically granted Salary (Generally exempt)
to the employee to meet expenses wholly, necessarily
and exclusively for the performance of the duties of
an office or employment of profit
6 City Compensatory Allowance/ Dearness allowance Salary
7 Benefit or Perquisite to a Director / a person having Salary (If as per employment
substantial interest/ relative of director

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 agreement) Else under Other
Sources (If not in the terms of
employment agreement)
8 Any Benefit or perquisite to a Representative Other Sources
Assessee
9 Deemed profits chargeable to tax under section 28 or PGBP
section 41 or section 59
10 Capital Gain Capital Gains
11 Insurance Profit PGBP
12 Banking income of a Co-operative Society PGBP
13 Winnings from Lottery Other Sources
14 Employees Contribution Towards Provident Fund PGBP if not deposited by the
assessee to the specified fund
15 Amount Received under Keyman Insurance Policy PGBP
16 Amount received for not carrying out any activity: PGBP
Any sum referred to in Section 28(va), i.e. any sum,
whether received or receivable in cash or kind, under
an agreement for -
(i) not carrying out any activity in relation to any
business or profession
(ii) not sharing any know-how, patent, copyright,
trademark, license, 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
17 Any sum referred to in clause (v) or (vi) of sub- Other Sources
section (2) of section 56
18 Gift received for an amount exceeding Rs. 50,000 Other Sources
19 Any consideration received for issue of shares as Other Sources
exceeds the fair market value of the shares referred in
section 56(2) (viib)

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 20 Amount received as an advance or otherwise in the Other Sources
course of negotiation for transfer of a capital asset
referred to in clause (ix) of section 56(2)
21 Any sum of money or value of property received Other Sources
without consideration or for inadequate consideration
as referred to in clause (x) of Section 56(2)
22 Any sum of money or value of property received Other Sources
without consideration or for inadequate consideration
as referred to in clause (x) of Section 56(2)
23 Any compensation or payment in connection with Other Sources
termination of employment as referred under clause
(xi) of Section 56(2)
24 Assistance in the form of a subsidy or grant or cash PGBP
incentive or duty drawback or waiver or concession
or reimbursement (by whatever name called) by the
Central Government or a State Government or any
authority or body or agency in cash or kind to the
assessee other than the subsidy or grant or
reimbursement which is taken into account for
determination of the actual cost of the asset in
accordance with the provisions of Explanation 10 to
clause (1) of section 43.

Concept of Income

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 ▪ Cash or kind : Income may be received in cash or kind. When the income is received
in kind, its valuation will be made in accordance with the rules prescribed in the
Income-tax Rules, 1962.
▪ Receipt basis/ Accrual basis: Income arises either on receipt basis or on accrual basis.
It may accrue to a taxpayer without its actual receipt. The income in some cases is
deemed to accrue or arise to a person without its actual accrual or receipt. Income
accrues where the right to receive arises.
▪ Legal or illegal source: The income-tax law does not make any distinction between
income accrued or arisen from a legal source and income tainted with illegality. In CIT
v. Piara Singh (1980) 3 Taxman 67, the Supreme Court has held that if smuggling
activity can be regarded as a business, the confiscation of currency notes by customs
authorities is a loss which springs directly from the carrying on of the business and is,
therefore, permissible as a deduction.
▪ Temporary/Permanent: There is no difference between temporary and permanent
income under the Act. Even temporary income is taxable under the Income Tax Act.
▪ Lumpsum / Instalments: Income whether received in lump sum or in instalment is
liable to tax. For example: Arrears of salary or bonus received in lump sum is income
and charged to tax as salary.

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 ▪ Gifts: Normally, gifts constitute a capital receipt in the hands of the recipient. However,
certain gifts are brought within the purview of income-tax, for example, receipt of
property without consideration is brought to tax under section 56(2)(x). Gifts of
personal nature do not constitute income subject to maximum of Rs. 50,000 received in
cash. The recipient of gifts like birthday, marriage gifts, etc. is not liable to income tax
as received in kind however as per the Finance Act, 2009 gifts in kind having fair value
upto Rs. 50,000 are not liable to tax but having fair value of more than Rs. 50,000 is
wholly taxable.
▪ Revenue or Capital receipt: Income-tax, as the name implies, is a tax on income and
not a tax on every item of money received. Therefore, unless the receipt in question
constitutes income as distinguished from capital, it cannot be charged to tax. For this
purpose, income should be distinguished from capital which gives rise to income.
However, some capital receipts have been specifically included in the definition of
income.

Agricultural Income

Introduction

The Indian government has defined various sections to categorise income and earnings for
better transparency while calculating the total taxable income and for the citizens to file taxes.
One such category is agriculture income.

Understanding “what is agriculture income” is critical, as it is taxed differently under the two
tax regimes. Agriculture income is the total revenue an individual or entity earns from sources,
including land farming, commercial produce from horticulture land and buildings on identified
agricultural land.

Under the Income Tax Act of 1961, section 2(1A) defines the agricultural revenue of an
individual or entity.

What Is Agriculture Income?

To define agriculture income, it is the total revenue generated by an individual or entity by

executing agricultural activities on identified agricultural land. Section 2(1A) of the Income
Tax Act of 1961 defines agriculture income under the following activities.

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● Revenue or rent generated through activities executed on agricultural land situated in India
for agricultural purposes

● Income or revenue generated by the commercial sale of produce grown on agricultural land

● Income or revenue generated by leasing or renting buildings on or around agricultural land

(the tenant should be a farmer or cultivator and use the building for a warehouse/storeroom,
residential space or outhouse)

Furthermore, the land on which the building is situated should be assessed for land revenue or
through a local rate set and collected by local government officers.

For an income to be categorised as agricultural income and for a better understanding of the
agricultural income meaning, consider the following factors.

● Existence: The income earned should come from an existing piece of land.

● Utilisation: The rent or revenue and the income generated by the tenant or the cultivator
from the agricultural land should be through agricultural operations only on the piece of land.
The income also includes the marketing expenses done to promote the agricultural produce.

● Cultivation: The income will be considered agricultural income if the income is generated
by way of the cultivation of land. Such an income includes revenue from all land produce such
as fruits, pulses, grains, commercial crops etc. However, the income does not include revenue
from activities such as poultry farming, dairy farming etc., on the agricultural land.

● Optional Ownership: The cultivators do not necessarily have to be the owner of the land
through which they generate the agricultural income. However, the individual must possess a
monetary interest in the land as an owner or a mortgagee.

Meaning of Agricultural Income

The Income-tax Act has its own definition of agricultural income which constitutes the
following 3 main activities:

I. Rent or revenue earned from agricultural land situated in India:

Rent is the amount received to grant the right to use the land. There are many possible sources
of income that can be derived from land. An example would be fees received for renewal of
grant of land on lease.

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However, the amount received on the sale of land is not covered under the definition of
agricultural income.

II. Income from agricultural land in the following ways:

1. Agriculture: The meaning of agriculture though not covered in the Act, has been laid
down by the Supreme Court in the case CIT v. Raja Benoy Kumar Sahas Roy where
agriculture has been explained to consist of two types of operations –basic
operations and subsequent operations.

• The basic operations would include cultivation of the land and consequently
tilling of the land, sowing of seeds, planting and all such operations that require
human skill and effort directly on the land itself.

• The subsequent operations would include operations that are carried out for
growth and preservation of the produce like weeding, digging soil around the
crops grown etc and also those operations which would make the product fit for
use in the market like tending, pruning, cutting, harvesting, etc. Income derived
from saplings or seedlings grown in a nursery would also be considered to be
agricultural income whether or not the basic operations were carried out on land.

2. Through the performance of a process by the cultivator or the receiver of rent (in-
kind) that results in the agricultural produce being fit to be taken to the
market: Such processes involve manual or mechanical operations that are ordinarily
employed to make the agricultural produce fit for the market and the original character
of such produce is retained.

3. Through the sale of such agricultural produce: Where the produce does not undergo
ordinary processes employed to become marketable, the income arising on sale would
generally be partly agricultural (exempt) income and part of it will be non-agricultural
(taxable) income.

Agricultural Income in Income Tax: Exemption Limit, Tax Calculation, Examples

Agriculture is said to be the primary occupation in India. It is usually the only source of income
for the large rural population in India. The country as a whole is entirely dependent on
agriculture for its basic food requirements. The government has numerous schemes, policies

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and other measures to promote growth in this sector – one of them being an exemption from
income tax.

It may seem like the fact that exemption to income tax is all that we need to know when it
comes to the taxation of agricultural income but there is more to it. Let us take a look at the
provisions of the law in this regard.

The Income Tax has prescribed rules to make this bifurcation regarding agricultural and
non-agricultural produce for products like tea, coffee, rubber, etc

Operation Agricultural Non-

Income Agricultural
Income

Growing and Manufacturing Tea 60% 40%

Manufacturing Rubber 65% 35%

Growing and curing Coffee 75% 25%

Coffee grown, cured, roasted, and grounded with or 60% 40%

without mixing chicory or other flavouring ingredients

III. Income derived from farm building required for agricultural operations:

The conditions for classifying income derived from farm building as agricultural income are
as follows:

• The building should be on or in the surrounding area of the agricultural land. Also, the
rent receiver or cultivator of the land, by reason of his connection with the land, requires
the building as a house to stay or as a storehouse or uses it for these kinds of situations

• Either of the two conditions should be satisfied:

• The land is assessed by either land revenue or a local rate assessed and collected
by government officers; OR

• If the above condition is not satisfied, the land should not be located within the
following region:

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 Aerial distance from municipality* Population as per last preceding census.

Within 2 kms 10,000 to 1,00,000

Within 6 kms 1,00,000 to 10,00,000

Within 8 kms > Rs. 10,00,000

*Municipality includes municipal corporation, notified area committee, town area committee,
town committee and cantonment board.

Note: Even where the local population is < 10,000, the land should also not be situated within
the jurisdiction of the local municipality or cantonment board.

In cases where the activities have only some distant relations to land like dairy farming,
breeding, rearing of livestock, poultry farming, etc. they do not form a part of agriculture
income.

Indirect connection with land:

We have seen above that agricultural income is exempt, whether it is received by the tiller or
the landlord. However, non-agricultural income does not become agricultural merely on
account of its indirect connection with the land. The following examples will illustrate the
above point.

Example: A rural society has its principal business of selling butter which was made from the
cream sold to them by farmers. The making of butter was a factory process separated from the
farm.

The butter resulting from the factory operations separated from the farm was not an agricultural
product and the society was, therefore, not entitled to exemption under section 10(1) in respect
of such income.

Example: X was the managing agent of a company. He was entitled to a commission at the
rate of 10% p.a. on the annual net profits of the company. A part of the company’s income was
agricultural income. X claimed that since his remuneration was calculated with reference to the
income of the company, part of which was agricultural income, such part of the commission as
was proportionate to the agricultural income was exempt from income tax.

Since X received remuneration under a contract for personal service calculated on the amount
of profits earned by the company; such remuneration does not constitute agricultural income.

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Example: In regard to forest trees of spontaneous growth, which grow on the soil without any
human skill and labour, there is no cultivation of the soil at all. Even though operations in the
nature of forestry operations performed by the assessee may have the effect of nursing and
fostering the growth of such forest trees, it cannot constitute agricultural operations.

Income from the sale of such forest trees of spontaneous growth does not, therefore, constitute
agricultural income.

Here are some examples of agricultural income:

▪ Income from the sale of seeds.

▪ Revenue generated from the sale of replanted trees.
▪ Interest on the capital amount a partner receives from a company or firm engaged in
agricultural operations.
▪ Income from growing creepers and flowers.
▪ Rent received by an individual or entity for agricultural land.
▪ Profits received by a partner from a company or a firm engaged in agricultural produce
or activities.

Examples of Non-Agricultural Income

Below are some examples of non-agricultural income:

▪ Income from poultry farming.

▪ Income from agricultural land held as stock-in-trade
▪ Any dividend paid from an organization’s agriculture income.
▪ Income from dairy farming.
▪ Income from bee hiving.
▪ Income from fisheries.
▪ Income from cutting and selling timber trees.
▪ Income from butter and cheese making.
▪ Receipts from TV serial shooting in the farmhouse.

Types of Agricultural Income

The Indian government has classified agricultural income into three categories.

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 ▪ Income from agricultural land: This includes income earned from cultivating crops,
fruits, vegetables, and other agricultural products. It also incorporates income from
selling livestock, dairy products, and poultry.
▪ Income from agricultural business: This includes income earned from agricultural
processing and manufacturing activities such as sugar, textiles, jute, and other
agricultural products.
▪ Income from agricultural rent: This includes income earned by the landowner from
renting out the land to farmers for cultivation purposes. The owner can receive the rent
income either in cash or in kind.

Agricultural Income in Income Tax

The Indian government, with the Income Tax Department, has exempted agriculture income
by defining agriculture income tax under section 10(1) of the Income Tax Act of 1961. The
exemption implies that the government wants Indian citizens to take on agricultural activities
without being liable to pay income tax on the earned income.

However, the state government levies agriculture income tax on agriculture income using a
method known as partial integration of agricultural income with non-agricultural income when
the below conditions are met.

▪ The net agriculture income is above Rs 5,000 in the previous financial year.
▪ Total income after deducting the agricultural income is higher than the exemption limit
of Rs 2,50,000 for individuals below 60 years, Rs 3,00,000 for senior citizens and Rs
5,00,000 for super senior citizens.

Taxation of Agricultural Income

Although the Indian government has exempted agriculture income from income tax, the
Income Tax Act of 1961 defines a method to indirectly tax the income earned from agriculture.
It partially integrates agricultural and non-agricultural income with the above-mentioned
conditions.

If an individual and entity fulfil the above criteria, the agriculture income tax is calculated
through the below three-step process:

1. Determining tax on non-agricultural income + net agricultural income.

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2. Calculating tax on net agricultural income + maximum set exemption limit as per applicable
tax slab.

3. Calculating the final tax amount by determining the difference between the amounts of
steps 1 and step 2. This step provides the following information:

▪ Deduction of a tax rebate, if available.

▪ Addition of a surcharge, if applicable.
▪ Addition of the Health and Education Cess.

Section 54B of the Income Tax Act of 1961 provides tax relief to an entity or individual if they
sell their owned agricultural land and use the amount they receive after selling to acquire
another piece of land.

However, you must fulfil the following criteria to claim the benefit under section 54B.

▪ The benefit-claiming entity can only be an individual or a Hindu Undivided Family

(HUF).
▪ The individual or their parents should have used the agricultural land for at least two
years before the date of selling. For HUFs, the land should have been used by a member.
▪ The individual or the HUF must purchase another agricultural land within two years of
selling the last one.

Taxation of Agricultural Income

As discussed above, agricultural income is exempt from income tax.

However, the Income-tax Act has laid down a method to indirectly tax such income. This
method or concept may be called the partial integration of agricultural income with non-
agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.

Applicability:

This method is applicable to individuals, HUFs, AOPs, BOIs, and artificial juridical persons,
when the following conditions are met:

• Net agricultural income is greater than Rs. 5,000 during the year; and

• Non-agricultural income is above the basic exemption limit:

o Greater than Rs 2.5 lakh for individuals below 60 years of age and all other
applicable persons (old regime)
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 o Greater than Rs 3 lakh for individuals between 60 – 80 years of age(old regime)

o Greater than Rs 5 lakh for individuals above 80 years of age(old regime)

▪ Greater than Rs 3 lakh irrespective of the age of the person (new regime)

In simple terms, the non-agricultural income should be greater than the maximum amount not
chargeable to tax (as per the slab rates).

Thus companies, firms/LLP, co-operative societies, and local authorities are excluded from
using this method.

Calculation of Agricultural Income

Example:

Income from other sources is Rs.7,00,000 and Net agriculture income Rs.2,00,000. The
calculation of agriculture relief and net tax payable under the old tax regime is as follows

1. Total taxes on Rs.9,00,000 (Non-agricultural income + net agricultural income) =

Rs.92,500 (before education cess @ 4%)

2. Total taxes on Rs.4,50,000 (Basic exemption limit + net agricultural income) =

Rs.10,000 (before education cess @ 4%)

3. Net tax payable shall be Rs.82,500 (Rs.92,500 - Rs.10,000) + education cess @ 4%

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Tax liability on agricultural income over and above the basic exemption limit shall be allowed
as a relief. The higher the proportion of agriculture income in your total income higher the
agriculture tax relief one can enjoy.

