LOT (TAX)

COURSE MATERIALm
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 CONTENTS

UNIT - I
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HISTORY OF TAXATION (PRE – 1922)

UNIT - II
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IMPORTANT DEFINITIONS

UNIT - III
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INCOME-TAX AUTHORITIES

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UNIT - IV
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WEALTH TAX .
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UNIT - V
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CENTRAL SALES TAX

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 UNIT - I

HISTORY OF TAXATION (PRE – 1922)

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“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture
from the Earth to give it back a thousand fold”
— Kalidas in Raghuvansh eulogizing KING DALIP.
It is a matter of general belief that taxes on income and wealth are of recent origin but there is enough

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evidence to show that taxes on income in some form or the other were levied even in primitive and ancient
communities. The origin of the word “Tax” is from “Taxation” which means an estimate. These were levied
either on the sale and purchase of merchandise or livestock and were collected in a haphazard manner
from time to time. Nearly 2000 years ago, there went out a decree from Ceaser Augustus that all the world
should be taxed. In Greece, Germany and Roman Empires, taxes were also levied sometime on the basis

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of turnover and sometimes on occupations. For many centuries, revenue from taxes went to the Monarch.
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In Northern England, taxes were levied on land and on moveable property such as the Saladin title in 1188.

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Later on, these were supplemented by introduction of poll taxes, and indirect taxes known as “Ancient
Customs” which were duties on wool, leather and hides. These levies and taxes in various forms and on
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various commodities and professions were imposed to meet the needs of the Governments to meet their
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military and civil expenditure and not only to ensure safety to the subjects but also to meet the common

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needs of the citizens like maintenance of roads, administration of justice and such other functions of the
State.
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In India, the system of direct taxation as it is known today, has been in force in one form or another even

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from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures.

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Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The wise
sage advised that taxes should be related to the income and expenditure of the subject. He, however,

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cautioned the king against excessive taxation and stated that both extremes should be avoided namely
either complete absence of taxes or exorbitant taxation. According to him, the king should arrange the
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collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes. He laid down
that traders and artisans should pay 1/5 of their profits in silver and gold, while the agriculturists were to pay
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1/6 , 1/8 and 1/10 of their produce depending upon their circumstances. The detailed analysis given by
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Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times.
Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even
dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by
rendering personal service.
The learned author K.B.Sarkar commends the system of taxation in ancient India in his book “Public
Finance in Ancient India”, (1978 Edition) as follows:-
“Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with indirect Taxes
secured elasticity in the tax system, although more emphasis was laid on direct tax. The tax-structure was a
broad based one and covered most people within its fold. The taxes were varied and the large variety of
taxes reflected the life of a large and composite population”.
However, it is Kautilya's Arthasastra, which deals with the system of taxation in a real elaborate and
planned manner. This well known treatise on statecrafts written sometime in 300 B.C., when the Mauryan

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Empire was as its glorious upwards move, is truly amazing, for its deep study of the civilisation of that time
and the suggestions given which should guide a king in running the State in a most efficient and fruitful
manner. A major portion of Arthasastra is devoted by Kautilya to financial matters including financial
administration. According to famous statesman, the Mauryan system, so far as it applied to agriculture, was
a sort of state landlordism and the collection of land revenue formed an important source of revenue to the
State. The State not only collected a part of the agricultural produce which was normally one sixth but also
levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as
well as from mining of metals etc. Salt tax was an important source of revenue and it was collected at the
place of its extraction.
History of Taxation post 1922
1. Preliminary : The rapid changes in administration of direct taxes, during the last decades, reflect
the history of socio-economic thinking in India. From 1922 to the present day changes in direct tax

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laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be
seen in the 1961 Act as it stands amended to date. It was but natural, in these circumstances, that
the set up of the department should not only expand but undergo structural changes as well.
2. Changes in administrative set up since the inception of the department : The organisational

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history of the Income-tax Department starts in the year 1922. The Income-tax Act, 1922, gave, for
the first time, a specific nomenclature to various Income-tax authorities. The foundation of a proper
system of administration was thus laid. In 1924, Central Board of Revenue Act constituted the
Board as a statutory body with functional responsibilities for the administration of the Income-tax
Act. Commissioners of Income- tax were appointed separately for each province and Assistant

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Commissioners and Income-tax Officers were provided under their control. The amendments to the

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Income tax Act, in 1939, made two vital structural changes: (i) appellate functions were separated

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from administrative functions; a class of officers, known as Appellate Assistant Commissioners,
thus came into existence, and (ii) a central charge was created in Bombay. In 1940, with a view to

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exercising effective control over the progress and inspection of the work of Income-tax Department

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throughout India, the very first attached office of the Board, called Directorate of Inspection (Income

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Tax) - was created. As a result of separation of executive and judicial functions, in 1941, the

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Appellate Tribunal came into existence. In the same year, a central charge was created in Calcutta

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also.

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2.1 World War II brought unusual profits to businessmen. During 1940 to 1947, Excess Profits

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Tax and Business Profits Tax were introduced and their administration handed over to the

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Department (These were later repealed in 1946 and 1949 respectively). In 1951, the 1st

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Voluntary Disclosure Scheme was brought in. It was during this period, in 1946, that a few
Group 'A' officers were directly recruited. Later on in 1953, the Group 'A' Service was

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formally constituted as the 'Indian Revenue Service'.
2.2 This era was characterised by considerable emphasis on development of investigation
techniques. In 1947, Taxation on Income (Investigation) Commission was set up which was
declared ultra vires by the Supreme Court in 1956 but the necessity of deep investigation
had by then been realised. In 1952, the Directorate of Inspection (Investigation) was set up.
It was in this year that a new cadre known as Inspectors of Income Tax was created. The
increase in 'large income' cases necessitated checking of the work done by departmental
officers. Thus in 1954, the Internal Audit Scheme was introduced in the Income-tax
Department.
2.3 As indicated earlier, in 1946, for the first time a few Group A officers were recruited in the
department. Training them was important. The new recruits were sent to Bombay and
Calcutta where they were trained, though not in an organised manner. In 1957, I.R.S. (Direct
Taxes) Staff College started functioning in Nagpur. Today this attached office of the Board
functions under a Director-General. It is called the National Academy of Direct Taxes. By
1963, the I.T. department, burdened with the administration of several other Acts like W.T.,
G.T., E.D., etc., had expanded to such an extent that it was considered necessary to put it

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 under a separate Board. Consequently, the Central Board of Revenue Act, 1963 was
passed. The Central Board of Direct Taxes was constituted, under this Act.
2.4 The developing nature of the economy of the country brought with it both steep rates of
taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in
followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement
mechanism resulted in the creation of the Settlement Commission.
2.5 A very important administrative change occurred during this period. The recovery of arrears
of tax which till 1970 was the function of State authorities was passed on to the departmental
officers. A whole new wing of Officers - Tax Recovery Officers was created and a new cadre
of post of Tax Recovery Commissioners was introduced w.e.f. 1-1-1972.
2.6 In order to improve the quality of work, in 1977, a new cadre known as IAC (Assessment)
and in 1978 another cadre known as CIT (Appeals) were created. The Commissioners'

