CRESTA First Grade College, Mysuru Income Tax Law and Practice I

Syllabus

Income Tax Law and Practice - I

Module-1:Basic Concepts of Income Tax

Introduction Meaning of tax-, types of taxes, cannons of taxation. Brief history of Indian
Income Tax, legal framework of taxation, Important definitions, assessment, assessment
year, previous year including exceptions, assesses, person, income, casual income,
Gross total income, Total income, Agricultural income, scheme of taxation, Exempted
incomes of an individual under section 10.

Module -2: Residential Status and Incidence of Tax

Introduction Residential status of an individual. Determination of residential status of

an individual. Incidence of tax or Scope of Total income. Problems on computation of
Gross total Income of an individual

Module- 3: Income from Salary

Introduction - Meaning of Salary -Basis of charge Definitions Salary, Perquisites and

profits in lieu of salary - Provident Fund Transferred balance. - Retirement Benefits
Gratuity, pension and Leave salary. Deductions and Problems on Computation of
Taxable Salary.

Module -4: Income from House Property

Introduction - Basis for charge - Deemed owners -House property incomes exempt from
tax, composite rent and unrealized rent. Annual Value Determination of Annual Value -
Deductions from Annual Value - Problems on Computation of Income from House
Property

Module No.-5: Tax Deduction at Sources & Advance Tax Ruling

Introduction - Meaning of TDS - Provisions regarding TDS - TDS to be made from

Salaries - Filing of Quarterly statement Theory and Problems; Advance Tax: Meaning of
advance tax - Computation of advance tax - Instalment of advance tax and due dates.
Deductions under Sections 80C, 80CCC, 80CCD, 80CCG, 80D, 80DD, 80DDB, 80E,
80G, 80GG, 80TTA and 80U as applicable to Individuals.

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Question Paper Pattern

Part No. of Questions Marks

Part A Answer any 5 out of 7. Each question carries 2 5*2 = 10
marks

Part B Answer any 2 out of 4. Each question carries 10 10 * 2 = 20

marks
Part C Answer any 2 out of 4. Each question carries 15 15 *2 = 30
marks
Total 60

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CRESTA First Grade College, Mysuru Income Tax Law and Practice I

Module-1:

BASIC CONCEPTS OF INCOME TAX

INTRODUCTION

Income tax is an imposition from the central government, which

constitutionally valid. Every person earning income in India is required to
pay tax known as income tax. Income tax forms the biggest revenue to the
central government to meet its expenditure on social health and
infrastructure. It is a branch of direct taxes. All the provisions of this
actare contained in an act known as INCOME TAX ACT, 1961.

Meaning of TAX:
Tax is a compulsory payment to be made by every resident of India. It is a charge
or burden laid upon persons or the property for the support of a Government.
Government decided the rates and the items on which tax will be charged, like
income tax, GST, et
revenue or source of income. The money collected under the taxation system is put

> The Indian Constitution authorizes the Central and the State Governments to
levy taxes.
> The Parliament passes laws to approve taxes collected by the Central
Government. In the case of the State Governments, the State Legislature holds this
power.
> By the State Government: Also, the local governing and civic bodies too have
the right to levy certain taxes.

BACKGROUND OF TAXATION SYSTEM IN INDIA

The taxation system in India traces its roots to ancient texts like Manusmriti and
Arthashastra. As prescribed by these texts, artisans, farmers, and traders hundreds
of years ago would pay taxes in the form of silver, gold and agricultural produces.
Taking clues from these texts and with some added tweaks, the basis for the modern
tax system in India was laid by the British when Sir James Wilson introduced income
tax in 1860. At the time of independence, the newly-formed Indian Government

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cemented the system to catalyze the economic progress of the country and also to
eradicate income and wealth disparity.

There are two types of taxes direct taxes and indirect taxes.
Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it is a
direct tax e.g. income-tax.
Indirect Taxes: If tax is levied on the price of a good or service, then, it is an indirect
tax e.g. Goods and Services Tax(GST) or Custom Duty. In the case of indirect taxes,
the person paying the tax passes on the incidence to another person.

Canons of Taxation

i. Canon of Equality:

Canon of equality states that the burden of taxation must be distributed equally or
equitably among the taxpayers. However, this sort of equality robs of justice because
not all taxpayers have the same ability to pay taxes. Rich people are capable of
paying more taxes than poor people. Thus, justice demands that a person having
greater ability to pay must pay large taxes.