Case Law

30.11.2011 Dy. CIT v. Best Roses Biotech (P) Ltd. Ahmadabad bench
ITAT
Facts of the Case:
Assessee acquired land from agriculturist on lease and constructed a greenhouse flower
project on said land. It started growing of rose flower / plants on bridge of plastic trays
erected with help of M.S. stand 2.3 ft. above land. The assessee claimed the income from
rose flower as exempt. The Assessing Officer held that the rose plants were not planted on
earth land and no basis operation was carried out by assessee on land hence, not eligible for
exemption.
According to assessee, for plantation of roses a very well-treated soil was required, manures
were mixed in soil for preparing a base for growing rose plants trays were filed with mixture
of soil, insecticides were sprinkled on plants to save plants from any disease, root stocks
were brought from market and planted in green house, mother plant was otherwise reared on
earth, subsequently saplings were planted on plastic trays which were kept at height of 2-3
ft. placed on M.S. stand, purpose of growing rose plants at a height was primarily to avoid
pest and to develop in a controlled atmosphere and green house was used for various benefit
so that sunlight and humidity level both could be maintained.
Judgment:
In fact, assessee’ s activity has already been endorsed as an agriculture activity by several
other connected authorities certifying it as an agricultural operation. After an elaborate
discussion of the facts as well as law pronounced by several courts, as also the decisions now
cited from the side of the Revenue, it is finally held that considering the advancement of
technology and the use of the advanced equipment in DCIT Navsari v. Best Roses Biotech
Pvt. Ltd. cultivation; coupled with the conventional cultivation method, put together, made
the operation carried out by the assessee was agricultural operation in nature. Respectfully
placing reliance on this decision as also the few decisions cited hereinabove, the considered
view that the income in question cannot be included in total income being within the ambits

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 of the provisions of Section 10(1) of the Act. The view taken by Ld. CIT(A) is hereby
affirmed and this ground of Revenue’s appeal is dismissed.

Case Law
Whether claim of assessee of exemption under section 10(1) on proceeds from sale of
coffee subjected to only pulping and drying was accepted for several years and there
were hundreds of coffee growers whose income were also exempted, re-opening notice
issued only against assessee during relevant assessment year was unjustified
[Assessment year 2009-10] [In favour of assessee]
Karti P. Chidambaram vs. Asstt. CIT (2017) (Mad.) The assessee, owner of coffee estates,
was engaged, in growing coffee and after pulping and drying, sells coffee as raw coffee. For
several assessment years, the assessee had been granted exemption under section 10(1) on
income from sale of raw coffee. During relevant assessment year, reopening notice was
issued against the assesse on ground that the assessee sold cured coffee and not raw coffee
and hence 25 percent of total receipts from sale of coffee was eligible to tax. Subsequently,
a reassessment order was passed making additions to income of the assessee. Held that since
re-assessment order was passed without disposing of the assessee’s objections to re-opening
of assessment and without passing a speaking order, same was unjustified. Further, where
claim of the assessee of exemption of income under section 10(1) on proceeds from sale of
coffee subjected to only pulping and drying was accepted for several years and there were
hundreds of coffee growers whose income were also exempted, re-opening notice issued
only against the assessee during relevant assessment year was unjustified.

CASUAL INCOME

What is Casual Income in Income Tax?

In Income Tax, casual income is an extra financial gain that cannot be considered a steady
revenue stream. It is a one-time gain that occurs suddenly and is not a result of any future
expectations or contractual agreements.

Understanding casual income involves knowing some important points:

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 • Expenses related to casual income aren't deductible. Any costs incurred to earn casual
money can't be subtracted from the earnings. For example, the expense of buying a
lottery ticket can't be deducted from the income it generates.

• According to Section 194B, winnings from activities like lotteries, card games, or
crossword puzzles are subject to TDS (tax deducted at source) if they exceed Rs.10,000.
The TDS rate is 31.2%, inclusive of cess and surcharge. The organization distributing
the prize money is responsible for deducting TDS.

• You can't offset any losses against casual income. If you experience a casual loss instead
of income, that amount won't be deducted from any other income you have.

What is the Casual Income Tax Rate?

Under the Income Tax Act, casual income falls under the category of "Income from Other
Sources" and is subject to taxation under Section 115BB.

Here are the tax implications for your casual income:

• A flat tax rate of 30% is applied to casual income. Including cess, the effective rate
becomes 31.2%.

• If you receive a prize in kind, such as a car, the distributor must ensure that the
applicable tax has been paid before awarding it.

• For prize money received in cash, demand draft, or cheque exceeding Rs.10,000, a
deduction of 31.2% TDS is made under Section 194B before you receive the money.

• If you receive both a prize in kind and cash, your total tax liability will be calculated
based on the cash received and the market value of the prize in kind.

• TDS is applicable to your winnings from horse racing if they exceed Rs.10,000.

What is the Example of Casual Income Tax?

Examples of casual income revolve around exciting opportunities for windfalls, including:

• Lottery Jackpots: Winning substantial sums through lottery draws, where luck plays
a significant role in determining the outcome.

• Quiz Shows: Earning prizes on quiz shows through knowledge and quick thinking.

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 • Poker Games: Profiting from successful plays in poker games, where skill and strategy
contribute to winning.

• Sports Betting: Gaining profits from successful bets on sports events based on
predictions and analysis.

• Crossword or Puzzle-Solving: Winning rewards from solving crosswords or puzzles,

showcasing mental acumen and problem-solving skills.

What is the Section for Casual Income Tax?

Under Section 115BB of the Income Tax Act 1961, casual income is subject to taxation. This
section aims to prevent tax evasion and ensure transparency in income sources.

Casual incomes falling under this category include:

• Crossword puzzles

• Lotteries

• Horse races

• Betting or gambling games

• Card games

casual income is taxed at a flat rate of 30% under Section 115BB, with an additional surcharge
and cess, bringing the total tax rate to 31.20%. Expenses cannot be deducted from your total
casual income, and any benefits from basic exemption limits do not apply to such income.

Furthermore, it is crucial to deduct TDS from your taxable income under this section. If your
taxable income exceeds Rs.10,000, the entity making the payment must deduct TDS under
either Section 194B (for winnings from crossword puzzles or lotteries) or Section 194BB (for
winnings from horse races).

Which Income is Not Considered Casual Income?

Some incomes that are not classified as casual income are given below -

• Receipts from profession, occupation, or business.

• Capital gains are charged under section 45 provisions.

• Receipts included in employee’s remuneration such as bonuses or perquisites.

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How is Tax Calculated for Casual Income?

Mr. X won Rs.2,00,000 from gambling, and Mr.Y responsible for handing over the winnings
must deduct 31.2% TDS from the total amount. Under Section 115BB, the person must deduct
Rs.62,400 from the winnings.

In another scenario, in a crossword competition, an individual won Rs.20,000 in cash and a car
worth Rs.80,000, and the responsible party will pay the cash and provide the car. While making
the payments, the tax must be deducted at a rate of 31.2%. In this case, it is necessary to deduct
tax not only from the cash winnings but also from the total winnings. Therefore, during
payments, the person must deduct Rs.20,000 from the total winnings and collect Rs.11,200 as
tax from the individual.

Section 115BB of the Income Tax Act deals with the tax rates charged on casual income. The
tax rate applied is 30%.

Total Income [Section 2(45)]

The term “total income” means the total amount of income referred to in section 5, computed
in the manner laid down in this Act.

CAPITAL AND REVENUE RECEIPTS

The Act contemplates a levy of tax on income and not on capital and hence it is very essential
to distinguish between capital and revenue receipts. Capital receipts cannot be taxed, unless
they fall within the scope of the definition of “income” and so the distinction between capital
and revenue receipts is material for tax purposes.

Certain capital receipts which have been specifically included in the definition of income are
compensation for modification or termination of services, income by way of capital gains etc.

It is not possible to lay down any single test or any single criterion as decisive, final and
universal in application to determine whether a particular receipt is capital or revenue in nature.
Hence, the capital or revenue nature of the receipt must be determined with reference to the
facts and circumstances of each case.

Criteria for determining whether a receipt is capital or revenue in nature

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An amount referable to fixed capital is a capital receipt whereas a receipt referable to
circulating capital would be a revenue receipt. While the latter is chargeable to tax, the former
is not subject to income tax unless otherwise expressly provided.

The Income-tax Act does not define the term “Capital receipt” & “Revenue receipt”. Also,
it has not laid down the criterion for differentiating the capital and revenue receipt. Yet, it has
exempted certain capital receipts from taxation while certain capital receipts have been taken
into ambit of capital receipts chargeable as capital gains.

Whether a particular receipt is of the nature of income or capital is explained below by the
following examples.

The following test can be applied to determine the nature of particular receipt.

Base Explanation Example

Type of capital will The very same thing may be fixed An amount received on
depend upon the capital in the hands of one business account of sale of trading
nature of business but circulating capital in the hands of goods or receipts in respect
another. of circulating capital or of
flowing capital is revenue
receipt, for example sale of a
motor car by a dealer. On the
other hand, a receipt on
account of sale of fixed
assets is a capital receipt, for
example, amount received on
sale of a motor car by a
person who is not a car
dealer.
Nature of receipt Whether a particular receipt is capital ▪ The reimbursement
also depends upon or revenue in nature must be of capital outlay is a
the reference to the determined with reference to the capital
recipient recipient who is sought to be taxed ▪ receipt even if the
as the assessee. For tax purposes the total amount received
capital or revenue character of the exceeds the

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 receipt must be determined on the ▪ cost of the outlay
basis of the nature of the trade in the itself.
course of which or in connection ▪ Compensation
with which it arises. received for the loss
of a capital asset is a
receipt of a capital
nature whereas the
compensation
received for damage
to or loss of a trading
asset is a revenue
receipt.
▪ A capital asset is
converted into
income and the price
realized on its sale
takes form of the
periodic payments of
a revenue nature.
▪ Where a person sells
his properties and the
sale price is payable
to him by the
purchaser in the form
of annuities of a fixed
sum so long as the
seller is alive or until
he attains a particular
age.
Capital and Profits and gains arising from
Revenue Receipts various transactions which are
in Relation to entered into in the ordinary course
Business Activities

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 of the business of the tax payers or
those which are incidental to or
closely associated with his business
would be revenue receipts
chargeable to tax. But even in these
cases the receipts may be of a capital
nature in certain circumstances.

Case Law

09.07.2010 CIT (Appellant) v. Saurashtra Cement Ltd. Supreme Court

(Respondent)
Liquidated Damages – Capital Receipt or Revenue Receipt?
Facts of the Case: The assessee, engaged in the manufacture of cement etc; entered into an
agreement with M/s Walchandnagar Industries Limited, Bombay, (hereinafter referred to as
“the supplier”) on 1st September, 1967 for purchase of additional cement plant from them
for a total consideration of Rs.1,70,00,000/-. As per the terms of contract, the amount of
consideration was to be paid by the assessee in four instalments. The agreement contained a
condition with regard to the manner in which the machinery was to be delivered and the
consequences of delay in delivery.
In the event of delays in deliveries except the reason of Force Majeure, the Suppliers shall
pay the Purchasers an agreed amount by way of liquidated damages without proof of
damages actually suffered at the rate of 0.5% of the price of the respective machinery and
equipment to which the items were delivered late, for each month of delay in delivery
completion. It is further agreed that the total amount of such agreed liquidated damages shall
not exceed 5% of the total price of the plant and machinery.” The supplier defaulted and
failed to supply the plant and machinery on the scheduled time and, therefore, as per the
terms of contract, the assessee received an amount of Rs.8,50,000 from the supplier by way
of liquidated damages.
During the course of assessment proceedings for the relevant assessment Year, a question
arose whether the said amount received by the assessee as damages was a capital or a revenue
receipt.

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 Judgement: Supreme Court held that it was clear from the agreement that the liquidated
damages were to be calculated at 0.5 per cent of the price of the respective machinery and
equipment which were delivered late, for each month of delay, without proof of the actual
damages suffered by the assessee on account of the delay. The delay in supply could be of
the whole plant or a part thereof but the determination of damages was not based upon the
calculation made in respect of loss of profit on account of supply of a particular part of the
plant. It was evident that the damages to the assessee were directly and intimately linked
with the procurement of a capital asset, i.e., the cement plant, which would obviously lead
to delay in coming into existence of the profit-making apparatus, rather than a receipt in the
course of profit-earning process.
Compensation paid for the delay in procurement of capital asset amounted to sterilization of
the capital asset of the assessee as supplier had failed to supply the plant within time as
stipulated in the agreement. The amount received by the assessee towards compensation for
sterilization of the profit-earning source and not in the ordinary course of its business, was a
capital receipt in the hands of the assessee.

CHARGE OF INCOME TAX [SECTION 4]

Section 4 of the Act is the charging section. It lays down the basis on which tax is imposed.
Section 4 of Income Tax Act is the most effective and operative of the various provisions in the
Act since, it is because of this section alone that all other sections become enforceable. The
charging section is the backbone of the Act, it lays down the provisions as to what are taxable
and at what rates; income of which period is taxable and in whose hands. Accordingly, the
section provides that:

(a) Income tax shall be charged at the rate or rates prescribed in the Finance Act for the relevant
previous year,

(b) the charge of tax is on various persons specified u/s 2(31),

(c) the income sought to be taxed is that of the previous year and not of the of assessment year,

(d) the levy of tax on the assessee is on his total or taxable income computed in accordance
with and subject to the appropriate provisions of the Income Tax Act, including provisions for
the levy of additional Income-tax.

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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.

RESIDENTIAL STATUS [SECTION 6]

Total Income of an assessee cannot be computed unless the person’s residential status in India
during the previous year is known because the taxability of an assessee is dependent on the
Residential status during any Previous Year. Thus, determining residential status of a person is
important steps for calculating tax liability of a person.

Section 6 of the Income Tax Act prescribes the criteria to determine the residential status of all
tax payers for purposes of income-tax. An assessee’s residential status must be determined
with reference to the previous year in respect of which the income is sought to be taxed. i.e.
the residential status of a person must be determined every year because the residential status
of a person may change from one year to next year and so on depending upon the situation.

There are different tests to be applied for different types of person, let us understand test for
each category of person:

TEST OF RESIDENCE FOR INDIVIDUAL

Resident

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Basic Conditions

Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in any
previous year if period of physical stay in India is

a. 182 days or more in that previous year, OR

b. 60 days or more in that Previous Year AND 365 days or more in Preceding 4 years

If an assessee fails to meet both the above criteria in any Previous Year, then he is considered
as Non-Resident for tax purpose in that Previous Year.

Exception to the Basic Condition

In case of the following individuals:

(a) being a citizen of India, who leaves India in any previous year as a member of the crew
of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act,
1958, or for the purposes of employment outside India, the provisions of the second
condition shall apply in relation to that year as if for the words “sixty days (60 days)
”, occurring therein, the words “one hundred and eighty-two days (182 days)” had
been substituted.
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation
to clause (e) of section 115C, who, being outside India, comes on a visit to India in any
previous year, the provisions of the second condition shall apply in relation to that year
as if for the words “sixty days (60 days)”, occurring therein, the words “one hundred
and eighty-two days (182 days)” had been substituted. However, in case of the citizen
or person of Indian origin in the above cases having total income, other than the income
from foreign sources, exceeding fifteen lakh rupees during the previous year, for the
words “sixty days” occurring therein, the words “one hundred and twenty days” had
been substituted. [Amended vide Finance Act, 2020].

Deemed Resident: An Individual will be considered as Deemed Resident in the below case:

▪ Individual being a Citizen of India, AND

▪ having Total Income in excess 15 lakhs in the Previous Year (Other than foreign Source)
AND

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 ▪ not liable to tax in any other country/territory, by reason of domicile, residence or any
similar criteria. [Section 6(1A) i.e. concept of Deemed Resident introduced vide
Finance Act, 2020].

Non-Resident (NR)

If an individual does not satisfy any of the above basic conditions, then, he will be treated as
Non-Resident. It must be noted that the fulfilment of any one of the above conditions (a) or (b)
as applicable will make an individual resident in India for tax purposes. Further it is to be noted
that these conditions are alternative and not cumulative in their application.

Resident and Ordinarily Resident (ROR)

An individual may become a resident and ordinarily resident in India if he satisfies both the
following conditions given u/s 6(1) besides satisfying any one of the above-mentioned
conditions:

(i) he is a resident in at least any two out of the ten previous years immediately
preceding the relevant previous year, and
(ii) he has been in India for 730 days or more during the seven previous years
immediately preceding the relevant previous year.

Resident but Not Ordinarily Resident (RNOR)

An individual is not ordinarily resident in any previous year if –

(a) he has been a non-resident in India in nine out of the ten previous years preceding that year;
or

(b) he has during the seven previous years preceding that year been in India for a period of, or
periods amounting in all to, seven hundred and twenty-nine days (729 days) or less;

(c) a citizen of India, or a person of Indian origin, having total income, other than the income
from foreign sources, exceeding fifteen lakh rupees during the previous year, who has been in
India for a period or periods amounting in all to one hundred and twenty days or more but less
than one hundred and eighty- two days; or

(d) a citizen of India who is deemed to be resident in India under clause (1A).

32

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Explanation: “income from foreign sources” means income which accrues or arises outside
India (except income derived from a business controlled in or a profession set up in India.

Therefore, if any individual fails to satisfy even one of the above conditions, he would be an
RNOR. From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for
employment outside India during the year will be a resident and ordinarily resident if he stays
in India for an aggregate period of 182 days or more.

However, this condition will apply only if his total income (other than foreign sources) exceeds
Rs 15 lakh. Also, a citizen of India who is deemed to be a resident in India (w.e.f. FY 2020-21)
will be a resident and ordinarily resident in India.