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cadre was further reorganised and five posts of Chief Commissioners (Administration) were
created in 1981.
2.7 Tax Reforms : Certain important policy and administrative reforms carried out over the past
few years are as follows :-

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a) The policy reforms include :-
lLowering of rates;

lWithdrawls/reduction of major incentives;

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lintroduction of measures for presumptive taxation;· simplification of tax
laws, particularly relating to capital gains; and
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lwidening the tax base.

b) The administrative reforms include :-

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lComputerisation involving allotment of a unique identification number to tax

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payers which is emerging as a unique business identification number; and
lrealignment
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of the available human resources with the changed business

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needs of the organisation.
2.8

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Computerization : Computerisation in the Income-tax Department started with the setting
up of the Directorate of Income tax (Systems) in 1981. Initially computerisation of

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processing of challans was taken up. For this 3 computer centres were first set up in 1984-
85 in metropolitan cities using SN-73 systems. This was later extended to 33 major cities by
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1989. The computerized activities were subsequently extended to allotment of PAN under
the old series, allotment of TAN, and pay roll accounting. These computer centres used
batch process with dumb terminals for data entry.
In 1993 a Working Group was set up by the Government to recommend computerisation of
the department. Based on the report of the Working Group a comprehensive
computerisation plan was approved by the Government in October, 1993. In pursuance of
this, Regional Computer Centres were set up in Delhi, Mumbai, and Chennai in 1994-95
with RS6000/59H Servers. PCs were first provided to officers in these cities in phases. The
Plan involved networking of all users on LAN/WAN. Network with leased data circuits were
accordingly set up in Delhi, Mumbai and Chennai in Phase-I during 1995-96. A National
Computer Centre was set up at Delhi in 1996-97. Integrated application software were
developed and deployed during 1997-99. Thereafter, RS6000 type mid range servers were
provided in the other 33 Computer Centres in various major cities in 1996-97. These were
connected to the National Computer Centre through leased lines. PCs were provided to
officers of different level upto ITOs in stages between 1997 and 1999. In phase II offices in
57 cities were brought on the network and linked to RCCs and NCC.

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 2.9 Restructuring of the Income-tax department : The restructuring of the Income-tax
Department was approved by the Cabinet in its meeting held on 31-8-2000 to achieve the
following objectives :-
lIncrease in effectiveness and productivity;

lIncrease in revenue collection;

lImprovement in services to tax payers;

lReduction in expenditure by downsizing the workforce;

lImproved career prospects at all levels;

lInduction of information technology; and

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lStandardization of work norms

The aforementioned objectives have been sought to be achieved by the department

through a multi-pronged strategy of :
a. redesigning business processes through functionalisation;

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b. increasing the number of officers to rationalise the span of control for better
supervision, control and management of workload and to improve tax-payer
services and

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c. re-orient, retrain and redeploy the workforce with appropriate incentives in the form

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of career advancement.

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Income Tax Timeline in India

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1860 1860 Introduced for the first time for a period of five years to cover the 1857 mutiny expenses. It was

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abolished in 1873.

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1877 1877 The tax system was revived as a result of the Great Famine of 1876.
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1886 1886 Introduced as Act II of 1886. It laid down the basic scheme of income tax that continues till the

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present day.

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1918 1918 Introduced as Act VII of 1918. It had features like aggregation of income from various sources

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for the determination of the rate, classification of income under six heads and application of the Act

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to all income that accrued or arose or was received in India from whatever source in British India.
1922 1922 On the recommendations of the All-India Income Tax Committee, the father of the present act
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was introduced. The central government was vested with the power to administer the tax.
1961 1961 The Act came into force from 1 April 1962, it extended to the whole of India.
1997 1997 Establishment of the Tax Reform Committee under the chairmanship of Dr. Raja J. Chelliah. It
was followed by restructuring the income tax with parameters like lower taxes, fewer slabs, higher
execptions, etc.
2003 The Kelkar Task Force, which was followed by outsourcing of PAN/TAN, exemption of dividend
income, compensated by levy of the dividend distributed tax to be paid by the company.
CONCEPT OF TAXATION
To tax (from the Latin taxo; “I estimate”) is to impose a financial charge or other levy upon a taxpayer (an
individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is
punishable by law.
Taxes are also imposed by many sub national entities. Taxes consist of direct tax or indirect tax, and may be
paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a

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“pecuniary burden laid upon individuals or property owners to support the government […] a payment
exacted by legislative authority. A tax “is not a voluntary payment or donation, but an enforced contribution,
exacted pursuant to legislative authority” and is “any contribution imposed by government […] whether
under the name of toll, tribute, gable, impost, duty, custom, excise, subsidy, aid, supply, or other name.”
The legal definition and the economic definition of taxes differ in that economists do not consider many
transfers to governments to be taxes. For example, some transfers to the public sector are comparable to
prices. Examples include tuition at public universities and fees for utilities provided by local governments.
Governments also obtain resources by creating money (e.g., printing bills and minting coins), through
voluntary gifts (e.g., contributions to public universities and museums), by imposing penalties (e.g., traffic
fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet
compulsory transfer of resources from the private to the public sector levied on a basis of predetermined
criteria and without reference to specific benefit received.

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NATURE AND CHARACTERISTICS OF TAXES
Meaning of Taxation
Taxation is the inherent power of the state, acting through the legislature, to impose and collect revenues to
support the government and its recognized objects. Simply stated, taxation is the power of the State to

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collect revenues for public purpose.
Purpose of Taxation
Primary Purpose - is to provide funds or property with which the government discharges its appropriate
functions for the protection and general welfare of its citizens.

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Non Revenue Objectives

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Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry

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out the national objective of social and economic development.

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1. to strengthen anemic enterprises by granting them tax exemptions or other conditions or incentives
for growth;

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2. to protect local industries against foreign competition by increasing local import taxes;

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3. as a bargaining tool in trade negotiations with other countries;

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4. to counter the effects of inflation or depression;

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5. to reduce inequalities in the distribution of wealth;
6. to promote science and invention, finance educational activities or maintain and improve the

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efficiency of local police forces;
7. to implement police power and promote general welfare.
Meaning of Taxes
Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of
the state by virtue of its sovereignty for the support of the government and all public needs.
Tax in a general sense, is any contribution imposed by the government upon individuals for the use and
service of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid,
supply or other name. Tax, in its essential characteristics, is not a debt.
Essential characteristics of tax
1. it is an enforced contribution
2. it is generally payable in money.
3. It is proportionate in character, usually based on the ability to pay.