If everyone is asked to pay taxes according to his ability, then sacrifices of all
taxpayers become equal. This is the essence of canon of equality (of sacrifice). To
establish equality in sacrifice, taxes are to be imposed in accordance with the
principle of ability to pay. In view of this, canon of equality and canon of ability are
the two sides of the same coin.

ii. Canon of Certainty:

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The tax which an individual has to pay should be certain and not arbitrary.
According to A. Smith, the time of payment, the manner of payment, the quantity to
be paid, i.e., tax liability, ought all to be clear and plain to the contributor and to
everyone. Thus, canon of certainty embraces a lot of things. It must be certain to the
taxpayer as well as to the tax-levying authority.

Not only taxpayers should know when, where and how much taxes are to be paid. In
other words, the certainty of liability must be known beforehand. Similarly, there
must also be certainty of revenue that the government intends to collect over the
given time period. Any amount of uncertainty in these respects may invite a lot of
trouble.

iii. Canon of Economy:

This canon implies that the cost of collecting a tax should be as minimum as
possible. Any tax that involves high administrative cost and unusual delay in
assessment and high collection of taxes should be avoided altogether.

According to A. Smith: out and

to keep out of the pockets of the people as little as possible, over and above

iv. Canon of Convenience:

Taxes should be levied and collected in such a manner that it provides the greatest
convenience not only to the taxpayer but also to the government.

Thus, it should be painless and trouble-free as far as practicable. ,

stresses
likely to be convenient for the That is why, after the
harvest, agricultural income tax is collected. Salaried people are taxed at source at
the time of receiving salaries.

These canons of taxation are observed, of course, not always faithfully, by modern
governments. Hence these are basic and classic canons of taxation.

Other Canons of Taxation:

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i. Canon of Productivity:

According to a well-known classical economist in the field of public finance, Charles

F. Bastable, taxes must be productive or cost-effective. This implies that the revenue
yield from any tax must be a sizable one. Further, this canon states that only those
taxes should be imposed that do not hamper productive effort of the community. A
tax is said to be a productive one only when it acts as an incentive to production.

ii. Canon of Elasticity:

Modern economists attach great importance to the canon of elasticity. This canon
implies that a tax should be flexible or elastic in yield.

It should be levied in such a way that the rate of taxes can be changed according to
exigencies of the situation. Whenever the government needs money, it must be able
to extract as much income as possible without generating any harmful consequences
through raising tax rates. Income tax satisfies this canon.

iii. Canon of Simplicity:

Every tax must be simple and intelligible to the people so that the taxpayer is able to
calculate it without taking the help of tax consultants. A complex as well as a
complicated tax is bound to yield undesirable side-effects. It may encourage
taxpayers to evade taxes if the tax system is found to be complicated.

A complicated tax system is expensive in the sense that even the most honest
educated taxpayers will have to seek advice of the tax consultants. Ultimately, such a
tax system has the potentiality of breeding corruption in the society.

iv. Canon of Diversity:

dynamic or diverse in nature rather than having a single or two taxes. Diversification
in a tax structure will demand involvement of the majority of the sectors of the
population.

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If a single tax system is introduced, only a particular sector will be asked to pay to
the national exchequer leaving a large number of population untouched. Obviously,
incidence of such a tax system will be greatest on certain taxpayers. A dynamic or a
diversified tax structure will result in the allocation of burden of taxes among the
vast population resulting in a low degree of incidence of a tax in the aggregate.

The above canons of taxation are considered to be essential requirements of a good

tax policy. Unfortunately, such an ideal tax system is rarely observed in the real
world. But a tax authority must go on maintaining relentlessly the above canons of
taxation so that a near- ideal tax structure can be built-up.