Note: Income from foreign sources means income which accrues or arises outside India (except
income derived from a business controlled in India or profession set up in India).

Important Points

▪ The fact that an assessee is resident in India in respect of one year does not
automatically mean that he would be resident in the preceding or succeeding years as
well. Consequently, the residential status of the assessee should be determined for each
year separately. This is in view of the fact that a person resident in one year may become
non-resident or not ordinarily resident in another year and vice versa.
▪ It must also be noted that the residential status of an individual for tax purposes is
neither based upon nor determined by his citizenship, nationality and place of birth or
domicile. This is because of the fact that, for tax purposes, an individual may be resident
in more than one country in respect of the same year.
▪ The common feature in both the above conditions is the stay of the individual in India
for a specified period. The period of stay required in each of the conditions need not
necessarily be continuous or consecutive nor it is stipulated that the stay should be at
the usual place of residence, business or employment of the individual. Purpose of stay
is immaterial in determining the residential status.
▪ The stay may be anywhere in India and for any length of time at each place in cases
where the stay in India is at more places than one, what is required is the total period of
stay should not be less than the number of days specified in each condition.
▪ While determining residential status, the day of leaving and returning to India should
be considered as a stay in India.

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 ▪ Person of Indian Origin is one who is, or either of his parents or grandparents were born
in Undivided India.
▪ India means territory of India, its territorial waters, continental shelf, Exclusive
Economic Zone (upto 200 nautical miles) and airspace above its territory and territorial
waters.
▪ Where the exact arrival and departure time is not available then the day he comes to
India and the day he leaves India is counted as stay in India.

TESTS OF RESIDENCE FOR HINDU Undivided FAMILIES ‘HUF’

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Place of Control and Management

The expression control and management refer to the functions of decision-making and issuing
directions but not the places where from the business is carried on. In other words, the Control
and Management means taking policy decisions relating to business. Policy decisions are
concerning finance, marketing, production, advertising, personnel etc. It does not mean day to
day operations of the concern / assessee. The control and management are situated at that place
where policy decisions are taken. The business may be done from outside India and yet its
control and management may be wholly within India. Therefore, control and management of a
business is said to be situated at a place where the head and brain of the business is situated.

The place of control may be different from the usual place of running the businesses and
sometimes even the registered office of the assessee. But control and management do imply
the functioning of the controlling and directing power at a particular place with some degree
of permanence.

▪ Control and Management of HUF: It is with Karta or its Manager.

▪ Control and Management of Firm/AOP: It is with Partners/Members

“Control and Management” means de facto control and management and not merely the right
to control or manage. Control and management is situated at a place where the head, the seat
and the directing powers are situated. The mere fact that the family has a house in India, where
some of its members reside or the karta is in India in the previous year, does not constitute that
place as the seat of control and management of the affairs of the family unless the decisions
concerning the affairs of the family are taken at that place. Although, it is the karta who
normally has control and management of the affairs of a Hindu Undivided Family yet any other
coparcener can control and manage the affairs. Therefore, the mere fact of absence of the karta
does not make the family non-resident.

An HUF can be “not ordinarily resident”

If manager/karta has been a not ordinarily resident in India in the previous year in accordance
with the tests applicable to individuals. Where, during the last ten years the kartas of the H.U.F.
had been different from one another, the total period of stay of successive kartas of the same
family should be aggregated to determine the residential status of the karta and consequently
the H.U.F. In other words, if Karta of Resident HUF satisfies both the following

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additional conditions (as applicable in case of Individual) then Resident HUF will be ROR,
otherwise it will be RNOR :

Additional Conditions:

(1) Karta of Resident HUF should be resident in at least 2 previous

years out of 10 previous years immediately preceding relevant
previous year.
(2) Stay of Karta during 7 previous years immediately preceding
relevant previous year should be 730 days or more.

Important Note:

▪ It is immaterial whether Karta is Resident or Non-Resident during relevant previous

year, for the purpose of determining whether HUF is ROR or RNOR. If Karta satisfies
both the additional conditions, then HUF will be ROR, otherwise RNOR.
▪ Firms, association of persons, local authorities and other artificial juridical persons can
be either resident (ordinarily resident) or non-resident in India but they cannot be not
ordinarily resident in India.
▪ Even if negligible portion of the control and management of the affairs is exercised
from India, it will be sufficient to make the family, firm or the association resident in
India for tax purposes. For instance, if the affairs of a firm are controlled partly from
India and partly from Bangladesh, the firm would be resident in India.
▪ While the control and management of the affairs of the firm or family would necessarily
be exercised by the partners of the firm or members of the family, the residential status
of the members or partners is generally irrelevant for determining the residential status
of the firm or family. But in cases where the residential status of the partners materially
affects or determines the place of control and management of the affairs of the firm, the
residential status of the member or partners should also be taken into account in
determining the residential status of the firm or the family.
▪ The mere fact that all the partners are resident in India does not necessarily lead to the
conclusion that the firm is resident in India because there may be cases where even
though the partners are resident in India, control and management of the affairs of the
firm is exercised from outside India.

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 ▪ A Hindu Undivided Family would generally be presumed to be resident in India unless
the assessee proves to the tax authorities that the control and management of its affairs
is situated wholly outside India during the relevant accounting year

TEST OF RESIDENCE FOR FIRM AND AOP/BOI

▪ Business and the whole of it may be done outside India and yet the control and
management of that business may be wholly within India.
▪ It is entirely irrelevant where the business is done and where the income has been
earned. What is relevant and material is from which place has that business been
controlled and managed.

TEST OF RESIDENCE FOR COMPANIES

A company shall be said to be resident in India in any previous year, if

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India.

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Accordingly, all Indian companies are always resident in India regardless of the place of its
place of effective management. However, in the case of a foreign company the place of
effective management is the basis on which the company’s residential status is determinable.

For this purpose, Place of Effective Management means a place where Key management and
commercial decisions that are necessary for the conduct of the business of an entity as a whole
are, in substance made. Note: Vide Circular No 08 of 2017 dated 23rd February, 2017, it has
been clarified that the POEM provisions shall not apply to a company having turnover or gross
receipts of Rs. 50 crore or less in a financial year. So, in those cases, the criteria for determining
the residential status would be Control and Management of the affairs.

Guiding Principles for Determination of Place of Effective Management (POEM)

The process of determination of POEM would be primarily based on the fact as to whether or
not the company is engaged in active business outside India. The PoEM concept is one of
substance over form and since “residence” is to be determined for each year, POEM will also
be required to be determined on year-to-year basis. An entity may have more than one place of
management, but it can have only one place of effective management at any point of time.

The test of PoEM is based on whether the entity is earning only passive income and its
operations are so structured that it is present or active in a country without paying applicable
taxes. Thus, a company having key managerial people stationed in India with substantial asset

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base in India and selling goods through a subsidiary may yet claim that it has no PE in India
and being incorporated outside India, it could end up paying very little tax. The concept of
PoEM thus examines whether the company is in fact a tax resident of a foreign state with
substantial operations outside India or whether the incorporation or having different places of
business is only a device to evade tax by being a non-resident.

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

▪ less than 50% of its total assets are situated in India; and
▪ less than 50% of total number of employees are situated in India or are resident in India;
and
▪ the payroll expenses incurred on such employees is less than 50% of its total payroll
expenditure

The conditions of having earned passive income of less than 50% and having less than 50% or
assets, employees and payroll expenses have to be satisfied cumulatively. Thus, merely because
say 95% of the income of a company is from royalty but 90% of its assets are outside India, it
need not be scrutinized for PoEM since other conditions are not met. The company would be
engaged in active business outside India. The idea is to identify such companies who may be
trying to evade taxes by merely having incorporation or a set of directors operating from outside
India while in substance it is carrying out activity in India and earning incomes which should
be subject to tax in India.

The place of effective management in case of a company engaged in active business outside
India shall be presumed to be outside India if the majority meetings of the board of directors
of the company are held outside India. However, it is established that the Board of directors of
the company are standing aside and not exercising their powers of management and such
powers are being exercised by either the holding company or any other person (s) resident in
India, then the place of effective management shall be considered to be in India. For the purpose
of determining whether the company is engaged in active business outside India, the average
of the data of the previous year and two years prior to that shall be taken into account. In case
the company has been in existence for a shorter period, then data of such period shall be
considered.

The determination of POEM would be a two-stage process as follows:

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First Stage: Identification or ascertaining the person or persons who actually make the key
management and commercial decision for conduct of the company business as a whole.

Second Stage: Determination of place where these decisions are in fact being made.

Note: The place where these management decisions are taken would be more important than
the place where such decisions are implemented. For the purpose of determination of POEM,
it is the substance which would be conclusive rather than the form.

Some of the guiding principles for determining the POEM

(a) The location where a company’s Board regularly meets and makes decisions may be the
company place of effective management provided, the Board retains and exercises its authority
to govern the company; and in substance, make the key management and commercial decisions
necessary for the conduct of the company business as a whole. Mere formal holding of board
meetings at a place would by itself not be conclusive for determination of POEM being located
at that place.

Note: A company’s board may delegate some or all of its authority to one or more committees
such as an executive committee consisting of key members of senior management. In these
situations, the location where the members of the executive committee are based and where
that committee develops and formulates the key strategies and policies for mere formal
approval by the full board will often be considered to be the company’s place of effective
management.

The location of a company’s head office will be a very important factor in the determination
of the company’s place of effective management because it often represents the place where
key company decisions are made. The following points need to be considered for
determining the location of the head office of the company: If the company’s senior
management and their support staff are based in a single location and that location is held
out to the public as the company’s principal place of business or headquarters then that
location is the place where head office is located. If the company is more decentralized (for
example where various members of senior management may operate, from time to time, at
office located in the various countries) then the company’s head office would be the
location where these senior managers:

▪ are primarily or predominantly based; or

▪ normally return to following travel to other locations; or

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 ▪ meet when formulating or deciding key strategies and policies for the company as a
whole.

In situations where the senior management is so decentralised that it is not possible to determine
the company’s head office with a reasonable degree of certainty, the location of a company’s
head office would not be of much relevance in determining that company’s place of effective
management.

(c) The use of modern technology impacts the place of effective management in many ways. It
is no longer necessary for the persons taking decision to be physically present at a particular
location. Therefore, physical location of board meeting or executive committee meeting or
meeting of senior management may not be where the key decisions are in substance being
made. In such cases the place where the directors or the persons taking the decisions or majority
of them usually reside may also be a relevant factor. It may be clarified that day-to-day routine
operational decisions undertaken by junior and middle management shall not be relevant for
the purpose of determination of POEM.

If the above factors do not lead to clear identification of POEM, then the following secondary
factors can be considered:

▪ Place where main and substantial activity of the company is carried out; or
▪ Place where the accounting records of the company are kept.

The determination of POEM is to be based on all relevant facts related to the management and
control of the company, and is not to be determined on the basis of isolated facts that by itself
do not establish effective management, as illustrated by the following examples:

❖ The fact that a foreign company is completely owned by an Indian company will not be
conclusive evidence that the conditions for establishing POEM in India have been
satisfied.
❖ The fact that there exists a Permanent Establishment of a foreign entity in India would
itself not be conclusive evidence that the conditions for establishing POEM in India
have been satisfied.
❖ The fact that one or some of the Directors of a foreign company reside in India will not
be conclusive evidence that the conditions for establishing POEM in India have been
satisfied.

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 ❖ The fact of, local management being situated in India in respect of activities carried out
by a foreign company in India will not, by itself, be conclusive evidence that the
conditions for establishing POEM have been satisfied.
❖ The existence in India of support functions that are preparatory and auxiliary in
character will not be conclusive evidence that the conditions for establishing POEM in
India have been satisfied.
❖ The place where day to day, operational decisions are taken would not be PoEM.

Further, based on the facts and circumstances if it is determined that during the previous year
the POEM is in India and also outside India then POEM shall be presumed to be in India if it
has been mainly /predominantly in India.

SCOPE OF TOTAL INCOME [SECTION 5]

Section 5 of Income Tax Act, 1961 provides Scope of total Income in case of person who is a
resident, in the case of a person not ordinarily resident in India and person who is a non-
resident. Income can be from any source 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; or (c) accrues or arises to him outside India during
such year.

Scope of total income has been defined on the basis of Residential status

(A) Resident and Ordinarily Resident Assessee

According to Sub-section (1) of Section 5 of the Act the total income of a resident and
ordinarily resident assessee would consist of:

(i) income received or deemed to be received in India during the accounting year by or on
behalf of such person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during
the accounting year;
(iii) income which accrues or arises to him outside India during the accounting year.

It is important to note that under clause (iii) only income accruing or arising outside India is
included. Income deemed to accrue or arise outside India is not includible.

(b) Resident but Not Ordinarily Resident In India

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Proviso to section (1) of section 5 the total income in case of resident but not ordinarily resident
in India

(i) income received or deemed to be received in India during the accounting year by or
on behalf of such person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during
the accounting year;
(iii) income which accrues or arises to him outside India during the previous year if it is
derived from a business controlled in or a profession set up in India.

(C) Non-Resident

Sub-section (2) of Section 5 provides that the total income of a non-resident would comprise
of:

(i) income received or deemed to be received in India in the accounting year by or on

behalf of such person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India
during the previous year.

Rule of Taxation on the basis of Residential Status

Nature of Income ROR RNOR NR

Income received in India (Whether accrued in Taxed Taxed Taxed
or outside India)
Income deemed to be received in India Taxed Taxed Taxed
(Whether accrued in or outside India)
Income accruing or arising in India (Whether Taxed Taxed Taxed
received in India or outside India)
Income deemed to accrue or arise in India Taxed Taxed Taxed
(Whether received in India or outside India
Income received and accrued outside India Taxed Taxed Not Taxed
from a business controlled or a profession set
up in India
Income received and accrued outside India Taxed Not Taxed Not Taxed
from a business controlled from outside India
or a profession set up outside India

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 Income earned and received outside India but Not Taxed Not Taxed Not Taxed
later on remitted to India (Whether tax
incidence arises at the time of remittance)

CONCEPT OF RECEIPT, ACCRUAL AND ARISAL

Section 9 of the Income Tax Act - Income Deemed to Accrue or Arise in India

Taxability of income depends on two factors: (i) Accrual and (ii) Receipt. Income is taxed by
any country based on these two factors, i.e., either the income should be accrued in that country,
or it should be received in that country. Section 9 of the Income Tax Act 1961 lists the incomes
that should be deemed to accrue or arise in India, which specifically applies to incomes that
foreign entities or non-residents earn in India or are deemed to be earning in India. The section
stipulates the categories of income considered to arise or accrue in India. The increasing interest
of non-resident individuals and foreign companies in the Indian economy has paved the way
for the determination of the taxability of income earned from India. In this article, you will
understand the incomes that are deemed to accrue or arise in India.

Understanding Section 9 of the Income Tax Act

Section 9 of the Income Tax Act considers the source of income and defines who is regarded
as a taxpayer. The section administers income deemed to arise or accrue in India. It establishes
transparency in the taxation of income and avoids tax evasion. This section specifies that
income that has not accrued or arisen in India is to be considered income accrued or arisen in
India.

The income arising or accruing in India may originate from different sources like property
income, foreign income, salaries, capital gains, business income, and earnings from horse
racing and lottery. The government has amended this section to incorporate the categories of
income like royalty, interest, technical fees, etc.

Rules of Section 9 of the Income Tax Act

Under Section 9, the following three key provisions determine the tax implications of the
income foreign entities or non-residents earn in India.

i. Territorial Nexus Rule:

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Any income that arises or is deemed to arise in India is subject to tax. This rule applies to all
kinds of income, including interest, capital gains, business earnings, etc.

ii. Specific Inclusions Rule:

This rule applies to specific kinds of income, including royalties, interest, or fees (either for
technical services obtained from India or services provided in India. The rule states that the
income is deemed to arise in India, so it is subject to tax.

iii. Residence Rule:

As per this rule's provision, any income that arises or accrues outside India shall not be taxable
in India. The condition to fulfil this rule is that the recipient of such income must not be a
resident of India. This implies that if a non-resident earns income abroad, then that income is
not subject to tax in India.

Scope of Section 9 of the Income Tax Act

The scope of this section applies to different types of income that foreign entities or non-
residents earn in India.

It includes income obtained from:

• Any salary earned in India

• Any profession or business conducted in India

• Any property located in India

• Any dividend distributed by an Indian firm

• Any source of income or asset that is located in India

• Any interest earned on securities supplied by an Indian company or the Indian

government

The scope also includes the following:

• Fees or royalties for technical services provided in India

• Capital gains resulting from the transfer of any asset located, in India whether directly
or indirectly

• Gift of sum of money to non-residents

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Implications of Section 9

This section has various implications for foreign entities or non-residents conducting business
in India. Let’s go through the key implications:

i. Withholding Tax:

As per Section 195 of the Income Tax Act, any individual accountable for paying a non-resident
must deduct tax at source. The corresponding tax rate depends on the type of income and the
provisions of the DTAA (Double Taxation Avoidance Agreement) (if applicable).

ii. Taxation of Income:

An income that a foreign entity or a non-resident earns from an asset or business is subject to
tax in India. The corresponding tax rate depends on the income tax slab rates valid for the
particular financial year.