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4. it is levied on persons and property within the jurisdiction of the state.
5. it is levied pursuant to legislative authority, the power to tax can only be exercised by the law making
body or congress
6. it is levied for public purpose
7. it is commonly required to be paid a regular intervals.
TAX AND FEE
Tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not
payment for services rendered. Fee may be generally defined to be a charge for a special service rendered
to individuals by some governmental agency.
As far as fee is concerned, it is distinguishable from tax. The distinction between “tax” and “fee” lies

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primarily in the fact that a tax is levied as a part of common burden while a fee is paid for a special benefit or
privilege. Fees confer a special capacity although the special advantage as for example, in the case of
registration fee for documents or marriage license is secondary to the primary motive or regulation in the
public interest. Public interest seems to be at the basis of all impositions, but in a fee it is some special
benefit, which the individual receives. It is the special benefit accruing to the individual, which is the reason

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for payment in the case of fees. In the case of a tax, the particular advantage if it exists at all, is an incidental
result of State action. Unless the fee is earmarked or specified for rendering services to the payee, it would
amount to a tax and not a fee.
On the other hand the nature of tax is entirely different. Tax is a compulsory exaction of money by public

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authority for public purposes enforceable by law and is not payment for services rendered. A fee may be

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generally defined to be a charge for a special service rendered to individuals by some governmental

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agency. A fee may be compulsorily levied as well as tax, but the distinction between them lies primarily in
the fact that a tax is levied as a part of the common burden while a fee is a payment for special benefit or
privilege.
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The term 'tax' is a charge by the Government on the income of an individual corporation or trust as well as

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the value of the estate or goods. The objective necessitating the tax is to generate revenue to be used for

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the needs of public; a pecuniary burden laid upon individual or property to support the Government and is a
payment exacted by legislative authority. The essential characteristics of a tax are that it is not a voluntary

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payment or donation, but an enforced contribution, exacted pursuant to legislative authority. The tax is a
sum of money demanded by a Government for its support or for specific facilities, a burdensome charge,
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obligation or demand in consideration of the possession or occurrence of income, goods, sales etc. Fee a

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charge or payment for services as doctor's fee, a sum paid or charged for a privilege, such as submission
fee, a charge allowed by law for the services of a public officer. “Tax” is a compulsory contribution imposed

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by sovereign authority and received from the general body of subjects or citizens. Fee is a charge for
special services rendered to individual by some Governmental Authority. It is a sort of return or
consideration for services rendered and therefore, it is necessary that the levy of fee should, on the face of
legislative provision, be correlated with the expenses rendered by the Government in rendering the
services. No doubt both tax and fee are compulsory exactions, but the difference between the two lies in the
fact that the tax is not correlated to a particular service rendered, but is intended to meet the expenses of the
Government and a fee is meant to compensate the Government for expenses incurred in rendering
services to the person from whom fee is collected. A tax is for the purpose and goes to the general revenue
unlike fee. Fee is a reward or recompense for service while tax is an impost; a tribute imposed on the
subjects. It is compulsorily exacted from the citizens for the support of the Government
TAX AND CESS
In India, where it is still in widespread use, it is supposed to be a tax on tax or a surcharge which is applied to
a specific commodity or service and the monies that are raised are also meant to meet some specified
objective.
DIRECT AND INDIRECT TAXES

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The term indirect tax has more than one meaning.
In the colloquial sense, an indirect tax (such as sales tax, a specific tax [a tax per unit], value added tax
(VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the
person who bears the ultimate economic burden of the tax (such as the customer). The intermediary later
files a tax return and forwards the tax proceeds to government with the return. In this sense, the term
indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal
or natural) on which it is imposed. Some commentators have argued that “a direct tax is one that cannot be
shifted by the taxpayer to someone else, whereas an indirect tax can be.”
An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying
more for the products. Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is
[2]

paid in the first instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of
this duty to the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or

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passed on. The degree to which the burden of a tax is shifted determines whether a tax is primarily direct or
primarily indirect. This is a function of the relativeelasticity of the supply and demand of the goods or
services being taxed. Under this definition, even income taxes may be indirect.
Types of Direct Taxes

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Personal Income Tax : The Personal Income Tax is levied by the central government and is managed by
the Central Board of Direct taxes according to the Income Tax Act.
Corporate Income Taxes : The central government levies taxes on business organizations and
companies on their transactions that are done worldwide. For non resident organizations, tax is charged on

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the business transactions with Indian sources. A tax of 35 % and an additional surcharge of 2.5 % are levied

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on the domestic organizations. For foreign business organizations, the basic tax rate is around 40 % with

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2.5 % extra surcharge is charged. An education cess of 2 % is also charged.

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Capital Gains Tax : The central government levies taxes on the capital gains from the sale of assets. Long-
term Capital Gains Tax is charged if the capital assets remain for three years and also if the securities and
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shares are a part of any recognized stock exchange in India.

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Long term capital gains are taxed at 20 % while 10 % tax is charged on the short term capital gains.
Types of Indirect Taxes
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Customs Duty : The government formulated the Customs Duty under the Customs Act 1962 and Customs

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Tariff Act of 1975. Usually, the tax is levied on goods that are imported to the country. An additional

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educational cess is also charged. In case of industrial goods, the customs duty has been decreased to
15%.

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Service Tax : In most cases, 10 % service tax is levied on different kinds of services in the country. The tax
exemption limit has been raised from Rs.400, 000 to Rs.800, 000 for the small service providers.
Excise Duty : Excise duty is charged by the government of India under the Central Excise act of 1944 and
the Central Excise Tariff Act of 1985. A basic tax of 16% excise duty is charged and extra excise duty of
around 8 % is also charged in case of precious items. An educational cess of around 2 % is also charged
along with the basic tax rates.
TAXING PROCESS OF PARLIAMENT
India legislation: The initiative for substantial legislation in India comes primarily from the prime minister,
cabinet members, and high-level officials. Although all legislation except financial bills can be introduced in
either house, most laws originate in the Lok Sabha. A legislative proposal may go through three readings
before it is voted on. After a bill has been passed by the originating house, it is sent to the other house,
where it is debated and voted on. The second house can accept, reject, or amend the bill. If the bill is
amended by the second house, it must be returned to the originating house in its amended form. If a bill is
rejected by the second house, if there is disagreement about the proposed amendments, or if the second
house fails to act on a bill for six months, the president is authorized to summon a joint session of Parliament

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Studynama’s Law Community is one of India’s Largest Community of Law Students. About
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to vote on the bill. Disagreements are resolved by a majority vote of the members of both houses present in
a joint session. This procedure favors the Lok Sabha because it has more than twice as many members as
the Rajya Sabha.
When the bill has been passed by both houses, it is sent to the president of India, who can refuse assent
and send the bill back to Parliament for reconsideration. If both houses pass it again, with or without
amendments, it is sent to the president a second time. The president of India is then obliged to assent to the
legislation. After receiving the president's assent, a bill becomes an act on the statute book.
In India, the legislative procedure for bills involving taxing and spending—known as money bills—is
different from the procedure for other legislation. Money bills can be introduced only in the Lok Sabha. After
the Lok Sabha passes a money bill, it is sent to the Rajya Sabha. The upper house has fourteen days to act
on the bill. If the Rajya Sabha fails to act within fourteen days, the bill becomes law. The Rajya Sabha may
send an amended version of the bill back to the Lok Sabha, but the latter is not bound to accept these