BRIEF HISTORY OF INCOME TAX IN INDIA

(1) In India, this tax was introduced for the first time in 1860, by Sir James Wilson in
order to meet the losses sustained by the Government on account of the Military Mutiny
of 1857.
(2) In 1886, a separate Income Tax Act was passed. This Act remained in force upto
1917, with various amendments from time to time.
(3) In 1918, a new Income Tax Act was passed and again it was replaced by another new
Act which was passed in 1922. This Act remained in force up to the assessment year
1961-62 with numerous amendments.
(4) The Income Tax Act of 1922 had become very complicated on account of innumerable
amendments. The Government of India, therefore, referred it to the Law Commission in
1956 with a view to simplify and for the prevention of tax evasion. The Law Commission
submitted its report in September 1958, but in the meantime the Government of India
had appointed the Direct Taxes Administration Enquiry Committee to suggest measures
to minimise inconveniences to assessees and to prevent evasion of tax. This Committee
submitted its report in 1959. In consultation with the Ministry of Law finally the Income
Tax Act, 1961 was passed.
(5) The Income Tax Act, 1961 has been brought into force with effect from 1st April,
1962. It applies to the whole of India and Sikkim (including Jammu and Kashmir).
(6) Since 1962 several amendments of far-reaching nature have been made in the Income
Tax Act by the Finance Act every year.
(7) Besides this, amendments have also been made by various Amendment Acts, for
instance, Taxation Laws Amendment Act, 1984, Direct Taxes Amendment Act, 1987,
Direct Taxes Law (Amendment) Acts of 1988 and 1989, Direct Tax Law (Second
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Amendment) Act, 1989 and at last The Taxation Law (Amendment) Act, 1991. The
amendments in the Finance Acts 1992 and 1993, are mostly based on the
recommendations of Chelliah Committee Report.

(8) As a matter of fact, the Income Tax Act, 1961, which came into force on 1st April,
has been amended and re-amended widely. It has, therefore, become very complicated
both for the administering authorities and the tax-payers

Legal Framework of Taxation

Constitution of India gives the power to levy and collect taxes, whether direct or
indirect, to the Central and State Government. The Union and State Government are
empowered to levy taxes by virtue of Article 246 of the Constitution of India.
Seventh Schedule to Article 246 contains three lists which enumerate the matters
under which the Union and the State Governments have the authority to make laws for
the purpose of levy of taxes.
The following are the lists:
(i) Union List: Central Government has the exclusive power to make laws on the
matters contained in Union List.
(ii) State List: State Government has the exclusive power to make laws on the matters
contained in the State List.
(ii) Concurrent List: Both Central and State Governments have the power to make
laws on the matters contained in the Concurrent list.
Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I of
Seventh Schedule to Article 246 of the Constitution of India has given the power to
Central Government to levy taxes on income other than agricultural income.

The income-tax law in India consists of the following components

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Income Tax Law in India mainly comprises of Income Tax Act 1961, Income Tax
Rules 1962, Annual Finance Act, Judicial, and Circulars & Clarification. The Ministry of
Finance is the governing authority of Income Tax Law. The Government earns its core
revenue by levying taxes. This income is utilised for the welfare of the economy, like
defence, education, hospitals, etc. The charges can be classified into Direct and Indirect
Taxes. The Income tax law helps the Government in proper implementation and
collection of the taxes. Components of Income Tax law are:

1. The Income Tax Act, 1961: The Indian Tax system is administered by the
Income Tax Act, 1961. It defines the levy, collection and recovery of Income Tax.
It comprises of 298 sections and XIV schedules, which changes according to the
additions and deletions proposed by the Annual Finance Act.

2. Annual Finance Act: Every year, a budget is presented in the Parliament of India
by the Finance Minister. This budget contains the proposed policies related to
commercial areas and taxation. A finance bill is introduced in the Parliament
containing all the proposals. This bill is converted into the Finance Act, once
approved by the Parliament and by the President of India.

3. Income Tax Rules, 1962: The Central Board of Direct Taxes (CBDT) administers
efficient implementation and working of the direct taxes in the country. The
CBDT frames standard rules for efficient achievement of the purpose of the
Income Tax Act. These rules are referred as Income Tax Rules, 1962.

4. Judicial (Case Laws): For a complete understanding of the Income Tax Law, it is
very crucial to study the judicial laws. Judicial laws provide decisions for those
issues that may come up at the time of implementation of the Income Tax Act.
The Supreme Court is the first court in the country and the decisions made by it
are followed.

5. Circulars & Notifications: The CBDT issues circulars for clarifying any doubts
related to the provision of the Act. The primary purpose of these circulars is to
provide clarity to the assessee and the officers. It bounds the department,
whereas the assessee can take advantage of the circulars as they are not bound
by them.