INCOME RECEIVED OR DEEMED TO BE RECEIVED IN INDIA

Income received in India: Income received in India is taxable regardless of the assessee’ s
residential status therefore it has great significance.

(i) The receipt contemplated for this purpose refers to the first receipt of the amount in
question as the income of the assessee.

For instance, if A receives his salary at Delhi and sends the same to his father, the salary income
of A is a receipt for tax purposes only in the hands of A; his father cannot also be said to have
received income when he receives a part of the income of A. In the hands of A’s father, it is
only a receipt of a sum of money but not a receipt of income.

(ii) Method of Accounting: Although receipt of income is not the sole test of its taxability, the
receipt of income would be the primary basis for determining the taxability of the amount in
cases where the assessee follows the cash system of accounting; however, where the assessee
follows the mercantile system of accounting, the income would become taxable as the income
of the accounting year in which it falls due to the assessee regardless of the date or place of its
actual receipt.

(iii) While considering the receipt of income for tax purposes both the place and the date of
its receipt must be taken into account. The income in question should be not only received
during the accounting year relevant to the assessment year but must also be received in India

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in order to constitute the basis of taxation. Thus, if an item of income is received outside India
and after a few years is brought into India the subsequent receipt of the same amount in India
should not be taken as the basis of taxing the same since the same income cannot be received
twice and it will be known as Remittances.

(iv) For the purpose of taxation both actual and constructive receipt must be taken into
account. Receipt by some other person on behalf of the assessee should be treated as receipt
by the assessee for being taxed in his hands.

(v) The question of taxability of a particular income received by the assessee depends upon
the nature of income. For instance, income from salaries and interest on securities would
attract liability to tax immediately when it falls due to the assessee regardless of its actual
receipt by or on behalf of the assessee.

Income deemed to be received in India: In addition to the income actually received by the
assessee or on his behalf, certain other incomes not actually received by the assessee and/or
not received during the relevant previous year, are also included in his total income for income
tax purposes. Such incomes are known as income deemed to be received. Some of the examples
of such income are:

(i) All sums deducted by way of taxes at source.

(ii) Incomes of other persons which are included in the income of the assessee
i.e. clubbing provision.
(iii) The amount of unexplained or unrecorded investments. The amount of
unexplained or unrecorded moneys, etc.
(iv) The annual accretion in the previous year to the balance standing at the
credit of an employee participating in a Recognised Provident fund to the
extent provided in Rule 6 of Part A of the Fourth Schedule [Section 7(i)].
The contributions made by the employer to Recognised Provident Fund in
excess of 12% of the employee’s salary and the interest credited to the
Provident Fund account of the employee in excess of the prescribed rate
shall be included in the salary income of the employee. This amount is
known as annual accretion.
(v) The transferred balance in a Recognised Provident Fund to the extent
provided in Rule 11(4) of Part A - Fourth Schedule [Section 7(ii)].

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 (vi) Any dividend declared by a Company or distributed or paid by it within the
meaning of Section 2(22) [Section 8(a)].
(vii) Any interim dividend unconditionally made available by the Company to
the member who is entitled to it [Section 8(b)].

INCOME ACCRUE OR ARISE IN INDIA

The accrual of income is different and distinct from the receipt of income discussed above.
Sometimes in the context of accrual or arise the word earned is used. A person may be said to
have earned his income in the sense that he has contributed to the production by rendering of
goods or services. But in order that the income may be said to have accrued to him, an
additional element is necessary, that is, he must have created a debt in his favour. Income is
said to accrue when it comes into existence for the first time or at the point of time when the
right to receive the income arises although the right may be exercised or exercisable at a future
date. Income is said to be received when it reaches the assessee. When the right to receive the
income becomes vested in the assessee, it is said to accrue or arise.

Income is said to accrue only to that person who is lawfully entitled to that income. Income
accrues at the place where the source of the income is situated, which may or may not be the
same as the place from which the business activities are carried on. Normally, income accrues
at the place where the contract yielding the income is entered into and for this purpose the
contract should be taken to have been entered into at the place where the offer is accepted.

Case Law

2018 CIT v. Millennium Estate (P.) Ltd.

Income in respect of sale of flats accrued when possession of flat was given and not
when allotment letter was issued [in favour of assessee]
The assesse carried on business as a contractor and developer. During scrutiny, the Assessing
Officer found that an amount was shown as advances received from its buyers. The assesse
submitted that aforesaid amounts were received as advance at time of allotment on 14-3-
2007 and that further consideration was received on 1-4-2007, when possession of flat was
given, and, thus, said sum was chargeable to tax in next assessment year. However, the
Assessing Officer treated said sum as accrued income in subject assessment year holding
that sale of flats had taken place when they were allotted under an allotment letter.

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 Held that from the allotment letter and possession letter, it was very evident that possession
of flats was given on receipt of total consideration, i.e., only on 1-4-2007. The said amount
was an advance during subject assessment year and said income accrued as income in
assessment year 2007-08.

2018 Principal CIT v. Davangere Urban Co-operative Bank Ltd.

Income from Non-Performing Assets (NPA) should be assessed on cash basis and not
on mercantile basis, despite assessee following mercantile system of accounting
[Assessment year 2010-11] [in Favour of assessee]
Held that Income from NPA should be assessed on cash basis and not on mercantile basis,
despite the assessee following mercantile system of accounting. In view of aforesaid legal
position, the Assessing Officer was not justified in bringing to tax on interest on non-
performing assets on accrual basis just because the assessee followed hybrid system of
accounting.

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [SECTION 9]

Certain types of income are deemed to accrue or arise in India even though they may actually
accrue or arise outside India. The categories of income which are deemed to accrue or arise in
India are:

(1) Any income accruing or arising to an assessee in any place outside India whether directly
or indirectly

(a) through or from any business connection in India,

(b) through or from any property in India,

(c) through or from any asset or source of income in India, or

(d) through the transfer of a capital asset situated in India [Section 9(1)(i)].

(2) Income, which falls under the head “Salaries”, if it is earned in India. Salary payable for
service rendered in India would be treated as earned in India. Further, any income under the
head “Salaries” payable for rest period or leave period which is preceded and succeeded by
services rendered in India, and forms part of the service contract of employment, shall be
regarded as income earned in India [Section 9(1)(ii)].

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(3) Income from Salaries which is payable by the Government to a citizen of India for services
rendered outside India (However, allowances and perquisites paid outside India by the
Government is exempt) [Section 9(1)(iii)].

(4) Dividend paid by a Indian company outside India [Section 9(1)(iv)].

(5) Interest [Section 9(1)(v)]

(6) Royalty [Section 9(1)(vi)]

(7) Fees for technical services [Section 9(1)(vii)]

(1) (b) Income arising from any property in India: Income arising in a foreign country from
any property situated in India would be deemed to accrue or arise in India. In this context, the
term property does not refer to house property alone but it refers to all tangible properties
whether movable or immovable. For instance, the rent or hire charges for the use of buildings
or machinery of the assessee which, under an agreement are payable only outside India, would
be deemed to accrue or arise in India.

(1) (c) Income arising from any assets or source of Income in India: Income arising through
or from any asset or source of income in India would also be deemed to accrue or arise in India.
In this context, the term source means not a legal concept but something which a practical man
would regard as a real source of income.

(1) (d) Income arising from transfer of any capital assets situated in India

▪ Capital gains arising to an assessee from the transfer of a capital asset situated in India
would be deemed to accrue or arise in India irrespective of the fact whether the capital
asset in question represents a movable or immovable property or a tangible or intangible
asset.
▪ It is also immaterial whether the consideration for the transfer of the capital asset is
actually paid or payable in India or outside.
▪ The place of registration of the document of transfer of property is equally immaterial.
▪ However, if the capital asset, prior to the transfer, is situated outside India, the
provisions of Section 9(1) would not apply to deem the capital gains arising on the
transfer as accruing or arising in India for purposes of its taxation in India.

(2) Income from Salaries

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 ▪ Income which is chargeable under the head salaries is deemed to accrue or arise in India
in all cases when earned in India. For this purpose, income is said to be earned in India
if the services are rendered in India.
▪ The actual place of accrual of the salaries, the residential status of the employer, the
citizenship or nationality of the employee and whether the employee is a government
servant or an employee of private enterprise are immaterial. However, under Sub-
section (2) of Section 9, any pension payable outside India to a person residing
permanently outside India should not be deemed to accrue or arise in India if the
pension is payable to civil servants and retired judges provided, they were appointed
before the 15th August, 1947 and continued to serve after the constitution came into
operation.
▪ Barring this exception, non-residents and not ordinarily residents entitled to receive
salary or pension earned by them in India would be deemed to receive income which
has accrued in India even though the income may be actually accruing and received
outside India.

(3) Income from Salaries which is payable by the government to a citizen of India for
services rendered outside India

▪ Income from salaries payable by the Government to a citizen of India outside India for
his services rendered outside India, is deemed to accrue or arise in India even though
the income is actually accruing outside India and is also received outside India. Thus,
under this provision, salary income of all Government servants, working outside India
is deemed to accrue in India. In the absence of this provision, they would not be
chargeable to tax in respect of such income as they would, after some time, become
non-residents.
▪ This provision to deem income as accruing in India applies only in respect of their
income from salary but not in respect of the allowances and perquisites to which they
are entitled to while serving in a foreign country. Section 10(7) of the Income-tax Act,
1961 contains a specific provision to exempt Government servants from tax on their
services in a foreign country partly to meet the higher cost of living in that country.
▪ Salaries paid by the Indian Government in a foreign country to citizens of the foreign
country should not, however, be deemed to accrue in India since this provision applies
only to Indian citizens employed by the Government who are rendering service outside
India.

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(4) Dividend paid by an Indian company outside India

▪ Dividend paid by any Indian company outside India is deemed to accrue or arise in
India and the income is consequently chargeable to income-tax irrespective of the fact
whether the dividend is interim dividend or a final dividend and whether it is an actual
dividend or a notional dividend.
▪ The place of declaration of the dividend is immaterial and the date of payment is equally
immaterial for deeming the income to accrue in India.
▪ Normally, dividend income arises at the place where the source of income is situated,
i.e., where the shares yielding the income are kept. Shares are said to be situated at the
place where the share register of the company is kept. While the share register of a
company should ordinarily be kept at the place where its registered office is located,
even if the share register is kept outside India and the dividends are declared outside
India, the dividend would still be deemed to accrue in India because the company is an
Indian company.
▪ Dividends declared by foreign companies outside India would not, however, be deemed
to accrue or arise in India even in cases where the foreign company is resident in India
because of the control and management of its affairs being situated wholly in India.
▪ In order to deem the dividend income as arising in India, the residential status of the
shareholder as also the status of the assessee, whether he is an individual, company or
local authority, are irrelevant.

(5) Interest

Interest payable in following cases will be deemed to accrue or arise in India and will be taxable
in the hands of recipient irrespective of his residential status (i.e., ROR, RNOR or NR). Interest
payable by:

▪ Government; or
▪ A Resident in India, except where interest is payable in respect of moneys borrowed
and used for the purpose of business or profession carried outside India or earning any
income from any source outside India (i.e., Interest payable by a Resident for loan used
in India for any purpose, whether for business or profession or otherwise);
▪ A Non-Resident in India provided interest is payable in respect of moneys borrowed
and used for a business or profession carried on in India (i.e., Interest payable by a Non-
Resident for loan used for only business or profession in India).

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(6) Royalty

Royalty payable in following cases will be deemed to accrue or arise in India and will be
taxable in the hands of recipient irrespective of his residential status (i.e., ROR, RNOR or NR).

Royalty payable by:

▪ Government; or
▪ A Resident in India except where it is payable in respect of any
right/information/property used for the purpose of a business or profession carried on
outside India or earning any income from any source outside India (i.e., Royalty
payable by a Resident for right/information/property used for any purpose in India
whether business or profession or for earning other incomes);
▪ A Non-Resident in India provided royalty is payable in respect of any
right/information/property used for the purpose of the business or profession carried on
in India or earning any income from any source in India (i.e., Royalty payable by a
Non-Resident for right/information/property used for any purpose in India whether
business or profession or for earning other incomes).

(7) Fees for Technical Services

Fees for technical services payable in following cases will be deemed to accrue or arise in
India and will be taxable in the hands of recipient irrespective of his residential status (i.e.,
ROR, RNOR or NR). Fees for technical services payable by:

▪ Government; or
▪ A Resident in India except where services are utilized for the purpose of a business or
profession carried on outside India or earning any income from any source outside India
(i.e., Fees for technical services payable by a Resident for services utilised for any
purpose in India whether business or profession or for earning other incomes);
▪ A Non-Resident in India provided fee is payable in respect of services for the purpose
of a business or profession carried on in India or earning any income from any source
in India (i.e., Fees for technical services payable by a Resident for services utilised for
any purpose in India whether business or profession or for earning other incomes);

Incomes Which Do Not Form Part of Total Income- Exemption from taxation

INTRODUCTION

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Income Tax is calculated on the total income of a person for the previous year. For providing
relief to the tax payer, Income Tax laws provide various exemptions, deduction and rebate
under the Income Tax Act, 1961 ‘the Act’. The exempt income is often confused with the
deductions and rebate. However, there is difference between these concepts. Deduction &
Exemption are two Synonyms words in first appearance but has vital difference at length in
Income Tax Act. Deduction means subtraction of an amount from the SUM of Income which
is already having under different heads of Income. Whereas Exemption means the whole
income itself is exempt from tax. The same has been explained in the table below:

Exemption Deduction Rebate

Exemptions are claimed on Deduction Deductions are Rebate is a percentage
the basis of the source of allowed on the basis of the amount reduced from total
income. payments/ investments made income tax payable.
during the year.
The exempted income is not The tax deductions are Tax rebate is allowed as a
included in the total Income allowed under different reduction to the total tax
of the assessee for computing heads of income as well as payable
Gross Total Income. from the gross income.
There are several incomes that do not form part of the total income of the assessees, which are
entailed u/s 10 of the Act. Being exempt, these do not enter the computation of taxable incomes.
The major difference between incomes exempts u/s 10 and the deductions under Chapter-VI-
A, incomes u/s 10 do not enter into the computation of taxable income for assessees at all as
they are exempt; whereas Chapter for VI-A, first incomes are added and form part of Gross
Total Income (GTI) and only then these deductions under the Chapter are allowed.

Expenditure incurred in relation to any exempt income is not allowed as a deduction while
computing income under any of the Heads of Income. For getting deduction you have either to
expense out or invest in designated area in other words it is Cash outflow. On the other hand,
Inflow of income is itself exempt from tax i.e. Exemption. It results in increase in cash inflow.
The government declares the exemption through either circular or notification in public
interest. The following are the receipts / income which are exempt under Income tax Act, 1961

INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

What is Section 10 of the Income Tax Act?

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Section 10 under the IT Act is a provision that lists various types of incomes that are exempt
from income tax in India. The section provides a list of incomes that are not of taxable nature
for an individual or entity. These exemptions are provided to encourage certain activities or to
provide relief to certain categories of taxpayers.

Some examples of income exempted under Section 10 of the Income Tax Act include
agricultural income, income from gifts received from relatives, and income from scholarships,
etc.

What are the available Exemptions under Section 10?

Below is the list of exemptions available under Section 10 of the Income Tax Act: -

• Section 10(1) of Income Tax Act Section 10(1) of the IT Act provides for the exemption
of agricultural income earned by a Hindu Undivided Family (HUF) or an individual
from income tax. However, it should be noted that this exemption only applies to
agricultural income and not to income earned from activities such as dairy farming,
poultry farming, or any other animal husbandry activity.
The term "agricultural income" is defined as income earned from agricultural land
situated in India. This includes income from:

1. Agriculture: Any process used for cultivating the land, including tilling,
planting, and harvesting of crops.

2. Rent or revenue derived from land: Any rent or revenue received from land that
is used for agricultural purposes.

3. Income from agricultural operations: Any income derived from processing the
agricultural produce or raising and maintaining the agricultural produce.

• Section 10(2) of Income Tax Act As per Section 10(2) of the Income Tax Act, the
amount received by any member of a Hindu Undivided Family (HUF) from the family
income, or an impartible estate, out of the income of the family estate is exempt from
income tax.

• Section 10(2 A) of Income Tax Act-Section 10(2A) of the IT Act provides an

exemption for the share of profits received by a partner from a partnership firm or a
limited liability partnership (LLP). The exemption is applicable only to the share of

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 profits received by the partner and does not extend to any other income earned by the
partner, such as interest on capital or remuneration received from the firm or LLP.

• Section 10(4) of the Income Tax Act- Section 10(4) pertains to the exemption of
interest paid to non-residents on certain government securities, notified bonds, and
deposits. Any interest income earned by Non-resident on money standing in a Non-
Resident (External) Account in any bank in India in accordance with the Foreign
Exchange Management Act, 1999 is exempt from tax.