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changes. It may pass the original bill again, at which point it will be sent to the president for his signature.
STATE LEGISLATURE AND LOCAL BODIES
India has a well developed tax structure with a three-tier federal structure, comprising the Union
Government, the State Governments and the Urban/Rural Local Bodies. The power to levy taxes and

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duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian
Constitution. The main taxes/duties that the Union Government is empowered to levy are Income Tax
(except tax on agricultural income, which the State Governments can levy), Customs duties, Central Excise
and Sales Tax and Service Tax. The principal taxes levied by the State Governments are Sales Tax (tax on
intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of

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alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on
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Entertainment and Tax on Professions and Callings. The Local Bodies are empowered to levy tax on

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properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local

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Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

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The Seventh Schedule of the Constitution of India demarcates the taxing powers of Union and State
Governments and entries 46 through 63 in the State List specify the items on which States can levy taxes.
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Accordingly, the major taxes levied by the States are sales tax, State excise duties, stamp duties and

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registration fees, motor vehicles tax, land revenue,agricultural income tax, entertainment tax, profession

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tax, electricity duty, and other minor taxes. In India the tax bases of the Centre and States are by and large

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separate and very few tax bases are common and shared. For example, while the non-agricultural income

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is subject to Union taxation, the power to tax agricultural income is entrusted to the States. Similarly, while

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taxation of manufacturing activity is in the hands of the Central government, taxation of trading activity is in
the hands of the States. The broad principle applied for the demarcation of the tax powers between the

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Central and State governments seems to be that tax bases arising out of activities that are of local nature

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are kept within the purview of State taxation and the rest are left in the hand of the central government.
There are several other Constitutional provisions that have a bearing on the State level tax system.
Important among them are as follows.
(i) There are certain taxes (under article 268) whose rates and provisions are determined by the Union
Government while collection and use of the revenue is done by State Governments. Prominent
among these are the Central sales tax, and stamp duties and registration fees in respect of certain
financial instruments. State excise duties levied on certain medicines and toilet preparation also
come in this category. Consequently, States' freedom to raise revenue from these sources is
restricted.
(ii) Until recently, certain taxes were levied and collected by the Union Government but the revenues
were completely assigned to State Governments. For example, additional excise duties on textiles,
tobacco and sugar were levied by the Union Government but the proceeds were reassigned to the
State Governments under article 269. Following the Eleventh Finance Commission
recommendations, the Constitution (Eightieth) Amendment, 2000, stipulates that the proceeds of
the additional excise duties are combined with all other tax revenues of the Union government, to be

8
 shared among the States on the basis of a unified formula. It means that instead of all the revenue
from such taxes, only a portion is devolved to the States. However, if any State levied and collected
sales tax on sugar, textile and tobacco, it would not be entitled to any share from this 1.5 percent.
(iii) Article 276 restricts the power of States to raise the rate of profession tax beyond Rs.2,500.
(iv) There are certain constraints imposed on taxation of services by the Constitution (Eighty Eighth
Amendment) Act, 2003 (the Article 268A inserted by the act). The Constitution clearly demarcates
the division of the tax powers between Union and the State Governments such clear demarcation
does not exist as regards the distribution of tax powers between State and local Governments.
Consequently, the taxing powers of the local bodies are not uniform across the States. Local bodies derive
their tax revenue from entry tax, property tax, entertainment tax, local market levies and other minor levies.
In some States, these taxes are collected by the State Governments and revenues are assigned to the local
bodies. The portion of tax revenue assignments to the local bodies is also not uniform across the States.

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Artilce 268: Duties levied by the Union but collected and appropriated by the States.- (1) Such stamp
duties and such duties of excise on medicinal and toilet preparations as are mentioned in the Union List
shall be levied by the Government of India but shall be collected- (a) in the case where such duties are
leviable within any[Union territory], by the Government of India, and (b) in other cases, by the States
within which such duties are respectively leviable. (2) The proceeds in any financial year of any such

U
duty leviable within any State shall not form part of the Consolidated Fund of India, but shall be assigned
to that State [Constitution of India, Article 268]. Under the Additional Excise Duties (Goods of Special
Importance) Act 1957 Article 270: (1) All taxes and duties referred to in the Union List, except the duties and
taxes referred to in articles 268 and 269, respectively, surcharge on taxes and duties referred to in article

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271 and any cess levied for specific purposes under any law made by Parliament shall be levied and

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collected by the Government of India and shall be distributed between the Union and the States in the

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manner provided in clause (2). Further, Article 269 has been recast by the Amendment Act. The new article
includes only taxes on sale and purchase of goods and taxes on the consignment of goods. All other taxes

.
that were listed under article 269 prior to the amendment have been deleted from this article. Prior to the

a
Eightieth Amendment, Article 269 required the Finance Commission to suggest the principles governing

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the distribution of additional excise duties in lieu of sales tax on sugar, textiles and tobacco, and the grant in

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lieu of the tax under the repealed Railway Passenger Fares Tax Act, 1957.

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Article 276 : Taxes on professions, trades, callings and employments.- (1) Notwithstanding anything in

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article 246, no law of the Legislature of a State relating to taxes for the benefit of the State or of a

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municipality, district board, local board or other local authority therein in respect of professions, trades,

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callings or employments shall be invalid on the ground that it relates to a tax on income. (2) The total amount

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payable in respect of any one person to the State or to any one municipality, district board, local board or
other local authority in the State by way of taxes on professions, trades, callings and employments shall not

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exceed two thousand and five hundred rupees per annum. (3) The power of the Legislature of a State to
make laws as aforesaid with respect to taxes on professions, trades, callings and employments shall not be
construed as limiting in any way the power of Parliament to make laws with respect to taxes on income
accruing from or arising out of professions, trades, callings and employments. Thus, even with the distinct
tax bases and powers, States are not entirely free to design their tax systems.

IMPORTANT QUESTIONS
Q.1. Discuss the History of Tax Law in India.
Q.2. Discuss the nature and characteristics of taxes.

9
 UNIT - II

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IMPORTANT DEFINITIONS
There are certain terms and expressions, used in the Income-Tax Act, 1961, which require clarification. In
order to understand and interpret the legal provisions, it is necessary to have the conceptual clarity of these
terms and expressions. These have been defined in Sections 2 and 3 of the Act as follows :
I. Agricultural Income
Definition :
1.