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BASIC CONCEPTS
Assessment [Section 2(8)]

This is the procedure by which the income of an assessee is determined by the

Assessing Officer. It may be by way of a normal assessment or by way of reassessment
of an income previously assessed.

Assessment year [Sec 2(9)]

Assessment year (AY) means income of previous year of an assessee is

taxed during the next following year is called AY. In other words AY is year
in which the tax is payable by the assessee on the income of the PY. The
present AY is 2023-24

Previous year [Sec 3]

Every person is required to pay tax on income earned during a period known
as previous year. This previous year is a year consisting of 12 months, which

starts on 1st April of every year and ends on 31 st march of next year. The
current previous year is from 1-4-2022 to 31-3-2023 [2022-2023]. The
income earned during the previous year is taxable in the assessment year.

Certain cases when income of a previous year will be assessed in the previous year
itself

Ina few cases, this rule does not apply and the income is taxed in the previous year
in which it is earned. These exceptions have been made to protect the interests of
revenue. The exceptions are as follows

i. Shipping business of non-resident [Section 172] Where a ship, belonging to or

chartered by a non-resident, carries passengers, livestock, mail or goods shipped at
a port in India, the ship is allowed to leave the port only when the tax has been paid
or satisfactory arrangement has been made for payment thereof. 7.5% of the freight
paid or payable to the owner or the charterer or to any person on his behalf,
whether in India or outside India on account of such carriage is deemed to be his
income which is charged to tax in the same year in which it is earned.

ii. Persons leaving India [Section 174] Where it appears to the Assessing Officer that
any individual may leave India during the current assessment year or shortly after

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its expiry and he has no present intention of returning to India, the total income of
such individual for the period from the expiry of the respective previous year up to
the probable date of his departure from India is chargeable to tax in that
assessment year.

Example: Suppose Mr. X is leaving India for USA on 10.6.2017and it appears to the
Assessing Officer that he has no intention to return. Before leaving India, Mr. X will
be required to pay income tax on the income earned during the P.Y. 2017-18 as well
as the total income earned during the period 1.4.2017 to 10.06.2017.

iii) AOP / BOI / Artificial Juridical Person formed for a particular event or purpose
[Section 174A] If an AOP/BOI etc. is formed or established for a particular event or
purpose and the Assessing Officer apprehends that the AOP/BOI is likely to be
dissolved in the same year or in the next year, he can make assessment of the income
up to the date of dissolution as income of the relevant assessment year.

(iv) Persons likely to transfer property to avoid tax [Section 175] During the current
assessment year, if it appears to the Assessing Officer that a 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.

(v) 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

Person Sec [2(31)]

Every person earning income in India is required to pay income tax.

The term person includes:

a) An individual, which includes males, females, and minors.

b) A Hindu Undivided Family [HUF], which consists of a Hindu

family consisting of senior most male member as karta, the rest of
members are known as co-perceners.
c) A company.

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d) A firm.

e) An association of persons [AOP] and body of individuals [BOI].

f) A local authority.
Assessee [sec 2(7)]

The term assessee includes;

1. A person who is liable to pay tax, interest and penalty under this act.

2. A person against whom proceedings under this act has been

undertaken to decide his income liable for tax, loss suffered by an
assessee, balance of tax payable and refund due to an assessee, if he has
paid excess tax.
3. Who is a deemed assessee; a deemed assessee is a person who is liable to
pay tax on income of other persons. For example, parents will pay tax on
income of their minor kids. Hence, parents are deemed assessee.
Assessee in default: Means a person who fails to discharge any duty
imposed or specified under this act. For example, an officer responsible to
pay salary is required to detect tax at the time of paying salary (known as
tax deducted at source-TDS) and pay to the government on behalf of
employees. If such officers fail to do so, he is called as assessee in default.

Income Sec [2(24)]

Income is the subject matter of the income tax act 1961, as per this
section, the following are to be treated as income:

Profits and gains.

Dividends

Voluntary contributions received by trust created for

charitable purpose and associations during scientific research.
Value of perquisites received by employees.

Allowances, in addition to basic pay, given to employees to meet

their personal expenses.