• Section 10 (4B) of the Income Tax Act- Section 10(4B) of the Income Tax Act
provides an exemption for interest income earned on notified savings certificates issued
by the government.

• Section 10 (4C) of the Income Tax Act-Section 10(4C) of the IT Act provides an
exemption for interest income earned by non-resident individuals or Foreign company
on certain Rupee Denominated Bond issued outside India during the period 17-09-2018
to 31-03-2019

• Section 10 (4D) of the Income Tax Act-Section 10(4D) of the Income Tax Act provides
for an exemption from tax for specified funds in respect of income accrued or arisen or
received by them which is attributable to a non-resident's holding (not being a
permanent establishment in India) or the investment division of offshore banking unit.
The exemption is allowed for certain incomes such as income from the transfer of
securities, income from securities issued by a non-resident, and income from a
securitization trust chargeable under the head 'Profits and gains from business or
profession', among others.

• The term "specified fund" includes the Investment Division of an Offshore Banking
Unit, which is a unit of a non-resident banking entity located in the International
Financial Services Centre (IFSC) and having a registration certificate as a Category-I
Foreign Portfolio Investor and an Alternative Investment Fund (AIF) established or
incorporated in India as a trust, company, LLP or body corporate and granted a
certificate of registration as Category-III AIF and located in an IFSC. All the units of
such AIF must be held by non-residents except units held by sponsor or manager.
Certain other conditions also need to be fulfilled to claim this exemption.

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 • Section 10 (4E)- Section 10(4E) of the Income Tax Act provides an exemption from
tax on income arising from the transfer of non-deliverable forward (NDF) contracts
entered into by a person with an offshore banking unit (OBU) located in an International
Financial Services Centre (IFSC).

• The exemption is available to any person who enters into NDF contracts with an OBU
located in an IFSC, and the income arising from such contracts is deemed to accrue or
arise outside India.

• It is important to note that this exemption is only applicable to income arising from
NDF contracts and not to any other income received from an OBU in an IFSC.

• Section 10(4F) of the Income Tax Act-Section 10(4F) of the Income Tax Act provides
for exemption of royalty income received by a non-resident on account of leasing of
aircraft or ship to an International Financial Services Centre (IFSC) unit if the unit is
eligible for deduction under section 80LA and has commenced its operations on or
before 31st March 2024. However, it is important to note that this exemption is
available only in respect of the royalty income and not any other income arising from
such leasing activity.

• Section 10(4G) of the Income Tax Act-Section 10(4G) provides an exemption to any
income received by a non-resident from a portfolio of securities, financial products, or
funds managed or administered by any portfolio manager on behalf of such non-
resident. The exemption is applicable only if the income arises in an account maintained
with an offshore banking unit in any International Financial Services Centre. However,
the exemption is limited to the extent such income accrues or arises outside India and
is not deemed to accrue or arise in India. This provision was introduced to promote
investment in India's financial sector and attract foreign investors to IFSCs in India.

• Section 10(4H)- This section provides exemption to non-residents or IFSC units on

transfer of shares of domestic companies engaged in aircraft leasing business in IFSC
as referred to in Section 80LA(1A) subject to fulfilment of prescribed conditions.

• Section 10 (5) of Income Tax Act-Section 10(5) of the Income Tax Act provides an
exemption for Leave Travel Concession (LTC) received by an employee from their
employer. This exemption encourages employees to travel within India and explore
different parts of the country.

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 • The exemption is available to salaried individuals who receive LTC from their employer
for themselves and their families. Family, in this context, includes the employee's
spouse, children, parents, and dependent siblings.

• The exemption is available for travel expenses incurred on domestic travel in India. The
exemption covers travel expenses for air, rail, and road transport, The exemption is
limited to the actual amount incurred on travel, subject to certain conditions. For
example, the exemption is available only if the employee undertakes the travel, and the
exemption is limited to two journeys in a block of four years.

• Section 10(6)(ii) of the Income Tax Act- Section 10(6)(ii) of the Income Tax Act
provides an exemption from tax for the amount received by an individual who is not an
Indian citizen, remuneration received by him as an official or staff member of a foreign
embassy, high commission, legation, commission, consulate, or trade representative in
India, provided that the corresponding Indian official in that foreign country enjoys a
similar exemption. This exemption is granted to ensure parity in the treatment of
officials of both countries and to promote friendly relations between them.

• Section 10 (6) (vi) (viii) of the Income Tax Act-Under Section 10(6)(vi) of the Income
Tax Act, the salary earned by a foreign employee of a foreign enterprise for services
provided during their stay in India is exempt from tax if certain conditions are met.
Similarly, under Section 10(6)(viii), salaries received by non-resident foreign nationals
for services rendered on a foreign ship during their stay in India for less than 90 days
in a year are also exempt from tax.

• Section 10(6)(xi) of the Income Tax Act-The remuneration or payment received by a

foreign trainee during the period of his stay in India for training in any establishment
owned by the government, financed by the government, or established under a central
or state act.

• Section 10(6)(A)-Tax paid by the Indian government on behalf of a foreign company,

earning income in the form of royalty for technical services, is exempt from tax for the
foreign company.

• Section 10(6)(B)-Tax paid by the central government on behalf of a foreign company

or non-resident earning any income is exempt for the foreign company or non-resident.

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 • Section 10(6) (BB)-Tax paid by an Indian company engaged in aircraft operations on
behalf of a foreign entity having income from the lease of aircraft is exempt from tax
for the foreign company.

• Section 10(6)(C)-Notified foreign companies earning income using royalty or fees for
technical services are exempt from tax.

• Section 10(6)(D)-Income in the form of fees for technical services or royalty arising
from the services rendered to NTRO by a non-resident is exempt from tax in India.

• Section 10(7)-Allowance/perquisites to Government employees outside India by the

Government to a citizen of India for rendering service outside India is exempt from tax.

• Section 10(8)-Direct or indirect remuneration received by an individual from a foreign

government for a cooperative technical assistance program is exempt from tax in India.

• Section 10(8)(A) and 10(8)(B)-Under section 10(8A), any income earned by a

consultant directly or indirectly under a technical assistance agreement and the income
which accrues outside India is exempt from tax. Under section 10(8B), the employee
of the consultant can receive a similar exemption if the employee is not a resident of
India or not ordinarily resident in India.

• Section 10(9)-The income of the family member of an employee serving under co-
operative technical assistance programme in sections 10(8A) and 10(8B), arising
outside India, is exempt from tax.

• Section 10(10)(i)-Gratuity received by a government employee is exempt.

• Section 10(10)(ii)- Exemption on gratuity for the employees covered under the
Payment of gratuity act, 1972, is the least of the following -

o 15 days salary x years of service

o INR 20 lakhs

o Actual gratuity received

• Section 10(10)(iii)-Exemption on gratuity for the employees not covered under the
Payment of gratuity act, 1972, is the least of the following -
Exemption on gratuity for the employees not covered under the Payment of gratuity
Act, 1972, is the least of the following –

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 o Half-month salary for every completed year (Average monthly salary x 0.5 x
years of service)

o INR 10 lakhs

o Actual gratuity

• Section 10 (10A) of the Income Tax Act-Section 10(10A) of the Income Tax Act
provides an exemption from tax on commuted pensions received by a government
employee.

• Section 10(10) (AA)- Leave encashment received by a government employee is

exempt. Leave encashment received by non-government employees will be the least of
the following

o Earned leave to the employee’s credit x average monthly salary

o 10 months average monthly salary

o INR 3 lakhs

o Actual amount received

• Section 10(10B)- Money received at the time of retrenchment is exempt from tax. The
amount least among these is exempt –

o The amount calculated under section 25F(b)

o INR 5 lakhs

o Actual amount received

• Section 10(10BB)-Compensation given to the victims of the Bhopal gas leak tragedy
is exempt.

• Section 10(10BC)-The amount received by the victims of a disaster or their legal heirs
as compensation from the central or state government is exempt from tax.

• Section 10(10C)-Money received on voluntary retirement or termination is exempt if a

government employee receives money at the time of termination or voluntary
retirement, and the maximum exemption amount is INR 5 lakh.

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 • Section 10(10CC)-The value of perquisites is taxable in the hands of employees.
However, tax paid by the employer on non-monetary perquisites is exempt in the
employee’s hands.

• Section 10 (10D) Of the Income Tax Act-Section 10(10D) provides an exemption

from tax on the proceeds received from a life insurance policy, subject to certain
conditions.

• Section 10(11) and Section 10(12) of the Income Tax Act both provide for tax
exemptions on the amount received by employees from their Provident Fund accounts.
However, there are some distinctions between the two sections.

• Section10(11)-Payment from Statutory Provident Fund Employer’s contribution to

such a fund is not treated as income of the employee also interest credited to such a
fund is exempt in the hands of the employee. At the time of termination of service,
Lump sum amount received from such fund is exempt in the hands of employees

• Section 10(12)-Payment from Recognised Provident Fund Employer’s contribution to

such fund, up to 12% of salary is not treated as income of the employee also Interest
credited to such fund up to 9.5% per annum is exempt in the hands of the employee,
interest in excess of 9.5% is charged to tax in the hands of the employee. If certain
conditions are satisfied, then lump sum amount received from such fund, at the time of
termination of service, is exempt in the hands of employees.

• Section 10(11A)-Payment from Sukanya Samriddhi Account.

Any payment from an account opened in accordance with the Sukanya Samriddhi
Account is exempt from tax. In other words, interest and withdrawals from such an
account will be exempt from tax.

• Section10(12A)- 40% of the total amount payable at the time of account closing or
opting out of the NPS scheme is exempt from tax. With effect from April 01, 2020, 60
% of the amount payable shall be exempt from tax

• Section 10(12B)- A partial withdrawal from the National Pension Trust not exceeding
25% of the total contribution made is exempt from tax.

• Section 10(13)- Employer’s contribution to approved superannuation fund up to

1,50,000 is exempt Payments from the fund are exempt in the case of death,

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 commutation of the annuity on his retirement, Payment by way of refund of
contributions, refund of employee’s contributions on leaving the service, or payment
by transfer to his account under a pension scheme referred to in section 80CCD.

• Section 10 (13A) of the Income Tax Act-Section 10(13A) provides an exemption for
House Rent Allowance (HRA) received by an individual who is a salaried employee.
This exemption is provided to alleviate the tax burden on rent paid by salaried
individuals who live in rented accommodations. The exemption is available if the
employee receives HRA as part of their salary and pays rent for a residential
accommodation. The exemption is limited to the minimum of the following amounts:

1. The actual amount of HRA received by the employee from their employer

2. The actual rent paid by the employee minus 10% of their salary

3. 50% of the employee's salary if they live in a metro city, or 40% of their
salary if they live in a non-metro city.

The term "salary" for this purpose includes basic salary, dearness allowance, and any other
commissions or bonuses received by the employee.

Also, the exemption under Section 10(13A) is not available to self-employed individuals, and
the employee must have incurred the expenditure on rent to claim the exemption. Additionally,
if the employee owns a residential property in the same city where they work, they cannot claim
the HRA exemption for rent paid.

• Section 10 (14) of the Income Tax Act- Section 10(14) of the Income Tax Act provides
an exemption for certain allowances an employee receives. The allowances covered
under this section are: -

o Travel allowance

o Daily allowance

o Helper allowance

o Uniform allowance

o Children’s education allowance

Also, the exemption under Section 10(14) is subject to certain conditions and limitations, and
the limits for exemption may change from time to time based on the updates in the law.
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Section 10(14) of the Income Tax Act covers the food allowance. According to this section,
any allowance granted by an employer to their employee for the purpose of meeting their daily
expenses on food during working hours is exempt from income tax.

• Section 10(15)- Section 10(15) of the IT act lists the interest incomes exempt under
various subsections.

• Section 10(15A)- Lease rent of an aircraft or an aircraft engine paid to a foreign

Government or to a foreign enterprise by an Indian company, engaged in the business
of operation of aircraft is not taxable in the hands of such foreign Government or non-
resident concern subject to condition satisfied.

• Section 10(16)- Any amount received as an educational scholarship is exempt in the

recipient’s hands.

• Section 10(17)-Daily allowance received by an MP or a member of the state legislature,

another expenditure received by an MP, or any constituency received by a Member of
the State legislature is exempt from tax.

• Section 10(17A)- Any amount received as an award in the public interest or a reward
by the Central or State government.

• Section 10(18)- Pension received by an individual who has received a gallantry award
is exempt from tax.

• Section 10(19)- Any family pension received by a member of the armed forces or their
family members is exempt from tax in the family member’s hands.

• Section 10(19A)- The annual value of one palace in possession of a former ruler is
exempt.

• Section 10(20) Income of local authority Income from these sources is exempt from
tax.

o Income under house property, capital gains, and other sources.

o Income arising from the supply of a commodity or service.

o Earnings from the business of supply of electricity or water.

• Section 10(21)-Income from research association approved under section 35(1) is

exempt if below condition satisfied: -
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 o Income is used for fulfilling its core objectives

o Funds should not be deposited or invested in the previous year otherwise than
in any one or more of the forms/modes specified in section 11(5).

• Section 10(22B)- Income of a news agency made for the purpose of distribution and
collection of news is exempt from tax. However, no exemption shall be available w.e.f.
Assessment Year 2024-25

• Section 10(23A)- Income received by an association or professional institution is

exempt from tax if it is established in India for supervising the profession of law,
engineering, accountancy, medicine, and architecture. The income should be used for
fulfilling its primary objectives and should be approved by the Central government.

• Section 10(23AA)- Any income received on behalf of a public fund or a non-regimental

fund established by the armed forces is exempt.

• Section 10(23AAA)- Income received from an approved fund that is made for the
welfare of employees and for such purpose as may be notified by the Board in Official
Gazette, of which the employees are members, is exempt.

• Section 10(23AAB)-Any income of a fund set-up by the Life Insurance Corporation of

India or any other insurer to which contribution is made by any person for receiving
pension from such fund, and fund approved by the Controller of Insurance or the
Insurance Regulatory and Development Authority, is exempt from tax.

• Section 10(23B)- Any income earned by a charitable organization made to develop

village and khadi industries is exempt.

• Section 10(23BB)- Income received by Khadi and the village industries board is
exempt.

• Section 10(23BBB)- Any interest, dividend, or capital gain of the European Economic
Community derived in India, from investments made out of its funds under a notified
scheme is exempt under section 10(23BBB).

• Section 10(23BBC)- Income earned by the SAARC fund for regional projects is
exempt from tax.

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 • Section 10(23BBD)- Earnings of the Secretariat of the Asian Organization of Supreme
Audit Institutions is exempt for the A.Y. 2001-02 to 2010-11

• Section 10(23BBE)- Earnings of IRDAI established under section 3(1) are exempt
from tax.

• Section 10(23BBG)- The income of the Central Electricity Regulatory Commission

after A.Y. 2008-09 is exempt.

• Section 10(23BBH)-Earnings of Prasar Bharati, established under the Prasar Bharati

Act, 1990, is exempt from tax under section 10(23BBH).

• Section 10(23C) of Income Tax Act-Section 10(23C) of the IT Act provides an

exemption from tax for the income received by certain educational and medical
institutions. This exemption is available to institutions that meet certain criteria and are
for charitable purposes and approved by the government.

• Section 10(23D)- Any income from the mutual fund registered under SEBI or set up
by a public sector bank is exempt from income tax.

• Section 10(23DA)- Any income earned by a securitization trust by way of

securitization is not taxable.

• Section 10(23EA)- Any income in the form of contributions received from recognized
stock exchanges and the members of an investor protection fund is exempt. However,
if any amount is shared with a recognized stock exchange, it becomes taxable.

• Section 10(23EB)- Income received by the credit guarantee fund trust, which is created
by SIDBI and the Government of India, is exempt from income tax for 5 years from
2002-03 to 2006-07

• Section 10(23EC)- Income of the notified investor protection fund set-up by

commodity exchange Contributions received from commodity exchanges are exempt
from tax. However, the amount present at the credit of the fund and shared with the
recognized commodities exchange is taxable.

• Section 10(23ED)- Income of Investor Protection Fund set by a depository

Contributions received in the Investor Protection Fund are exempt from tax. However,
if such an amount is transferred to a depository, it is chargeable to income tax.

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 • Section 10(23EE)-The specified income of a core settlement guarantee fund that is set
up by a clearing corporation is provided exemption from tax under this section. It should
be checked that where any amount standing to the credit of the Fund and not charged
to income-tax is shared with the specified person, the amount so shared shall be deemed
to be the income and shall be chargeable to income-tax.

• Section 10(23FB)- Earnings of a venture capital fund from investing in a venture

capital undertaking is not taxable from the A.Y. 2001-02 subject to satisfaction of
conditions specified in section 10(23FB).

• Section 10(23FBA)- Any income received by an investment fund except those

chargeable under ‘Income from business and professions’ is exempted from tax under
this section.

• Section 10(23FBC)- Any income received by a unit holder from a specified fund or on
transfer of units in a specified fund is exempt from tax.