2.
agricultural purposes;
Any income derived from such land by –
a) agriculture; or
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Any rent or revenue derived from the land which is situated in India and is used for

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a

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b) the performance by a cultivator or receiver of rent-in-kind or any such process
ordinarily employed by him to render the produce raised or received by him fit for
sale in the market; or
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c) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by

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him in respect of which only the process as referred to in (ii) above has been
performed.
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3. Any income derived from any building owned and occupied by the receiver of the rent or
revenue of any such land or occupied by the cultivator or receiver of rent-in-kind, provided

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that –
a) the building is on or in the immediate vicinity of the land and is used as a dwelling
house, store house or other out-building by the receiver of rent or revenue or by the
cultivator or by the receiver of rent-in-kind; and
b) the land is either assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the government. If the land is not so assessed
to land revenue or subject to a local rate, if should not be situated within the following
limits, i.e. urban areas–
i) within the jurisdiction of a municipality or a cantonment board having a
population of 10,000 or more; or
ii) Within 8 kilometers from the local limits of any municipality or cantonment
board. The Central Government is empowered to extend this limit of 8
kilometers.
Essential Elements : From the analysis of the above definition it is clear that following essential

10
 conditions should be fulfilled before an income is treated as agricultural income –
1. Income Must be Derived from Land : Income here means any rent or revenue. Rent
means any payment made to the owner of land for its use. Revenue means any income,
yield or return to the owner or the land. It may be in form of sharing in agricultural produce.
Rent or revenue may, thus be derived in cash or in kind. But the land revenue imposed by
State Government or a local rate imposed by Local Government will not be agricultural
income. Derived from land means received or to be received in connection with land. Any
income is deemed to have been derived from land if it is directly related with land. Thus,
arrear of rent is directly related with land but any interest thereon is not. Similarly, dividend
received by a shareholder of an agricultural company or remuneration received by a firm
manager are not directly related with land. Hence, these are not agricultural income.
2. Land Must be Situated in India : It is necessary that land must be situated within the

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territorial jurisdiction of India. Thus, any income from land situated outside India cannot be
regarded as agricultural income.
3. Land Must be Used for Agricultural Purpose : Agricultural purpose means cultivation of
land for raising crops and other products and incurring some expenditure on labour and skill

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upon it. Agricultural operations are divided into two basic and subsequent operations. Basic
operations include tilling of land, sowing of seeds, watering the land, manuring etc.
Subsequent operations are performed after basic operations. These include weeding,
pruning, cutting, harvesting and rendering the produce fit for the market. Performance of
basic operations is must for agricultural activity. Any income which has arisen only due to

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subsequent operations will not be regarded as agricultural income.

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II. Assessee : According to Section 2 (7) of the Income-tax Act, “Assessee” means a person by whom
any tax or any other sum of money is payable under the Act. Any other sum of money may include a

.
fine, penalty or interest. Thus, an assessee includes the following–

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1. Every person by whom any tax is payable under the Act;
2.
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Every person by whom any other sum of money (fine, penalty or interest) is payable under
the Act;
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3. Every person in respect of whom assessment proceeding under the Act has been taken;
4.
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Every person on whom an assessment proceeding in respect of income, belonging to some

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other person, has been taken under the Act;

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5. Every person on whom an assessment proceeding of the loss, sustained by him or by such

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other person for whom he is liable to be assessed, has been taken under the Act;
6. Every person who is deemed to be in assessment proceeding of the amount of refund, due
to him or such other person for whom he is liable to be assessed, has been taken under the
Act;
7. Every person who is deemed to be an assessee under any provision of this Act;
8. Every person who is deemed to be an 'assessee in default' under any provision of this Act;
9. “Assessment” includes reassessments.
III. Assessment Year : According to section 2(9) of the Income-tax, Act, assessment year means the
period of twelve months commencing on the Ist day of April every year. Thus, a period beginning
from Ist April and ending on 31st March next is called assessment year. This is the financial year of
the Government. The current financial year is the assessment year.
IV. Income : 'Income' is the subject matter of the Income-tax Act. Every proceeding under the Act,
whether it be in connection with tax, refunds or penalty etc. is carried on in relation to income. It is,

11
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therefore, necessary to understand the term 'income' properly. The term 'income' has not been
defined in the Act. The definition of income as given in section 2(24) of the Act is inclusive and not
exhaustive. This means that 'income' shall include not only those items which are specifically
mentioned in this section, but also includes such items as can properly be called income as per the
interpretation of the section. As per section 2(24) the term income has been defined as follows–
“Income” includes :
1. Profits and gains;
2. dividends;
3. voluntary contributions received by a trust created wholly or partly for charitable or religious
purposes or by an institution established wholly or partly for such purposes or by an
institution or a fund referred to in section 10(21); 10(23); 10(23C) (iv) (v).

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4. the value of any perquisite or profit in lieu of salary taxable under the head salaries;
5. any special allowance or benefit specifically granted to the assessee to meet expenses
wholly, necessarily and exclusively for the performance of his duties;

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6. any allowance granted to the assessee either to meet his personal expenses at the place
where he performs his duties or at a place where he ordinarily resides or to compensate him
for the increased cost of living;
7. the value of any benefit or perquisite obtained from a company by a director or by a person

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who has a substantial interest in the company or by a relative of the director or of such
person.
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Important Principles of Income : In different leading cases courts have laid down a few important

.
principles which will be helpful in understanding the concept of income. These are as follows –

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1. Income should be Received from Outside : Income must come from any outside source.

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A person cannot make a taxable profit out of a transaction with himself. Thus,

a
excess of revenue over expenditures in a club, in which the revenue comes through the

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subscription from members only, cannot be considered as income of the club

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because this excess is not the receipt from outside but it is from within the club
itself. But the subscription received from non-members and the income accrued on
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account of the capital assets of the club will be the income. Similarly, if a person revalues his

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assets and shows the profit on revaluation in his book, such profit will not be
income.

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2. Legality of Income : Income may be legal or illegal, both are taxable under the Act. In this
way income from black marketing or smuggling will be taxable under the Act and the
confiscation of currency notes by custom authorities will be a loss and allowed as deduction
in computing the income from smuggling.
3. Income may be in Cash or in Kind : Income may be in cash or in kind, both are taxable
under the Act. If the income is received in kind, it will be valued in terms of money.
4. Income in Installments or Lumpsum : It is not necessary that income should flow slowly
or gradually. A single receipt may be income.
5. Regular or Irregular Income : Income may flow regularly, for example, daily, weekly,
quarterly, monthly etc. It may also be received only once in a year. In both the cases income
is taxable.
6. Permanent or Temporary Income : It is not necessary that the income should be
permanent. It may be temporary i.e. may be or may not be. Incomes from salary, house
property, interest on securities etc. are of permanent nature. But incomes from auction,

12
 business or profession or capital gains etc. are not of permanent nature. Income from these
sources may be or may not be. Temporary nature of an income will not render it non-taxable.
It is taxable irrespective of its stable or instable nature.
7. Received or Accrued Income : Income received or income accrued both are taxable as
per income-tax Act, 1961. The assessee may pay tax either on receipt basis or on accrual
basis. Accrued income, if taxed at the time of accrual, will not be taxed when it is received.
Similarly, income received, if taxed at the time of its receipt, will not be taxed when it is
accrued. The assessee will have to select a basis- accrual basis or receipt basis - for his
taxability. Once the basis is selected, he will have to strictly follow the basis. If he pays tax on
accrual basis, he will not include the income received in his total income.
8. Relief from Expenses or Loans : Relief or reimbursement of expenses is not treated as
income. For example, reimbursement of the actual travelling expenses of the employee by

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the employer is not income. Similarly, if a person is relieved from paying any loan due to him
it will not be treated as income.
9. Personal Gifts : If any gift is received by a person on account of natural love and affection or
personal relations, it will not be treated as income for income-tax purpose. But if a person

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gets gifts from his pupils, it will be treated as income.
10. First Receipt Determines the Nature of Income : Whether a particular receipt is income
or not, is decided at the time of its first receipt. If an amount is not income at the time when it
is received for the first time, it cannot be treated income subsequently under the changed

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circumstances. For example, an advance received for sale of a property will not be treated

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as income when it is forfeited due to non-fulfilment of obligation by the buyer.