Value of benefits or perquisites received by directors of a company

having more than 20% voting right in the company.
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Amount received by association existing for the promotion of business

interest of its members. For example chamber of commerce.
Any salary, bonus commission, interest are received by partners
from firm.
Refund of customs and export duties paid by exporters under export
promotion schemes.
Value of any benefit or perquisite received in exercise of business or
profession e.g., gift received by lawyer from client.
Capital gains.

Interest incomes.

Winning from crossword puzzles, card games, lottery and horse

race income.
Gross Total Income

Incomes earned by a person can be grouped under the following heads;

a) Income from salary this head includes incomes earned by a person

from his employment.
b) Income from house property this head includes incomes earned by a
person from letting out or hiring out buildings.
c) Profits and gains from business or profession.

d) Capital gains- this head includes incomes earned by a person from

transferring capital assets, like land, building etc.
e) Income from other sources- this head includes any other taxable
income that cannot be placed under the first four heads of
income. For example lottery income.
The total of income earned by a person from all the five heads is
known as gross total income. A person is not required to pay tax
on gross total income, but on total income.

Total Income Sec [2(45)]

When gross total income is reduced by giving deductions under

sections 80C to 80U, the balance of income left over is known as
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total income. A person is required to pay tax on his total income.

CASUAL INCOME
Any receipt which is of a casual and non-recurring nature is casual income. In other
words, casual income is that income the receipt of which is accidental and without any
stipulation. It is in nature of an unexpected wind-fall.
Winnings from lottery, crossword puzzles, card games and other games of any sort or
from gambling or betting of any form or nature whatsoever are casual incomes. Receipts
even from habitual betting are non-recurring receipts and assessable as casual income.
The casual income does not include:
(i) (a) capital gains; or
(b) receipts arising from business or the exercise of a profession or occupation; or
(c) receipts, by way of addition to remuneration of an employee, such as bonus, gratuity,
perquisites, etc.
(ii) Voluntary payment received in exercise of an occupation are not treated as casual
income, e.g., tips given in the ordinary way to taxi-drivers in the employ of taxi-owners
are income arising from the exercise of an occupation. Similarly, gratuities to waiters in
a hotel are taxable. A receipt may be taxable as income arising from the legal exercise of
the profession even if the amount is received as a gift from third parties to whom the
legal services were not rendered and who were under no obligation to pay anything at all.
If an architect submitted a plan in a competition for construction of a building, the prize
won by him, is income from profession.
(iii) A gift from a relative is not income at all. Birthday and wedding gifts are simplest
instances in point. A gift from a relative does not become income merely because it is
repeated year after year. A regular allowance given year after year purely as a voluntary
gift by a parent to a child or by a husband to his wife, or by one relation to another, is
merely a fresh gift every time it is paid and does not amount to income.
(iv) Payment by husband to his wife under an agreement to live apart as maintenance
allowance is neither casual income nor a personal gift. Hence, it is taxable.
Other provisions relating to Casual Income
(i) Expenses are not deductible. If expenses are incurred to receive casual income, such
expenses are not deductible from any income. For example, an individual purchases
lottery tickets, the cost of lottery tickets is not deductible from any income whatsoever.

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Similarly, if postal charges have been paid for sending crossword puzzles, such charges
(expenses) are not deductible from any income.
(ii) Set-off of losses not permitted. If instead of casual income there is casual loss, such
loss cannot be set-off from any income. For example, if a person wins in a card game on
the first day and loses the next day, he cannot set-off the loss against any income.
(iii) Tax deduction at source :
(a) If the winnings from horse race exceed 10,000, tax will be deducted at source at the..
prescribed rate.
(b) If the winnings from any lottery, crossword puzzle, card game and other game of
any sort exceed 10,000, tax will be deducted at source at the prescribed rate...
(iv) Rate of tax. On winning from lottery, crossword puzzle, races, gambling, betting, etc.
tax is chargeable @ 30%.

AGRICULTURAL INCOME [Sec. 2(1A)]

The meaning of the term agricultural income can be explained with the help of the
following chart:

Agricultural Income

(i) Any rent or revenue (i) Any income derived from such Any income
derived from land, (ii) land by agricultural operations or (ii) from a farm
which is situated in any process by cultivator or receiver house.
India and (iii) is used for of rent-in-kind, which renders the
agricultural purposes. produce fit for the market or (iii) the
I sale of such produce.