• Section 10(23FC)- Any income of a business trust by way of Interest or dividend

received or receivable from a special purpose vehicle is exempt under this section.

• Section 10(23FCA)- Renting or leasing income of a real estate investment trust by

renting any real estate asset is exempted from tax.

• Section 10(23FE)- Any income of a specified person received in the form of interest,
dividend, or capital gains from an investment in India is exempt if specified conditions
are fulfilled by the specified entity as stated under section 10(23FE)

• Section 10(23FF)- Capital gains arising from transferring the share of an Indian
company by a non-resident/ specified fund are exempt from tax to the extent attributable
to units held by non-resident

• Section 10 (23FD)- Any distributed income received by a unit holder from the business
trust, other than income which is referred to in sub-clause (a) of clause (23FC) or clause
(23FCA) of section 10, is exempt from tax.

• Section 10(24)- Income under 'income from house property’ or ‘income from other
sources formed for regulating the relation between employer and workmen and
workmen and workmen is not taxable.

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 • Section 10(25)- Interest and capital gains on securities held by a statutory provident
fund, income received by the trustee on behalf of a recognized provident fund, and
income of the board of trustees on behalf of a deposit-linked insurance fund is exempt
from tax.

• Section 10(25A)- Any income earned by the employees' state insurance fund is exempt
from income tax.

• Section 10 (26) of the Income Tax Act- Section 10(26) of the IT Act provides an
exemption for income received by members of certain specified categories of
individuals who are considered as Scheduled Tribes (ST). Any income received by a
member of a Scheduled Tribe is exempt from income tax if they live in certain specified
areas. These specified areas include the states of Arunachal Pradesh, Manipur,
Meghalaya, Mizoram, Nagaland, Tripura, and the areas falling within the Ladakh
region of the state of Jammu and Kashmir. Such exemption is available of income which
earned or received from any source in such areas or income by way of dividends/interest
on securities arises from any area

• Section 10 (26AAA) of the Income Tax Act-Section 10(26AAA) covers the Sikkimese
individuals earning either in Sikkim or earning through dividends or interest on
securities in any area.

• Section 10(26AAB)- Any income earned by the agricultural produce marketing

committee for regulating the marketing of agricultural produce is exempt from tax.

• Section 10(26B)- Any income of a corporation established by a Central, State or

Provincial Act or of any other body, institution or association wholly financed by the
Government for promoting the interests of the members of the Scheduled
Castes/Tribes/backward classes is exempt from tax under section 10(26B).

• Section 10(26BB)- Any income of a corporation established for the welfare of a

minority community is exempt from tax.

• Section 10(26BBB)- Any income of a statutory corporation established to uplift ex-

servicemen from the assessment year 2004-05 is exempt.

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 • Section 10(27)- Income earned by a cooperative society for the benefit of SCs and STs
is not taxable. An exemption is available only if the cooperative society is government
funded and its membership consists only of other cooperative societies.

• Section 10(29A)- Income earned by the tea board, coffee board, rubber board, tobacco
board, agricultural and processed food products, export development authority, coir
board, spices board, and marine products export development authority is exempt from
tax.

• Section 10(30) --Any subsidy received by a person who carries on business of growing
and manufacturing of tea in India from the tea board for rejuvenating the cultivation
area, replacing, or replanting tea bushes is not charged to income tax.

• Section 10(32)- If the income of an assessee includes the income of his/her minor child,
an exemption of the least of the following can be claimed -
1500 per minor child or the income of each minor child that has been clubbed.

• Section 10(33)- Any capital gains from the transfer of units of the unit scheme, 1964,
that takes place after 1.04.2002 are exempt from tax.

• Section 10(34A)- Any income arising to shareholders from the buyback of shares is
exempt from tax. This exemption is available only in those cases where additional
income-tax is payable on distributed income under section 115QA by the company
opting for buy back of such shares.

• Section 10(34B)-The Finance Act 2023 has introduced a new clause (34B) in Section
10, which will come into effect from the assessment year 2024-25. This exempts
dividend income earned by an IFSC unit primarily engaged in aircraft leasing business.
However, the exemption is subject to the condition that the company paying the
dividend should also be an IFSC unit and engaged in the aircraft leasing business

• Section 10(35)- Section 10(35) of the IT Act provides an exemption from tax on any
income gained from the sale of specified mutual fund units.

• Section 10(37) of Income Tax Act- This clause provides an exemption from tax on
capital gain arising on transfer by way of compulsory acquisition of agricultural land
situated in an urban area subject to that compensation is received on or after April 1,
2004. This exemption is available if the land was used by the taxpayer or by his parents

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 for agricultural purposes for a period of 2 years or more immediately before the date of
its transfer.

• Section 10(37A)- This Section Provides exemption in respect of capital gain arising on
transfer of specified capital asset by an Individual or HUF under the land pooling
scheme of the Andhra Pradesh Government subject to fulfilment of certain conditions.

• Section 10 (38) of the Income Tax Act- Section 10(38) of the IT Law provides an
exemption from tax on LTCG arising from the sale of equity shares or units of equity-
oriented mutual funds where securities transaction tax paid at the time of transfer
No exemption under section 10(38) is available from Assessment Year 2019-20. The
long-term capital gains arising from sale of listed securities in excess of Rs. 1 lakh is
taxable at the rate of 10% under Section 112A (subject to certain conditions).

• Section 10(39)- Any income of a notified person earned from an international sporting
event in India from 2006-07 is not chargeable to income tax. The event should be
approved by the international body and notified by the Central Government and has
participation by more than two countries.

• Section 10(40)- Grant received by a subsidiary from its Indian holding company
engaged in the business of generation/ transmission/distribution of power for revival or
reconstruction of existing power business is not chargeable to income tax.

• Section 10(42)- Any specified income of a non-profit body or authority notified by the
Central Government and formed under a multilateral treaty agreement to which the
Central Government is a signatory is exempt from tax.

• Section 10(43)- Any amount received as a loan in a transaction related to a reverse

mortgage is exempt from tax.

• Section 10(44)- Income received for the new pension system trust which was
established on 27/02/2008, will be exempt from Income tax.

• Section 10(46)- Income of a trust established by the government for benefitting the
general public and does not perform any commercial activities and is notified by the
Central Government in the Official Gazette is exempt from income tax under this
section.

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 • Section 10(47)- Earnings of a notified infrastructure debt fund set-up under rule 2F is
exempt.

• Section 10(48)- Income received by a foreign company in India in Indian currency from
the sale of crude oil is exempt from tax if the central government approves the income,
is of national interest, and the foreign company does not perform any activity in India
except the receipt of income.

• Section 10(48A)- Income of a foreign company arising from the storage of crude oil in
an Indian facility which is then sold to an Indian resident is exempt provided it is in the
national interest and is according to an agreement made with the central government.

• Section 10(48B)- The income of a foreign company arising from the sale of leftover
inventory of crude oil from an Indian facility is not chargeable to tax.

• Section 10(48D)- Earnings of an institution established for providing finance for

infrastructure development do not attract tax under this section. This exemption is
available for 10 consecutive years from the assessment year in which the institution is
set up

• Section 10(48E)- Income of a DFI licensed by RBI is exempt from tax for 5 consecutive
years from the year in which it is established.

• Section 10(49)- Earnings of the National Financial Holdings Company limited, which
is set-up by the Central Government for any AY starting before 1st April 2014, is
exempt from income tax.

• Section 10(50)- Earnings from specified services or e-commerce supply or services

provided on or after 1-04-2020 that attract equalization levy do not attract Income Tax.

CASE LAW

Retiring employees of ICICI under VRS was eligible for section 10(10C) exemption
[Assessment year 2004- 05] [In favour of assesse] R. Banumathy v. CIT [2018] (Madras
High Court) The assessee an employee of ICICI bank opted for Early Retirement
Optional Scheme and received a consolidated payment.

According to the Income Tax Department, Voluntary Retirement Scheme issued by the ICICI
Bank was not in conformity with the Rules. Therefore, the employees were not entitled to any
exemption under section 10(10CC) of the Income tax Act, 1961. Held that the Supreme Court

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and the Bombay High Court have dealt with voluntary retirement scheme of the RBI and held
that retiring employees are eligible for section 10 (10C) exemptions. Section 10(10C) and rule
2BA, do not specifically apply to the RBI alone and, therefore, benefit was applicable to the
assessee also and thus, the assessee was entitled to section 10(10C) benefit.

CASE LAW

Merely because surplus earned by assessee educational institution was invested for
expansion of school building, it could not be held that assessee did not exist solely for
educational purpose so as to deny assessee exemption under section 10(23C) (vi) of the
Income tax Act, 1961 [In favour of assesse]

Mallikarjun School Society v. Chief CIT [2018] (Uttarakhand)

The assesee, educational society, applied for exemption under section 10(23C) (vi) of the
Income tax Act, 1961. Exemption was denied to the assessee on grounds that surplus of society
was utilized for expansion/ addition of school building, thus, it did not apply its funds for
purpose of education. Held that it was noted that main purpose, aim and object, as stated in
Memorandum of Association of the assessee, was to impart education along with ancillary
objects. Merely because surplus earned by the assesse educational institution was used for
expansion of school building etc. it could not be held that the assessee did not exist solely for
educational purpose. Thus, the assessee was to be allowed exemption under section 10(23C)
(vi) of the Income tax Act, 1961.

CLUBBING OF INCOME

Generally, a person is taxed in respect of income earned by them only. However, in certain
situation, income of other person is included (i.e., clubbed) in the taxable income of the
taxpayer and in such a case, he will be liable to pay tax in respect of his income as well as
income of other person too. The situation in which income of other person is included in the
income of the taxpayer is called as clubbing of income. E.g., Income of minor child is to be
clubbed with the income of his/her parent.

Section 60 to 64 of the Income-tax Act, contains various provisions relating to clubbing of

income. The special provisions contained in these sections are designed to counteract the
various attempts which an individual may make for avoiding or reducing his liability to tax by
transferring his assets or income to other person(s) while, at the same time, retaining certain
powers or interest over the property or it’s income. The clubbing provisions are as under:

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Clubbing of Income in Income Tax

Clubbing of income is the process of including another person's income in your taxable income.
Deemed income is the income that gets added to your total income. Clubbing of income
applies only in the case of individuals and not to firms, HUFs, companies, and other
assessees.

For instance, if your total income is Rs 3,00,000, consisting of Rs 1,00,000 as rental income
and Rs 2,00,000 as salary income, and you transfer the rental income to your wife without
transferring the house, your taxable income will still be assessed at Rs 3,00,000 instead of Rs
2,00,000 because of income tax laws. Provisions of Income Tax Act relating to clubbing of
income are as follows:

• Section 60: Transfer of income without transfer of asset

• Section 61: Revocable transfer of asset

• Section 64(1)(ii), 64(1)(iv), 64(1)(vii): Clubbing of spousal income

• Section 64(1)(vi), 64(1)(viii): Clubbing of income in case of son's wife

• Section 64(1A): Clubbing of income of a minor child

• Section 64(2): Clubbing of Income & HUF

Clubbing Provisions: Applicability of Clubbing of Income in Various Circumstances

The Clubbing of Income rule is applicable in a variety of contexts. Let's talk about each of
them individually.

Section 60: Transfer of Income without Transfer of Asset

The revenue is subject to taxation in the hands of the transferor when it is transferred without
the ownership of the asset that generated the revenue being transferred as well. The most
common instance of this is when a property owner requests that a renter pay the rent in the
name of their parents, spouses, or children.

Let us illustrate using a straightforward example: X receives Rs 20,000 per month in rental
income from his Delhi home. However, he requested that his tenant deposit rental payments
into his wife's bank account in order to avoid paying taxes. In this instance, even when the
money is deposited into the wife's account, X will be taxed on it because he moved the source
of income without changing the house's legal ownership. When doing their taxes, people
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frequently make this error. Thus, the next time, don't forget to transfer the asset's legal
ownership before transferring the revenue. You can prevent such errors and undertake proper
tax preparation.

Section 61: Revocable Transfer of Asset

A clause allowing the transferor to reclaim ownership of the item at any moment after it has
been transferred to the recipient is kept in the transaction. It is known as a Revocable Transfer
in this scenario. Any income from an asset that is transferred in a "revocable manner" is subject
to taxation in the transferor's hands under the terms of the Clubbing of Income.

For example, A gave B ownership of his house. The deal stipulates that after two years, A will
receive back ownership of the asset. According to the clubbing of income, any income that B
receives from this house during the next two years will only be included in A's income.

Section 64(1)(ii), 64(1)(iv), 64(1)(vii): Clubbing of Income of Spouse

The simplest method of avoiding taxes is, as the saying goes, to shift income into your spouse's
name. To control such transactions, there are extremely specific provisions in place. Below is
a discussion of each of the several scenarios.

Case 1- Your spouse works for a company or organisation in which you have a sizable stake.
This situation has two components, which are covered below.

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Case 2- If both you and your spouse get compensation from a company and have a significant
stake in that company, your combined compensation will be combined into the hands of the
spouse whose income does not include that compensation the most. However, the consensus is
that the clubbing provisions do not apply if both spouses are being paid for their professional
skills. Substantial interest is defined as having the right, at any point in the year, to not less than
20% of a company's voting power (in the case of a company) or 20% or more of the firm's
profits.

Case 3- If you gave your wife any assets without giving them any thought. Transferring an
income-generating item into the name of one's spouse to avoid paying taxes is a relatively
prevalent practice. These new regulations aim to stop these kinds of tax evasion schemes.
Income from these assets will thereafter be subject to taxation in your situation. This income
clubbing clause will not be applicable if the asset is transferred for sufficient value, as a
condition of a divorce, or moved before marriage.

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Case 4- Occasionally, a transferred present that was previously exempt from taxes is further
invested in a source such that it begins to generate income. The rules of section 64(1)(iv) apply
in all such cases where the transferee spouse modifies the asset's character, resulting in income
clubbing.

For example, Mr. X gave his spouse a present of Rs. 5,00,000. This sum is invested by the wife
in an FD, where interest is immediately earned. Will Mr. X be required to pay taxes on this
interest income? A gift of Rs 5,00,000 to a relative won't be subject to taxes because of this.
However, Mr. X will be subject to taxation on the interest received on the FD in accordance
with section 64(1)(iv). The clubbing provisions will apply as the transferee, Mrs. X, has altered
the form of the asset being transferred.

Case 5- Any asset transferred to a third party or AOP must have been done so with no
consideration at all or with insufficient consideration in order to eventually benefit your spouse,
either now or in the future. The clubbing provisions will also apply to this kind of asset route,
which delays the benefit of the assets to your spouse.

Section 64(1)(vi),64(1)(viii): Clubbing of Income in case of Son’s Wife

If you transfer any money to your daughter-in-law, the clubbing of income provisions also takes
effect. We talk about the situation below. Without due deliberation, the asset was passed to your
daughter-in-law. If this is the case, any income you get from that asset will be subject to
taxation. For instance, you have 10,000 10% Debentures, each worth Rs 100, that you have
given to your daughter-in-law without any thought. The interest income of Rs. one million will
now be included in your taxes.

In another scenario, to eventually postpone the asset's benefits to your daughter-in-law, it has
been transferred to another individual or AOP. When such transactions are made carelessly to
shift the burden of income tax to third parties, the Income Tax Department keeps a careful eye
on them and adds the proceeds back to your income by the clubbing of income rules.

Section 64(1A): Clubbing of Income of Minor Child (Less than 18 years)

Any money received by a minor kid is combined and given to one or both of his or her parents,
whose income (without including the income from minor children) is higher. For instance, the
interest on a fixed deposit made in a minor child's name will be combined with the parent who
makes the most money. Nonetheless, the clubbing of income provisions will not apply in some
circumstances, as per Income Tax provisions. These are:

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 • When a minor kid has any of the disabilities listed in Section 80U

• When a minor child works manual labour to earn money;

• The minor child's earnings are from skills, talents, education, etc. For instance, a young
child wins money on television programmes such as Voice India Kids and Indian Idol
Junior.

Additionally, under Section 10 (32) each minor child's income is exempted up to Rs. 1500 for
the parent to whom the minor's income is clubbed. Remember to apply for this exemption.

Frequently, people inquire about the money that their major child makes. In this kind of
situation, no specific clause is required. Major children are subject to the same rules that apply
to adults up to the age of sixty. Therefore, your significant child must file an income tax
return if his income exceeds Rs 2,50,000 (before any deductions). There must be no clubbing
of income provisions. It could happen that the child was a minor in the same fiscal year that
they became a major. Income in this situation would be pooled until the child was a minor, not
for the remainder of the year.

Section 64(2): Clubbing of Income & HUF

The Hindu Undivided Family has been around for a very long time. Rules about income taxes
also acknowledge HUF as an assessee. To put it plainly, a HUF must file an income tax return.
Therefore, it follows that in the case of HUF, clubbing of income provision is also attracted.
Any income derived from personal assets that were transferred to the HUF without proper
consideration will be subject to personal taxation. The dispersed property in your spouse's
possession will be combined with your income in the event of a future HUF split. For instance,
you have a residence that generates Rs 5,00,000 in rental income annually. The entire Rs
5,00,000 in income will be subject to taxation in your name alone if you transfer this house to
the HUF without giving it proper or sufficient thought.