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11. Disputed Title : If there is a dispute regarding the title of an income, its assessment cannot

.
be held up or postponed. It will be assessed in the hands of the person who has received it.
The recipient shall pay the tax on it.
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12. Diversion or Application of Income : There is a minor difference between diversion of
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income and application of income. But this minor difference is very significant. It decides the

a
taxability of a particular income. If the income has been diverted, there will be no tax-liability

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but if the income has been applied, there will definitely be tax-liability of the original recipient

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of such income. In case the income has been diverted, the tax on such income will be paid

d
by the person in whose favour it has been diverted. Diversion of income, here, means

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diversion by over-riding title.
Diversion may be any of the following forms –
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1. the income is diverted on account of a legal obligation which is enforceable in court of law;
2. the source of income has been alienated or assigned in favour of some other person; the
person alienating or assigning is said to have diverted his income;
In these cases, the income is said to have been diverted. But if the income is applied by the recipient
in discharging his obligations, which are not enforceable in court of law or voluntary obligations, it is
the application of income. Thus, unless and until there is an over-riding obligation, the amount
received from the assessee cannot be treated as income of the person receiving the amount.
V. Person : According to section 2(31). Person includes–
1. an individual,
2. a Hindu undivided family,
3. a company,
4. a firm,

13
 5. an association of persons or a body of individuals, whether incorporated or not, e.g., a club,
a co-operative society etc,
6. a local authority such as Municipality, Cantonment Board, District Board, Port Trust etc., and
7. every artificial juridical person, not falling within any of the above, for example, a Hindu idol
or a deity (Balaji etc.) or God or Allah. It also includes all artificial persons with a juridical
personality such as a corporation, Bar Council etc.
VI. Total Income : “Total Income” as per section 2(45) of the Income tax Act, 1961 means the total
income as referred to in section5, computed in the manner laid down in this Act. Total income of an
assessee is computed head-wise keeping in view his residential status and allowing all deductions,
he is entitled to, under Section 80. This is the income on which income-tax liability is determined. In
common parlance it is called as taxable income or total income. Numerically, total income will be :-

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Total Income = Total of the taxable incomes from all the heads of
Income-Deduction under section 80
OR
= Gross total income - Deduction u/s 80

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VII. Gross Total Income :
1. Salaries;
2. Income from house property;

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3. Profits and gains of business or profession;

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4. Capital gains;
5. Income from other sources.
.
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Taxable income of each head is computed by aggregating the incomes falling under the head, as

m
per provisions of the Act, and deducting therefrom the deductions of the head allowed under the

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Act. Taxable income of one head is called net taxable income of the head, Net taxable income of all

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the heads are added. The total of the net taxable incomes of all the heads is termed as 'Gross total

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income'.
VIII.
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Previous Year : As per section 2 (34B) of the Act, “previous year” means the previous year as

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defined in section 3. The concept of previous year is very important to know. It is the income of
previous year which is charged to income-tax during the current year. According to section 3(I) of

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the Act, 'previous year' means the financial year immediately preceding the assessment year. For
every assessee and for every income there shall be uniform previous year. For the current year
2001-02 the previous year would be 2000-01 i.e. a period from Ist April, 2000 to 31st March, 2001.
Thus, for every current year, the immediately preceding financial year shall be the previous year.
Provisions given in Section 3 of the Act are sumarised as below –
1. Preceding Financial Year : Previous year is the financial year immediately preceding the
assessment year. For example, in relation to assessment year 2001-02, immediately
preceding financial year is 2000-01 beginning from Ist April, 2000 and ending on 31st
March, 2001. Thus, for the assessment year 2001-02, previous year will be the preceding
financial year i.e. 2000-01.
2. Previous Year for Newly Set-up Business or Profession : If a business or profession is
newly set-up in any financial year, its first previous year will be the period beginning from the
date of its set-up and ending with the close of that financial year. For example, if a new
business is set-up on 5th January 2001 i.e. during financial year 2000-01, its first annual
accounts must be closed on 31st March, 2001 i.e. during financial year 2000-01, its first
annual accounts must be closed on 31st March, 2001 and the period from 5th January,

14
 2001, to 31st March, 2001 will be previous year for the assessment year 2001-02. Similarly,
if a new business is commenced on 27th June, 2000 i.e. in the financial year 2000-01, its first
annual accounts must be closed on 31st March, 2001. The period from 27th June, 2000 to
31st March, 2001 will be previous year for assessment year 2001-02. Thus, the previous
year for newly set-up business or profession starts with the date of its set-up and ends on the
immediately following 31st March.
SALARIES
Note : As per Section-14 of the Income-tax Act, 1961, all incomes, for the purpose of charge of income-tax
and computation of total income, are classified under the following 5 heads –
1. Salaries (Section 15, 16 and 17);
2. Income from house property (Section 22 to 27);
3.
4.
5.
Capital gains (Section 45 to 55);
Income from other sources (Section 56 to 59)

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Profits and gains of business or profession (Section 28 to 44-D);

'Salaries' is the first head amongst the five heads of income. Generally, salary is the payment made by
employer to the employee in consideration of his services rendered in favour of the employer. In general
sense, income under the head 'Salaries' comprises of the remuneration (including valuation of perquisites)
due or received by any person for the personal services rendered by him under an express or implied

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contract of employment or service.
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Some Important Rules with Regard to 'Salaries' : Before the salary head is discussed as per law, it is
necessary to understand and study some important principles regarding 'salaries'. These principles are
given here below –
.
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1. Relationship of Employer and Employee : A payment will be regarded as salary only when there

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exists the relationship of employer and employee, or master and servant between the payer and the

a
payee. If there does not exist the relationship of employer and employee between the payer and the

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payee, any payment made by the payer will not be taxed as 'salaries', such as fees or commission

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received by a director, examinership remuneration received by a teacher, salaries and allowances
receivable by M.P.'s, M.L.A.'s etc. Such payments will be taxed under the head Income from other
d
sources. It may be noted that employment may be a full-time or part-time, may be in India or outside