Note: Capital Gains arising from the transfer of agricultural land shall not be treated as
agricultural income.
If the following conditions are satisfied the income from land is treated as agricultural
income:

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1. The land must be situated in India. If the land is situated outside India, the income
from such land will not be treated as agricultural income.
2. Land must be used for agricultural purposes. It means, tilling of the land, watering it,
sowing of the seeds, planting and similar operations on the land must be carried out
by the assessee.
3. The receiver of income from the land must have interest in the land. The landlord or
tenant or usufructuary mortgagee of the land has interest in the land.
If a person purchases a standing crop and after cutting it, sells it and makes profit,
the profit is not agricultural income.
4. The direct income from agriculture, is treated as agricultural income. An indirect
income from agriculture, is not agricultural income. For example, salary of a farm
manager or dividend from a company engaged in agricultural activities, is not
agricultural income.
KINDS OF AGRICULTURAL INCOME
(1) Rent or revenue derived from land. When one person grants to another a right to
use his land for agricultural purposes, the former receives from the latter rent or revenue
in consideration of such user. Such rent or revenue is treated as agricultural income.
(2) Income from agricultural operations. It means cultivation of a field, tilling of the
land, watering it, sowing of the seeds, planting and similar operations on the land.
Products which grow wild on the land or are of spontaneous growth not involving any
human labour or skill upon the land are not products of agriculture. The income derived
therefrom is not agricultural income.
(3) Income from making produce fit for market. If there is no market of the produce of
the field and the cultivator or receiver of rent-in-kind performs any activity to make the
produce fit for market, any income from such activity is also agricultural income. The
process employed in curing of coffee, flue curing of tobacco, ginning of cotton, etc., is
such a process.
(4) Income from sale of produce. Income derived by a cultivator or receiver or rent-in-
kind from the sale of produce raised or received by him is treated as agricultural income,
even if he keeps a shop for the sale of such produce.
(5) Income from a farm house. The income from a farm house is treated as agricultural
income if the following conditions are satisfied:
(i) the building is owned and occupied by the cultivator or receiver of the rent or revenue
of any such land;

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(ii) it is situated on or in the immediate vicinity of the agricultural land;

(iii) the building is, by reason of his connection with the land, used as dwelling house or
a store-house or an out-house by the cultivator or receiver of rent-in-kind;
(iv) the land is either assessed to land revenue in India or is subject to a local tax
assessed and collected by the officers of the government.

IMPORTANT POINTS REGARDING COMPUTATION OF AGRICULTURAL INCOME

(1) Agricultural Income by way of rent or revenue derived from land which is situated in
India and is used for agricultural purpose is computed as if it were income chargeable to
income tax under the head 'Income from Other Sources'.
(2) Agricultural Income from Agricultural building is computed as if it were income
chargeable to income tax under the head 'Income from House Property.
(3) Any other agricultural income is computed as if it were income chargeable to income
tax under the head 'Profits and Gains of Business or Profession'.
(4) Any sum payable by the assessee on account of any tax levied by the State
Government on the agricultural income shall be deducted in computing the agricultural
income.
(5) Where in respect of any source of agricultural income there is a loss, such loss shall
be set-off against any other source of agricultural income.
(6) Where the assessee is a member of an association of persons or body of individuals
and his share in the agricultural income of the association or body is a loss, such loss
shall not be set-off against any other agricultural income of the assessee.
(7) If there is loss from agriculture, it can be carried forward and set-off against
agricultural income in the following eight years provided the return of income has been
filed and such loss has been determined by the Assessing Officer.
(8) Where the net result of the computation made in accordance with these rules is a
loss, the loss so computed is ignored and the net agricultural income is deemed to be nil.
(9) The net agricultural income is rounded-off to the nearest multiple of rupees ten.