Conversion of Self-acquired Property into Joint Ownership

When a person's self-acquired property is converted into joint family property without
sufficient consideration, the income the joint family makes from that property is included in
the overall income that the joint family is responsible for. The income from such property will
be included in the total income of the individual if a member of the HUF:

• Converts their separate property to the HUF

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 • Integrates the property into the family's common stock

• Transfers their individual property to the family without receiving sufficient

consideration

This inclusion guarantees that any revenue recognised in the applicable tax assessments from
the conversion or transfer of self-acquired property into joint family property.

SET-OFF AND CARRY-FORWARD OF LOSSES

While one endeavours to derive income, the possibility of incurring losses cannot be ruled out.
Based on the principles of natural justice, a set-off should be available for loss incurred. The
income tax laws in India recognize this and provide for adjustment and utilization of the losses.
For this purpose, the Income-tax Act, 1961 contains specific provisions (Sections 70 to 80) for
the set-off and carry- forward of losses.

SET-OFF OF LOSSES

Set off of losses means making adjust in losses which shall be against the profit of the same
financial year. If it is not possible to set off the losses against profit in the same year then it will
be carry forward to next year. A set off can be of two types which is intra-head set off and an
inter-head set off.

[Link]-Head Set Off: If in any year the taxpayer has incurred loss from any source under a
particular head of income, then he is allowed to adjust such loss against income from any other
source falling under the same head. The process of adjustment of loss from a source under a
particular head of income against income from other source under the same head of income is
called intra-head adjustment, e.g. Adjustment of loss from business A against profit from
business B.

Restrictions to be kept in mind while making intra-head adjustment of loss

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 Loss from speculative business cannot be set off against any income other than income
1 from speculative business. However, non-speculative business loss can be set off against
income from speculative business.
Long-term capital loss cannot be set off against any income other than income from long
2 term capital gain. However, short-term capital loss can be set off against long-term or
short-term capital gain.
No loss can be set off against income from winnings from lotteries, crossword puzzles,
3 race including horse race, card game, and any other game of any sort or from gambling
or betting of any form or nature.
Loss from the business of owning and maintaining race horses cannot be set off against
4
any income other than income from the business of owning and maintaining race horses.
Loss from business specified under section 35AD cannot be set off against any other
income except income from specified business (section 35AD is applicable in respect of
5 certain specified businesses like setting up a cold chain facility, setting up and operating
warehousing facility for storage of agricultural produce, developing and building a
housing project, etc.).
2. Inter-Head Set Off: After making intra-head adjustment (if any) the next step is to make
inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income
and is having income under other head of income, then he can adjust the loss from one head
against income from other head, E.g., Loss under the head of house property to be adjusted
against salary income.

Restrictions to be kept in mind while making inter-head adjustment of loss

Loss from speculative business cannot be set off against any other income. However,
1
non-speculative business loss can be set off against income from speculative business.
Loss under head “Capital gains” cannot be set off against income under other heads
2
of income.
No loss can be set off against income from winnings from lotteries, crossword puzzles,
3 race including horse race, card game, and any other game of any sort or from gambling
or betting of any form or nature.
Loss from the business of owning and maintaining race horses cannot be set off
4
against any other income.

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 Loss from business specified under section 35AD cannot be set off against any other
income (section 35AD is applicable in respect of certain specified businesses like
5
setting up a cold chain facility, setting up and operating warehousing facility for
storage of agricultural produce, developing and building housing projects, etc.)
Loss from business and profession cannot be set off against income chargeable to tax
6
under the head “Salaries”.
Loss under the head “house property” shall be allowed to be set-off against any other
7
head of income only to the extent of Rs. 2,00,000 for any assessment year.
Unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years
8
as per the existing provisions of section 71B.

CARRY-FORWARD OF LOSSES

Many times, it may happen that after making intra-head and inter-head adjustments, still the
loss remains unadjusted. Such unadjusted loss can be carried forward to next year for
adjustment against subsequent year(s) income. Separate provisions have been framed under the
Income-tax Law for carry forward of loss under different heads of income. Losses can be set-
off against the income of following years provided that they have been suffered by assessee
and determined in pursuance of a return filed by the assessee. Further, carry forward of losses
(other than loss from house property and unabsorbed depreciation) is permissible if the return
of income for the year, in which loss is incurred, is filed in time. The late filing of return should
not impact the status of carry forward of loss of previous years.

Loss under the Loss carried Less can be carried Loss can be carried
Head forward and Set- forward only if the forward upto
Off return of
income/loss of the
year in which loss is
incurred is
furnished on or
before the due date
of furnishing the
return, as

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 prescribed under
section 139(1).
Loss from non- If loss of any Applicable Eight Years
speculation business/profession
business (other than
speculative business)
cannot be fully
adjusted in the year
in which it is
incurred, then the
unadjusted loss can
be carried forward
for making
adjustment in the
next year. In the
subsequent year(s)
such loss can be
adjusted only against
income charged to
tax under the head
“Profits and gains of
business or
profession”
Loss from If loss of any Applicable Four Years
Speculation business speculative business
cannot be fully
adjusted in the year
in which it is
incurred, then the
unadjusted loss can
be carried forward
for making
adjustment in the

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 next year. In the
subsequent year(s)
such loss can be
adjusted only against
income from
speculative business
(may be same or any
other speculative
business).
Loss from business Loss from business Applicable Infinite Period
specified under specified under
section 35AD section 35AD cannot
be set off against any
other income except
income from
specified business
(section 35AD is
applicable in respect
of certain specified
businesses like
setting up a cold
chain facility, setting
up and operating
warehousing facility
for storage of
agricultural produce,
developing and
building a housing
project, etc.). Such
loss can be carried
forward for
adjustment against
income from

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 specified business
for any number of
years.
from the business of Loss from the Applicable Four Years
owning and business of owning
maintaining race and maintaining race
horses horses cannot be set
off against any
income other than
income from the
business of owning
and maintaining race
horses.
Loss under the head If loss under the head Not Applicable Eight Years
‘Income from House “Income from house
Property’. property” cannot be
fully adjusted in the
year in which such
loss is incurred, then
unadjusted loss can
be carried forward to
next year. In the
subsequent years(s)
such loss can be
adjusted only against
income chargeable to
tax under the head
“Income from house
property”.
Loss under the head If loss under the head Applicable Eight Years
Capital Loss “Capital gains”
incurred during a
year cannot be

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 adjusted in the same
year, then unadjusted
capital loss can be
carried forward to
next year. In the
subsequent year(s),
such loss can be
adjusted only against
income chargeable to
tax under the head
“Capital gains”,
however, long-term
capital loss can be
adjusted only against
long-term capital
gains. Short-term
capital loss can be
adjusted against long
term capital gains as
well as short-term
capital gains.
Unabsorbed de Depreciation is first Not Applicable Infinite Period
preciation, deducted from the
unabsorbed capital income chargeable to
expenditure on tax under the head
scientific research “Profits and gains of
and unabsorbed business or
capital expenditure profession”. If such
on promoting family depreciation could
planning amongst the not be fully adjusted
employees against such income
chargeable to tax in
that previous year,

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 the unabsorbed
portion shall be
added to the amount
of depreciation for
the following year
and shall be deemed
to be the part of
depreciation for that
year (similar
treatment would be
given to other
allowances as
mentioned above).
However, in the case
of set off, following
order of priority is to
be followed:
1) First adjustments
are to be made for
current scientific
research expenditure,
family planning
expenditure and
current depreciation.
2) Second
adjustment is to be
made for brought
forward business
loss.
3) Third adjustments
are to be made for
unabsorbed
depreciation,

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 unabsorbed capital
expenditure on
scientific research or
on family planning.

COMPUTATION OF Taxable INCOME AND Tax Liability OF AN ASSESSEE

Income tax is a charge on the assessee’ s income. Income Tax law lays down the provisions for
computing the taxable income on which tax is to be charged. Taxable income of an assessee
shall be calculated in the following manner.

Computation of Tax Liability includes following steps:

Determine the category of person

[Link] the residential status of the person as per section 6 of the Income tax
Act, 1961.

[Link] the income as per the provisions of respective heads of income. Section
14 classifies the income under five heads.

▪ Income from salaries

▪ Income from House Property
▪ Profits and gains of business or Profession
▪ Capital Gains
▪ Income from other sources.

[Link] all the deductions and allowances given under the respective heads
before arriving at the net under each head.

[Link] the income exempt under section 10 of the Act.

[Link] of incomes computed under the 5 heads of income after applying

clubbing provisions and making adjustments of set off and carry forward of losses
is known as Gross Total Income.

[Link] therefrom the deductions admissible under Sections 80C to 80U (if
applicable). The balance is called Total income.

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 [Link] total income is rounded off to the nearest multiple of Rupees ten. (Section
288A)

[Link] agriculture income (if any) in the total income calculated in (6) above. Then
calculate tax on the aggregate as if such aggregate income is the Total Income.

[Link] income tax on the net agricultural income as increased by Rs.

2,50,000/3,00,000/5,00,000 as the case may be, as if such increased net agricultural
income were the total income.

[Link] amount of income tax determined under (9) above will be deducted from
the amount of income tax determined under (8) above.

11. Calculate income tax on capital gains under Section 112, and on other income
at specified rates.

[Link] balance of amount of income tax left as per (10) above plus the amount of
income tax at (11) above will be the income tax in respect of the total income.

[Link] the following from the amount of tax calculated under (12) above.

• Rebate under section 87A (if applicable).

• Tax deducted and collected at source.
• Advance tax paid.
• Double taxation relief (Section 90 or 91).

[Link] balance of amount left after deduction of items given in (13) above, shall be the net
tax payable or net tax refundable for the assessee. Net tax payable/refundable shall be
rounded off to the nearest multiple of Ten rupees (Section 288B).

15. Along with the amount of net tax payable, the assessee shall have to pay penalties or
fines, if any, imposed on him under the Income-tax Act.

For calculation of income, amount received is classified under 5 heads of income; it is then
to be adjusted with reference to the provisions of the Income Tax laws in the following
manner.

Particulars Amount (Rs.)

Income under the Head:
+ Income from Salaries XXXX

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 + Income from House Property XXXX
+ Profits and gains of business or profession XXXX
+ Capital gains XXXX
+ Income from other sources XXXX
Adjustment in respect of:
+ Clubbing of Income XXXX
– Set off and carry forward of losses XXXX
= Gross Total Income XXXX
– Deductions under section 80C to 80U XXXX
= Total Income XXXX

INCOME TAX ASSESSMENT: TYPES OF ASSESSMENT IN INCOME TAX

Every year, taxpayers must file their income tax returns within the applicable due date to ensure
compliance with the country’s tax laws. The filed ITRs are examined by the Income Tax
Department with various types of income tax assessment procedures to ascertain the validity
of filings and uncover possible discrepancies. In this article, we discuss what are the different
types of assessments in income tax law and how they impact the taxpayer.

What is Assessment in Income Tax?

According to the provisions of the Income Tax Act 1961, if an individual’s earnings exceed the
basic exemption limit, they must file income tax returns. The new tax regime sets the basic
exemption limit at Rs. 3 Lakhs for individuals under the age of 60 years. Therefore, any person
earning above Rs. 3 Lakhs in a given financial year, must self-determine their tax liability and
file their ITR. Once the ITR is filed, the income tax department examines the accuracy of the
income details included. This scrutiny and review of ITRs by the income tax authorities is
termed as income tax assessment. Income tax assessment procedures evaluate the returns filed
by the taxpayer under different conditions and provisions. Accordingly, there are various types
of assessments in income tax.

Understanding Different Types of Income Tax Assessment

Taxpayers should be aware of the following different types of assessment in income tax:

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Self-Assessment u/s 140A

In India, self-assessment is the most common type of assessment in income tax. Under the self-
assessment procedure of income tax, the taxpayer calculates the total taxable income on their
own. As per the provisions of Section 140A, the taxpayer must first consolidate income from
various sources, including salary, rent, business income, capital gains, etc. This total income
needs to be adjusted against losses or applicable deductions/exemptions to arrive at the net
taxable income for the year. Next, the assessee must deduct advance tax or TDS already paid
from the net taxable income to determine the outstanding tax liability. This outstanding amount
of tax is self-assessment tax which must be cleared before filing returns. The deadline for filing
self-assessment ITRs is 31st July of every financial year.

Summary Assessment u/s 143(1)

Applicable under Section 143(1), summary assessment is a type of assessment procedure in

income tax where the information provided by the assessee is tallied with the details available
to the IT Department. This type of assessment in income tax is conducted without human
intervention and is used to locate clerical errors, miscalculations, incorrect claims, incorrect
disallowances, or any other inconsistencies in the taxpayer’s ITR. In other words, the accuracy
of the ITR is verified by the Income Tax Department. A summary assessment is generally
carried out prior to notifying the taxpayer of ITR discrepancies, refund, adjustment, or errors.

Scrutiny Assessment u/s 143(3)

Scrutiny or regular assessment in income tax is a type of assessment procedure that is not
applicable on all filings. The Income Tax Department authorises an Assessing Officer to
conduct such an assessment if the taxpayer’s profile meets certain CBDT parameters. Scrutiny
assessment in income tax is conducted to check if the taxpayer has paid inadequate tax either
by understating their income, overstating losses, or underpaying taxes. The AO examines books
of accounts or other documents thoroughly to validate that there is no disparity between income
earned and taxes paid. Post verification, the AO passes an order either ratifying the ITR filed
or raising an income tax demand. If the assessee is unhappy with the assessment, they can apply
for recitation u/s 154 or appeal to higher tax authorities, including the CIT, the ITAT, and the
High Court.

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Best Judgement Assessment u/s 144

This type of assessment in income tax can happen when there is no response from the taxpayer
on multiple notices issued by the Income Tax Department. In other words, this assessment
procedure in income tax happens only when the assessee fails to cooperate with the IT
Department, providing them with relevant information and documents. In such cases, the
Assessing Officer is responsible for computing the tax liability of the individual - to the best of
his judgement. Here, ‘best judgement’ refers to computing the tax liability of the assessee with
utmost honesty.

Best judgement assessment procedures in income tax are commonly adopted in the following
instances:

• When the assessee fails to respond to multiple notices sent by the IT Department
requesting books of accounts or other relevant documents.
• When the assessee fails to file their returns by the specified due date.
• When the assessee does not cooperate or comply with the directives of the IT
Department.
• When the Assessing Officer is not satisfied with the documents provided.

Income Escaping Assessment u/s 147

Income escaping assessment is one of the most critical types of assessments in income tax. This
income tax assessment procedure is followed when the income tax officer believes that taxable
income has escaped assessment in the given financial year. In such cases, a reassessment will
be ordered. For concealed funds of Rs. 1 Lakh or more, the AO can reopen ITR filings from
the last 3 years. If the concealed income amounts to more than Rs. 50 Lakhs, cases from the
last 10 years can be reopened.

This type of income tax assessment happens in the following situations:

• When the assessee has earned taxable income, but the ITR is not filed.

• When the ITR is filed but the income is understated or losses are overstated.

• When reports and details on international transactions are not furnished.

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Assessment in Case of Search u/s 153A

This type of income tax assessment is applicable on taxpayers who have been searched u/s 132
of the Income Tax Act. According to the income tax assessment procedures outlined in Section
153A, the Assessing Officer can scrutinise the taxpayer’s ITR for the last six years,
immediately preceding the ‘search’ year. However, it is to be noted that the assessment must
be made in accordance with the material disclosed during the search.

WEALTH TAX

INTRODUCTION

The Wealth Tax Act came into force on April 1, 1957 and it extends to whole of India including
the State of Jammu and Kashmir. [sec. 1] Wealth tax is a direct tax, which is charged on the net
wealth of the assessee. The unit of wealth tax has been divided into two lessons. In this lesson
we shall be studying the chargeability and computation of wealth tax and in the next lesson we
will be studying the valuation of assets and provisions relating to filing of return and
assessment.

What is Wealth Tax?

Wealth tax is a direct tax with the aim to reduce the inequalities of wealth. It is charged on the
net wealth of super rich individuals, companies, and Hindu Undivided Families (HUFs). It was
abolished and replaced with 2% additional surcharge levy.

Introduced in late 1950s, Wealth tax is a levy of tax on the net wealth (the aggregate value of
assets minus the aggregate value of debts or liabilities as on the valuation date) of super rich
individuals/HUF/companies at the end of a fiscal year.

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Wealth tax was essentially aimed at taxing the super-rich taxpayers who both by inheritance or
on their own, accumulated wealth and therefore, had to make a larger contribution to the
exchequer.

An individual, a Hindu Undivided Family or a company had to pay a wealth tax of 1% on

earnings of over Rs.30 lakh p.a.