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India, may be of a nature involving only mental faculties or involving only physical labour, any
payment or perquisite received from it, is taxed under the head 'salaries'. The employer may be an
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individual, a firm, an association of persons, Central Government, State Government, a local
authority, a trust, a club or any type of body, organization or artificial person.
2. More Than One Source of Salary : An assessee may receive salary from more than one employer
during the same previous year. It may be either due to change in employment or due to employment
with more than one employer at one time. For example, he may be a part-time employee with
several employers. Salary received from each employer is taxed under the head 'salaries'.
3. Salary and Wages : In principle and in law, there is no difference between salary and wages.
Wages receivable by a labourer and the salary receivable by the Prime Minister of India, are taxable
under the head 'salaries' generally, any amount paid in connection with manual labour is termed as
wages whereas salary is regarded as payment for mental or non-manual type of work. From
income-tax point of view, there is no difference between the two terms. Both salary and wages are
taxed under the head 'salaries'.
4. Voluntary Payments : Every payment, in cash or in kind, made by an employer to his employee in
consideration of his services, under a contract of service or voluntarily is taxed under the head
'salaries'. Thus, salary, perquisite or allowance may come as a gift to an employee, yet it would be

15
 taxable. Any payment made by the employee to his employer will not be excluded from his salary
income merely because the employer made it voluntarily.
5. Tax-Free Salary : If an employer pays tax-free salary to his employer, income-tax on such salary is
paid by the employer on behalf of his employee. In such a case the amount of tax paid by the
employer is regarded as perquisite in the hands of the employee. The employee shall pay income-
tax on the salary, perquisites (including the payment of income-tax by the employer) and
allowances received by him from his employer. Payment of tax-free salary does not mean that the
employer, who receives salary as such, is made free from his tax-liability. The employee's tax-
liability is ascertained by including the income-tax, paid by the employer on his behalf, in his salary
income. Out of the total tax-liability of the employee, the tax paid by the employer is deducted and
the remaining amount is paid by the employee. Thus, the tax paid by employer is the payment of
employee's obligation by the employer and is, therefore, perquisite in the hands of the employee.
The tax paid to the department is deemed as tax paid on behalf of the employee.

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What includes Salaries?
For computing taxable income under the head 'salaries', gross salaries shall first be ascertained. 'Gross
salaries' includes the following –

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1. Salary;
2. Allowances;
3. Perquisites; and

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4. Profit in lieu of salary.
I) Salary : This can be explained through the chart given follows –
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Transferred balance
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These have been discussed in detail hereinafter in this unit.
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II) Allowances : All monetary payments made by an employer to his employee, other than salary, are

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termed as allowances. From the income-tax view point, all the allowances have been classified

A
under the following three categories, as is evident from the following chart–

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Taxable Portion = Actual Allowance – Exempted Portion of the Allowance : Such allowances
are as follows :
House Rent Allowance [Sec. 10(13-A)] : Any special allowance, by whatever name called,
granted by the employer to his employee (assessee) to meet the expenditure actually incurred by
the employee on payment of rent of the residential accommodation occupied by the employee
(assessee) is known as “Home rent allowance”. The whole of the house rent allowance is not
exempt. The exempt portion is calculated as per provisions given in rule 2-A of Income-tax Rules,
1962.
As per this rule, least of the following is exempt from tax –
1. Actual house rent allowance received by the employee in respect of the relevant period; or
2. Rent paid by the employee in excess of 1/10 of the salary due to him in respect of the
relevant period; or
3. An amount equal to 1/2 or 50% of the salary due to him in respect of the relevant period if the
accommodation is situated at Mumbai, Kolkata, Delhi or Chennai; or

16
 4. An amount equal to 2/5 or 40% of the salary due to him in respect of the relevant period, if the
accommodation is situated at any other place.
III) Fully Exempted Allowance : The following allowances are fully exempted from income tax–
1. Car or Conveyance Allowance : Car or conveyance allowance, not being the transport
allowance granted to meet the expenditure for commuting between the place of his
residence and the place of his duty, given by the employer to an employee for the purpose of
performance of his duties, will be exempt to the extent it is actually spent in performing his
duties. Any amount saved will be taxed.
2. Foreign Allowance : Foreign allowance or perquisites received by an Indian citizen, being
government employee, from the Government during his service in a foreign country is fully
exempt from tax u/s 10 (7) of the Act.

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3. Allowance to High-Court Judges : Any allowance paid to a Judge of a High Court under
section 22-A (2) of the High Court Judges (conditions of service) Act. 1954 is fully exempted
from income-tax.

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4. Allowance received from United Nations Organization : All allowances paid by the UNO
to its employees are exempted from income-tax by virtue of section 2 of the UNO (Privileges
and Immunities) Act, 1974.
5. Passage Money Received by a Non-Citizen [Sec. 10(6-i)] : Passage money or the value

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of any free or concessional passage received by a foreign national, working in India, will be

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exempted from tax, if it is received by him or his employer for himself, his spouse and
children in connection with his proceeding on home leave out of India or in connection with

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his proceeding to his home country out of India after retirement from service in India or after

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termination of such service.

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6. Compensatory Allowance Received by a Judge : Compensatory allowance received by

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a Judge under article 222 (2) of the constitution is exempt from tax, since it is neither salary

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nor perquisite.

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7. Sumptuary Allowance : Sumptuary allowance given to a High Court Judge under section

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22-C of High Court Judge (conditions of service) Act, 1954 and to a Supreme Court Judge

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under section 23-B of the Supreme Court Judges (conditions of service) Act, 1958 is

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exempted from tax.
8. Special Allowance [Sec. 10(14) (i)] : Following allowances as prescribed u/s 10 (14) (i) of
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the Act are exempted in full :- (i) Allowance for travel on tour or transfer; (ii) Daily allowance;
(iii) Conveyance allowance; (iv) Helper allowance; (v) Academic allowance; and (vi)
Uniform allowance.
IV) Perquisites : Any casual receipt or gain available to a salaried employee from his employer, in
addition to regular salary or wages, is called 'Perquisite'. Generally, the term perquisite means any
casual emolument, fee or profit attached to an office or position, in addition to salary or wages. It
may be given in cash or in kind. For example, rent - free accommodation, free electricity, water, gas,
servants, education, car etc. provided by the employer to his employee and any payment by the
employer made on behalf of an employee are perquisites. Actually perquisite is not mere
reimbursement of any expenditure incidental to the employment but it is an additional personal
advantage that benefits an employee by 'going into his own pocket'. Perquisites are taxable under
the head 'Salaries'. A perquisite, to be taxable under the head 'Salaries', must fulfil the following
conditions–
1. Perquisite must be received by an employee from his employer (may be former, present or
prospective) Perquisites received from a person other than the employer, are taxable either

17
 under the head 'Profits and gains of business or profession' or Income from other sources.
2. Perquisite must directly be related with the employment.
3. Perquisite must have been given during the course of employment. Benefits received after
termination of the service are not perquisites.
4. Perquisite must have a legal origin, i.e. it has been received by an employee with his
employer's consent and authority. If an employee takes an advantage or benefit without his
employer's authority, such benefit or advantage would not amount as 'perquisite'.
It is not necessary that 'perquisite' should be regular or of recurring nature. It is also not necessary
that it must be under a contract.