Non-Agricultural Incomes from Land

The following incomes, are not derived from land used for agricultural purposes, hence
they
are non-agricultural incomes:
(i) Income from markets;

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(ii) Income from stone quarries;

(iii) Income from mining royalties;
(iv) Income from land used for storing agricultural produce;
(v) Income from supply of water for irrigation purposes (e.g., income from supply of water
for irrigation from a tube-well or well, as it does not involve any agricultural operation);
(vi) Income from self-grown grass, trees or bamboos;
(vii) Income from fisheries;
(viii) Income from the sale of earth for brick-making;
(ix) Remuneration received as manager of an agricultural farm;
(x) Dividend from a company engaged in agriculture;

PARTLY AGRICULTURAL INCOME

Sometimes there is composite income, which is partially agricultural and partially non-
agricultural. For determining the non-agricultural income chargeable to tax, the market
value of any agricultural produce which has been raised by the assessee and which has
been utilized as a raw material in such business, shall be deducted. No further
deduction shall be made in respect of cost of cultivation incurred by the assessee as a
cultivator.
For this purpose, market value shall be deemed to be :
(a) where the agricultural produce is ordinarily sold in the market, the value calculated
according to the average price at which it has been so sold, during the relevant previous
year; or
(b) where the agricultural produce is not ordinarily sold in the market the aggregate of
the following shall be its market value :
(i) the expenses of cultivation;
(ii) the land revenue or rent paid for the land on which it was grown; and
(iii) the profit which in the opinion of the Assessing Officer is reasonable.
Examples
(1) Profits of such Sugar Factories which produce sugar from cane grown on their own
farms, are treated as partly agricultural income. Sugarcane is generally sold in the
market. Hence, in order to separate the agricultural income from the business income,
the average market price of sugarcane during the relevant previous year shall be charged
as an expenditure and no note will be taken of the expenses of cultivating the sugarcane.
The income thus determined will be the business income.

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(2) Income from growing and manufacturing of Tea. Sixty per cent of the income derived
from the sale of tea grown and manufactured by the seller in India is deemed to be
agricultural income and the remaining forty per cent is taken as business income.
(3) Income from growing and manufacturing of centrifuged latex or cenex. Sixty five
percent of the income derived from the sale of centrifuged latex or cenex manufactured
or processed by him from rubber grown by him in India is deemed to be agricultural
income and the remaining thirty-five percent is taken as business income.
(4) Income from growing and manufacturing of Coffee:
(a) Seventy-five per cent of the income derived from the sale of coffee grown and cured by
the seller in India is deemed to be agricultural income and twenty-five per cent is taken
as business income.
(b) Sixty percent of the income derived from the sale of coffee grown, cured, roasted and
grounded by the seller in India, with or without mixing of chicory or other flavouring
ingredients is deemed to be agricultural income and the remaining forty percent is
taken as business income.

Scheme of Taxation
A scheme of taxation refers to the overall plan or framework that a government uses to
collect taxes from individuals and businesses within its jurisdiction. This plan typically
includes various components such as tax rates, tax bases, exemptions, deductions, and
credits. The scheme of taxation can vary significantly from one country to another and
can also change over time as governments adjust their tax policies to meet economic and
social goals.
Common components of a taxation scheme include:
Tax Types: Governments may levy various types of taxes, such as income tax, sales tax,
property tax, corporate tax, and more.

Tax Rates: These determine the percentage of income, sales, or value of property that
individuals or businesses must pay as tax.

Tax Bases: Taxable items or income sources that are subject to taxation. For example,
income tax is typically based on an individual's earnings.

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Exemptions: Certain income or activities may be exempt from taxation. This is often
done to promote specific objectives, like supporting low-income individuals or
encouraging investment in certain industries.

Deductions: Taxpayers can often deduct specific expenses or contributions from their
taxable income, reducing the amount of tax they owe.

Credits: Tax credits are incentives provided to individuals or businesses to reduce their
tax liability, typically for activities that benefit society or meet certain criteria (e.g.,
education credits or renewable energy credits).

Filing and Compliance: Taxpayers are usually required to report their income and pay
taxes regularly, and governments have enforcement mechanisms to ensure compliance.

Progressivity: Some tax systems are designed to be progressive, meaning that higher-
income individuals or corporations pay a higher percentage of their income in taxes.

Administrative Procedures: Governments establish processes and agencies to administer

and enforce tax laws, including auditing and collecting unpaid taxes.
Overall, a scheme of taxation is a crucial aspect of a country's fiscal policy, as it
determines how the government raises revenue to fund public services and programs
while also influencing economic behaviour and social outcomes.