Significance of Wealth Tax

Given that India reportedly has around 800 million people in poverty, wealth tax has been a
politically sensitive subject and therefore, often figures in the 'pro-poor' and 'pro-industry'
narrative in the country.

Many political parties have, in the past, demanded wealth tax rates to be raised to 3% to
reportedly make several urban and rural crorepatis pay more taxes. Also, according to experts,
wealth tax holds special significance in today's India, what with the growing number of
billionaires in the country, owing to several factors including booming entrepreneurship and
foreign direct investment in specific sectors among others.

PROVISIONS OF WEALTH TAX

CHARGEABILITY

The Wealth Tax is charged for every assessment year in respect of the net wealth of the
corresponding valuation date of every individual, Hindu Undivided Family, and company,
@1% of the amount by which net wealth exceeds Rs.30 lakh. By virtue of section 45, no wealth
tax is chargeable in respect of net wealth of the following persons:

a) Any company registered under section 25 of Companies Act 1956

b) Any co-operative society

c) Any social club

d) Any political party

e) A Mutual Fund specified under section 10(23D) of the Income Tax Act

VALUATION DATE

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Sec.2 (q) Valuation date is 31st March immediately preceding the assessment year. Thus, for
assessment year 1st April 20023 to 31st March2024 valuation date is 31st March 2024.
Valuation date is very important because:

a) It is the tax base for the charge of wealth tax

b) The residential status of an assessee is determined with reference to the year ending on
valuation date

c) The value of an asset is determined on valuation date.

d) The wealth as on the last moment of the valuation date is taken to be the net wealth for
Taxation purposes

Incidence of Tax

Incidence of tax depends on residential status and nationality of the assessee:

Resident and ordinary Resident but not Non-resident

resident in India [or ordinary resident in
resident in case of a India
company]
In case of
a) Individual who is a
citizen of India
Taxable Taxable Taxable
b) Every Hindu Un
divided Family
c) Company
In case of an Taxable wealth =(A-B) Taxable wealth=(A- Taxable
individual who is not B) wealth=(A-B)
a citizen of India
Here in

‘A’ denotes all assets located in India

‘B’ denotes all debts owed on valuation date which have been incurred in relation to the assets
included above

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‘C’ denotes all assets located outside India

‘D’ denotes all debts owed on valuation date in relation to the assets included above

NET WEALTH

Net Wealth represents the amount by which the total value of all assets including deemed assets
but excluding exempt assets, belonging to the assessee on the valuation date exceeds the value
of all debts owed by the assessee on the valuation date incurred in relation to the taxable assets.

ASSETS Sec.2 (ea)

The term assets include the followings:

1) Building Sec.2 (ea)

(i) Any building or land appurtenant thereto u/s2 (ea) (i) is treated as an asset and it includes:

a) Commercial building

b) Residential building

c) Any guest house

d) A farmhouse situated within 25 kilometers from the local limits of a local authority

However following buildings are not treated as assets

a) A house meant for residential purposes is allotted by a company to an employee or an officer

or a whole-time director, having a gross annual salary of less than Rs.5lakhs

b) Any house for residential or commercial purposes, which forms part of stock in-trade

c) Any house occupied by assessee for the purposes of his own business or profession

d) Any residential property that has been let out for a minimum period of 300days in the
previous year

2) Motor Cars Sec.2 (ea) (ii)

Any motorcar is an asset except the following

a) Motor cars used by the assessee in the business of running them on hire b) Motor cars held
as stock- in- trade

3) Jewellery, Bullion, Utensils of Gold, Silver etc. Sec. 2(ea) (iii)

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Jewellery, bullion furniture, utensils or any other article made wholly or partly of gold, silver,
platinum, or any other precious metal of any alloy containing one or more of such precious
metals are treated as an asset for this purpose, the term jewellery includes

a) Ornaments made of gold, silver, platinum or any other precious metal of any alloy containing
one or more of such precious metals, whether or not containing any precious or semi-precious
stone, whether or not set in any furniture, utensils, or other articles or worked or sewn into any
wearing apparel.

b) Precious or semi-precious stones, whether or not set in any furniture, utensils or other articles
or worked or sewn into any wearing apparel However, the term jewelry shall not include the
Gold Deposit Bonds issued under Gold Deposit Scheme, 1999 notified by the Central
Government However, if any of the above stated assets are held by the assessee as stock-in
trade, then it is not treated as an asset

4) Yachts, Boats and Aircrafts Sec 2(ea) (iv)

Yachts, boats and aircrafts are treated as “assets” excluding yachts boats and aircrafts used by
assessee for commercial purposes.

5) Urban Land Sec 2(ea) (v)

Urban land is treated as an “asset” and urban land means land situated

a) in any area which is comprised within the jurisdiction of local authority and which has a
population of not less than ten thousand according to the last preceding figures of census of
which the relevant figures have been published before the valuation date; or

b) is any area within such distance, not being more than 8 kilometer from the local limits of the
local authority as the central government may, having regard to the extent, and scope for
urbanization of that area and other relevant considerations, specified in this behalf by
notification in the official gazette. However, land is not treated as “asset” in the following cases:

a) Land on which construction of a building is not permissible under any law for the time being
in force in the area in which such land is situated;

b) Land occupied by any building which has been constructed with approval of the appropriate
authority;

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c) Any unused land held by the assessee for industrial purposes for a period of two years from
the date of acquisition by him

d) Land held by an assessee as stock-in-trade for a period of 10 years from the date of its
acquisition by him.

6) Cash-in-hand Sec 2(ea) (vi)

Following is treated as an “asset”:

a) In case of any individual and HUF, cash in hand on the last moment of the valuation date in
excess of 50,000 shall be treated as “asset”

b) In case of any other person any amount not recorded in the books of accounts shall be treated
as “asset”.

DEEMED ASSETS [sec. 4]

Deemed assets represent those assets, which belong to some other person but for the purpose
of calculation of wealth tax, these are included in the wealth of the assessee. (transferor), it is
because at time an individual may transfer his assets without adequate consideration to persons
in whom he may be interested.

Thus, to prevent avoidance of wealth tax in this manner, wealth tax Act provides that assets
transferred by an individual after 31-03-1956 (in case of Dadra Nagar Havely, Goa, Daman and
Diu and Pondicherry on after 01-04-1963) shall be included in the net wealth of the transferor,
provided following conditions are satisfied.

(i) The individual must be the owner of these assets

(ii) The assets must be transferred without adequate consideration in money or money is worth.
In case of inadequate consideration, difference between adequate consideration and inadequate
consideration shall be included in the net wealth of the transferor.

iii) The asset must be held by the transferor on the valuation date whether in the same form or
in converted form.

If assets have been lost, destroyed, transferred by the transferee to a third party and it is not
held by transferee on the valuation date. Then the value of the assets shall not be included in
the net wealth of the transferor, further the form of asset has been changed by transfer then
value of substituted asset is included in the wealth of transferor if it is taxable u/s 2 (ea).

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If the asset transferred by an individual to the spouse without adequate consideration was not
an asset u/s 2 (ea) but on the valuation date, it has been substituted by an asset taxable u/s 2
(ea) then value of such asset shall be included in the net wealth of transferor.

DEEMED ASSETS u/s 4 (i) are as follows.

1) Assets transferred to spouse Sec. 4(1) (a) (ii).

If the assessee has transferred an asset to his/her spouse without adequate consideration or in
connection with in an agreement to live apart, then value of such asset in included in the wealth
of assessee provided their relationship exists both on the date of transfer and on the date of
valuation.

2) Assets held by minor child Sec. 4 (1) (a) (ii)

The value of assets held by minor child including step child and adopted child, excluding a
married daughter, a handicapped child, illegitimate child and grandchild of an individual is
included in the wealth of a parent.

If marriage of parents subsists, then in the wealth of that parent whose net wealth is more. If
marriage of parents does not subsist, then in the wealth of that parent who maintains the minor
child in the previous year. However, there are certain exceptions to it.

(i) Assets acquired by the minor child out of his income arising on account of his
manual work or activities involving application of his specialized knowledge and
experience shall not be included in the net wealth of a parent.
(ii) Assets held by a disabled minor child shall not be included in the wealth of the
parent.

In these cases, net wealth of the child shall be determined separately and assessed in his hands.

3) Assets transferred to a person or to AOP’s, Sec. 4 (1) (a) (iii)

If an individual transfers his assets to another person or AOP’s without adequate consideration,
directly or indirectly, for the immediate or deferred benefit of the individual or his spouse then
these assets are included in the wealth of the individual provided their relationship exists on
valuation date.

4) Revocable transfer of asset Sec. 4(1) (a) (iv)

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Revocable transfer means a transfer which can be revoked at any time by the transferor. Thus,
if an individual has transferred any assets to another person or AOP under revocable transfer
then value of such assets is included in the wealth of the individual.

5) Assets transferred to son’s wife Sec. 4(1) (a) (v)

If an individual transferred an asset to his son’s wife directly or indirectly after 31-05-1973
without adequate consideration then the value of such assets is included in the net wealth of
the individual.

6) Assets transferred to a person/AOP for the benefit of son’s wife Sec. 4(1) (a) (vi)

If an assessee has transferred his asset to another person or AOP directly or indirectly after 31-
05-1993 without adequate consideration for the immediate or deferred benefit of his son’s wife
then value of such assets shall be included in wealth of the individual.

7) Interest in a Firm or AOP Sec. 4(1) (b)

If the assessee is a partner in a firm or a member of an AOP (not being a co-operative housing
society), then value of his interest in the assets of firm or association shall be included in his
net wealth. Where a Karta of H.U.F. is a partner in a firm, his interest in the firm’s assets is
includible in the net wealth of the H.U.F.

8) Converted Property Sec. 4(1A)

If an individual who is a member of an HUF converts his individual property after 31-12-1969
into Joint family property either by throwing it into the common stock or by making gifts of
separate property or through act of impressing such separate property with the character of
property belonging to family without adequate consideration, such properly is called converted
property.

In this case value of the converted property or any part of it held by the family on valuation
date is included in the net wealth of the individual. However, in case the converted property
becomes the subject matter of partition among the members, then the part of the property
received by the individual and his spouse is includible in his net wealth.

9) Transfer by means of book entry [Sec.4 (5A)]

Where a person makes a gift of money to another person by means of entries in the books of
account maintained by the donor or an individual or HUF or firm or AOP or body of individuals

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with which the done has business or other relationship. Then value of such gift is includible in
the net wealth of donor unless the donor satisfies the Assessing officer that the money was
actually delivered to the done at the time of making the entries.

10) Impartible Estate Sec. 4(6)

Impartible estate of an H.U.F. is that estate which by special law or custom descend to one
member of the family though it is a Joint property belonging equality to all, Value of impartible
estate is included in the net wealth of such holder, so far wealth tax purposes. He is the deemed
owner of the impartible estate.

11) House from a Co-operative Housing society etc. Sec. 4(7)

If the assessee is a member of a co-operative Housing Society, company or AOP’s and he is

allotted a building a part thereof or leased under a house building scheme of the society,
company or association, as the case may be then he is the deemed owner of that building part
thereof and hence value of such building shall be included in his net wealth.

12) Building in part performance of a contract Sec. 4(8) (a)

If a person is allowed to take or retain possession of any building in part performance of a

contract of the nature referred u/s 53 A of Transfer of Property Act, 1882 then he is the deemed
owner of that building or part thereof and hence value of such building shall be included in his
net wealth.

13) Building on lease Sec. 4(8) (b)

If an assessee acquires any right by way of lease with respect to a building by virtue of any
transaction to a building by virtue of any transaction referred to in clause (f) of Sec. 269 U A.
shall be the deemed owner of the building or part thereof and its value shall be included in his
net wealth, however it excludes any right by way of a lease from month to month of for a period
not exceeding 1 year.

Exempt Assets [Sec 5]

The following assets are exempt from wealth tax

1) Property held under trust Sec. 5(i)

Any property held under trust or other legal obligations by the assessee for any public purpose
of a charitable or religious nature in India is exempt.

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2) Interest in the coparcener property Sec. 5(ii)

if the assessee is a member of H.U.F., he is not liable to pay tax on his share in the joint property,
so long as the property remains joint and he continues as the member of that family.

3) One building in the occupation of former Ruler Sec. 5(iii)

any one building which is in the occupation of a Ruler and which has been declared as his
official residence by the Central Govt .is totally exempt from tax. However, the exemption
available only to the Ruler during his life time.

4) Jewellery in possession of a former Rule Sec. 5(iv)

Jewellery in possession of a former Ruler not being his personal property which has been
recognized by the Central Govt. as his heirloom, before commencement of Wealth Tax Act or
by the board after that shall be exempt. However, this exemption is subject to fulfilment of
certain conditions like keeping of jewellery in India, in its original shape, allowing authorized
person to examine the jewellery as and when necessary.

5) Assets of Indian repatriate Sec. 5 (v)

Indian repatriate means a person of Indian origin or a citizen of India who was residing in a
foreign country and on leaving such country assessee has returned to India with the intention
of permanently residing therein. In this case his following assets shall be exempt for 7
successive assessment years, commencing with the assessment year following the date of his
return to India.

i. Money brought by him in India.

ii. Assets brought by him in India.
iii. Any balance in Non-Resident External Accounts in India on the date of his return
iv. Assets acquired by him out of money in his Non-resident External Account or by
sending money from foreign country within 1 year immediately preceding the date of
his return to India. Any assets acquired by him out of money brought in by him in India
or out of the balance in NRE account after his arrival in India.

[Link] [Sec 5 (vi)]

One house or part of a house or a plot of land belonging to an individual or HUF is exempt
provided size of plot is not bigger than 500 square meters.

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DEBT OWED

Debt owed represents an obligation to pay an amount either in present or in future. In the
computation of net wealth, from the total of all assets value of debts owed by an assessee is
deductible provided following conditions are satisfied

i) Debt is owed by assessee on valuation date

ii) Debt should have been incurred in relation to acquisition or creation of nay asset,
which is taxable for Wealth Tax in the hands of assessee.

COMPUTATION OF NET WEALTH AND WEALTH TAX

Procedure for computation of net wealth is as follows:

Computation of Net wealth of the assessee. Rupees

Assets owned by assessee on valuation date including deemed assets
X
and excluding exempt assets
Less: Deductible debts owed by assessee on the valuation date. Y
Net Wealth X-Y

How to calculate wealth tax in India?

Wealth tax was calculated on the market value of all the assets owned, irrespective of whether
they yielded any returns or not.

• All individuals and Hindu Undivided Family with net wealth above Rs. 30 lakhs were
required to pay wealth tax.

• Wealth tax was based on the valuation of assets as on March 31 and would, therefore,
be applicable on any assets acquired at the end of a financial year.

• However, assets sold during the year would not come under the purview of wealth tax.

• Significantly, some Double Taxation Avoidance Agreements (DTAAs) in the country,

provided relief to taxpayers from wealth tax, if they had already paid it in any other
country.

Why has Wealth Tax been abolished?

Some of the main objectives cited by experts behind the move include the following:

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 • Focus on more governance and less government: Finance minister, during his budget
speech, cited the lack of ease of doing business as one of the reasons for abolishing the
wealth tax. Also, by abolishing wealth tax, government has reduced the scope of some
taxpayers taking undue advantage of the loopholes in the wealth tax act.

• Simplification of tax procedures: According to experts, Indian tax laws are, by and
large, very complex and therefore, prone to litigations. Government wants to simplify
procedures for easier tracking and enhance transparency.

• Incurs high collection costs but provides low yield: In a country with increasing
number of billionaires, government collected a meagre Rs. 1008 crore as wealth tax last
fiscal, exposing how the cost of collecting the tax is much higher compared to the low
yield. Also, wealth tax does not form a major chunk of collection of direct taxes in India
(Rs.788.67 crore and Rs.844.12 crore was collected as wealth tax in 2011-12 and 2012-
13 respectively).

• Increase the revenue collection: By abolishing the wealth tax and replacing it with
additional surcharge, government can collect up to Rs. 9000 crores in a fiscal year,
opined the finance minister in his budget speech.

• Additional administrative burden: Taxpayers had to value their assets as per the
Wealth Tax Rules to compute their net wealth. For certain assets such as jewellery,
taxpayers had to obtain a valuation report from a registered valuer.

• Tax compliance and widening the tax base: Government wants to bring more persons
under its tax net given that individuals who file income tax returns outnumber those
who file wealth tax returns.

• Additional reporting: Taxpayers will have to do some additional reporting of

information in their income tax returns in terms of listing out their assets and liabilities.

• No leakage: Details about assets submitted by the taxpayer in the income tax returns
will help officials correlate declared wealth with the declared income. Tax officers can,
therefore, ensure that there is no tax 'leakage'. Earlier, unproductive assets such as
jewelry which cannot be readily tracked would allow assessees to skip making such
disclosures in their wealth returns.

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 • Low Awareness: According to rough estimates, many assessees in the country are only
dimly aware of the existence of the wealth tax. Consequently, more often than not,
assessees are served with notices for failing to pay wealth tax. In 2011-12, the number
of wealth tax assessees in India stood at 1.15 lakhs.

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