INCOMES EXEMPTED FROM TAX

Incomes earned by a person during the previous year can be classified

as taxable incomes and non-taxable incomes. If an assessee earns non-
taxable incomes during the previous, he will not required to pay tax on
such incomes. Hence, they are also known as tax-free incomes. All such
tax fee incomes are discussed under section 10 of Income Tax Act,1961.
there are around 70 exempted incomes. The following is the list of a few
exempted incomes discussed from the point of view of examination:

1. Agricultural income-sec 10(1) -Agricultural Income [Section 10(1)] As per

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section 10(1), agricultural income earned by the taxpayer in India is exempt from
tax. Agricultural income is defined under section 2(1A) of the Income-tax Act. As
per section 2(1A), agricultural income generally means:

(a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.

(b) Any income derived from such land by agriculture operations including
processing of agricultural produce so as to render it fit for the market or sale of
such produce.

(c) Any income attributable to a farm house subject to satisfaction of certain

conditions specified in this regard in section 2(1A).

Any income derived from saplings or seedlings grown in a nursery shall be deemed
to be agricultural income.

2. Share of profit received by a member from HUF-Sec 10(2) -As per section
10(2), amount received out of family income, or in case of impartible estate,
amount received out of income of family estate by any member of such HUF is
exempt from tax.

3. Share of profit received by a partner from firm-sec 10(2A) - As per section

10(2A), share of profit received by a partner from a firm is exempt from tax in the
hands of the partner. Further, share of profit received by a partner of LLP from the
LLP will be exempt from tax in the hands of such partner. This exemption is
limited only to share of profit and does not apply to interest on capital and
remuneration received by the partner from the firm/LLP.

4. Leave travel concession-sec 10(5)-refer

5. Allowances or perquisites received outside India-sec 10(7)-refer
6. Death cum retirement gratuity sec 10(10)- refer

7. Commuted pension-sec 10(10A)-Refer salary

8. Leave encashment-sec 10(10AA)- Refer

9. Retirement compensation-sec 10(10B)-Refer

10. Payment on voluntary retirement-sec 10(10C)- Refer

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11. Amount received from LIC-sec 10(10D) - As per section 10(10D), any amount
received under a life insurance policy, including bonus is exempt from tax.
Following points should be noted in this regard:

Exemption is available only in respect of amount received from life insurance

policy.

Exemption under section 10(10D) is unconditionally available in respect of sum

received for a policy which is issued on or before March 31, 2003. However, in
respect of policies issued on or after April 1st, 2003, the exemption is available
only if the amount of premium paid on such policy in any financial year does not
exceed 20% (10% in respect of policy taken on or after 1st April, 2012) of the
actual capital sum assured. With effect from 1-4- 2013, in respect of policy taken
in the name of a person suffering from diseases specified under section 80DDB or
in the name of a person suffering from disability specified under section 80U, the
limit will be increased to 15% of capital sum assured.

Value of premium agreed to be returned or of any benefit by way of bonus (or

otherwise), over and above the sum actually assured, which is received under the
policy by any person, shall not be taken into account while calculating the actual
capital sum assured.

Amount received on death of the person will continue to be exempt without any
condition

12. Daily allowances and other allowances to and

Sec 10(17)- Following allowances are exempt from tax in the hands of a
Member of Parliament and a Member of State Legislature

State Legislature or by member of any committee thereof.

allowance received by a Member of Parliament under the

Members of Parliament (Constituency Allowance) Rules, 1986.

13. Income of a minor child Sec 10( 32)- Under section 64(1A) income of a
minor child is clubbed along with the income of his/her parent, subject to certain
conditions.. If the income of an individual includes any income of his/her minor

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CRESTA First Grade College, Mysuru Income Tax Law and Practice I

child, then such individual can claim exemption (in respect of each minor child) of
lower of following amount:
(a) Rs. 1,500 per minor child; or
(b) Amount of income of each minor child (which is clubbed).
14. Interest on Rupee Denominated bonds [(Section 10(4C)] Any interest received or
receivable by a non-resident or foreign company in respect of Rupee Denominated
Bond (as referred to in Section 194LC) issued outside India during the period 17-
09-2018 to 31-03-2019 by an Indian company/business trust shall be exempt
from tax.

15. Infrastructure Debt Fund [Sec. 10(47)]

Any income of notified infrastructure debt fund is exempt.
16. Scholarship [Sec. 10(16)]
Scholarships granted to meet the cost of education.
Notes:
a. Cost of education also includes incidental expenses incurred for education.
b. The exemption is irrespective of actual expenditure.

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