INCOME FROM HOUSE PROPERTY

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Chargeability : 'Income from house property' is the second amongst the five heads of income. Sections 22
to 27 of the Income-tax Act, 1961 are related to this head of income. According to section 22, “The annual
value of property consisting of any buildings or lands attached thereto of which the assessee is the owner,
shall be chargeable to income-tax under the head 'Income from house property'. But if any portion of such
property is occupied for the purposes of any business or profession carried on by him the profits of which
are chargeable to income-tax, the annual value to such portion is not chargeable to income-tax under this
head.”
Thus, an income to be chargeable under the head 'Income from house property' must satisfy the following

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conditions–

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1. Income from Buildings or Lands Attached Thereto : Income-tax is payable by an assessee on
the income of any building or land appurtenant thereto. Income from an open land not attached to

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any building is not chargeable to income-tax under this head. Income from open land will be taxed

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under this head only when it is attached to a building. Open land attached to a building may be in the

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shape of courtyard or a compound or playground or a lawn or a parking place etc. The word

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'building' has not been defined in Income-tax Act, 1961. Building, as defined in different leading

a
cases by courts, means a place surrounded by walls, even if they may be mudwalls. Existence of

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roof is not necessary for a structure to be regarded as building. An enclosure without roof may be

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regarded as building such as a stadium, an open air swimming pool, music house, dancing home

d
etc. But a residential house without a roof and without doors cannot be called building. Land
attached to building means, in case of residential building the way to the house, chowk, gallery,

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kitchen-garden, play-ground, garage, a place for keeping animals etc. Income from building
whether situated in India or outside India is taxable under the head 'Income from house property'.
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Tax on foreign buildings is chargeable from residents only. Any stall permanently affixed with land is
considered as building. If any house property is lying as stock-in-trade with an assessee (when he
deals in purchase and sale of house properties or he has indulged in the trade of letting them on
hire) the income from such house property shall be charged under the head 'Income from house
property'.
2. Assessee Should be the Owner of the Property : An assessee is chargeable to income-tax on
income from buildings or lands attached thereto if he is the owner of such buildings or
lands attached thereto. Ownership means the legal ownership and not beneficial ownership.
The owner is that person who can exercise the rights of the owner not on behalf of the owner but in
his own right. It is not necessary that the owner of a house must also be the owner of the land
on which the house is constructed. Thus, the person constructing a house on land
taken on lease is deemed to be the owner of the house. Similarly, if an assessee is in occupation of a
building as owner as a matter of fact, though the sale-deed may not, yet, have been
executed, he would still be deemed as owner of the building and liable to tax on its income.
If the property is in the name of one person whereas its real owner is somebody else. Assessing
Officer may find out the real owner and fix on him the tax-liability. A receiver

18
 appointed by the court to manage a property cannot be assessed as the owner of the
property.
3. Annual Value : It is not the rent received which is chargeable to tax under the head 'Income from
house property' but it is the annual value of the house property which is subject to tax under this
head. Annual value is that notional rent for which the property can reasonably be let out from year to
year. Thus, the annual value to house property does not mean the rent received but it means the
expected rent which can reasonably be taken from the house property. Annual value of the
ownership of property is charged to tax, irrespective of the fact whether or not any income was
either actually received or had accrued to the assessee.
4. Property in Occupation or Owner's Business or Profession : If an assessee used his own
house property or any portion of it for purposes of any business or profession carried on by him, the
profits of which are chargeable to income-tax, the income from such house property or from any

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portion of such house property will not be chargeable to income-tax. Thus, two things are important
in order to exempt the income from house property on this ground:—(i) The business or profession
must be owned by the owner of house property, and (ii) The profits of such business or profession
must be chargeable to income-tax under Income-tax Act, 1961. If in any year, there is loss in the said
business or profession, the income from house property will not be chargeable to income-tax. But if

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any house property has been let out for the purposes of business or profession, the income from
such house property shall be taxable under the head 'Income from house property'. But if the letting
out of the property is beneficial, incidental and necessary to the main objects of the business, such
house property will be treated as house property used by the assessee for the purpose of business
and accordingly, annual value thereof will not be chargeable to income-tax under this head. The

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property belonging to the assessee company and used by its directors for the purpose of their
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residence should be treated as used for the purpose of the assessee's business. Similarly, a house

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property occupied as residence by the employees or directors etc. and letting out as subservient

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and incidental to the main business of the assessee – such use of the property shall be regarded for
the purpose of the assessee's business.
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Some Important Facts : The following important facts needs special attention –
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1. Disputed Ownership : If the ownership of a house property is under dispute in a court of law, the

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assessment proceedings in respect of the income from such house property will continue and the

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decision of ownership shall rest on the income-tax department. The income-tax department has
prima facie the power to decide whether the assessee is the owner and chargeable to tax under this
d
head (section-22), without waiting for judicial judgement of any suit filed in respect of the property.

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Generally, the person who is receiving any rent or profit from the disputed property or who is in
occupation of such property or who resides in such property, is deemed to be the owner, for the
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purpose of income-tax liability of the disputed property, by the department. It should be
remembered that decision of the Income-tax Department on the fact of ownership shall not, in any
way, affect the ownership decision of the court.
2. Splitting up of a Composite Rent : If the owner of a house property receives a composite rent for
the property as well as for the amenities or services rendered, the house property is to be assessed
under this head. The amenities or services provided alongwith the property are:—electricity facility,
facility of furniture, air conditioned plants, fans, cooler, lift facility etc. The amount of rent which
relates to these facilities is taxable under the head 'Income from business or profession' (if it is the
business of the assessee to provide these facilities) or under the head 'Income from other sources'.
If the composite rent is not separable, the entire income would be assessable under the head
'Income from other sources' or 'Income from business or profession'. Charges received for services
rendered in providing electricity, use of lifts, supply of water, maintenance of staircase and watch
and ward, are assessable as 'Income from other sources' since such services are not incidental to
letting out property.
3. Two or More Co-Owners of Property : According to section 26, where property consisting of

19
 building or buildings and lands appurtenant thereto, is owned by two or more persons and their
respective shares are definite and ascertainable, such persons shall be assessable separately for
their respective shares of income in the house property. If the property is jointly used, managed and
constructed or developed and the income of such property is also used jointly, then income from
such property shall be assessed separately as per the share of each co-owner provided their
respective share is definite and ascertainable. The deductions, in respect of such property,
provided for by section 23 (2) have to be allowed to each co-owner separately from out of his share
in annual value of house property. Share of each co-owner shall be a separate unit and its annual
value shall be determined as a separate unit as per the rules applicable to each of them. But a house
property belonging to a Dayabhaga HUF is not treated as property belonging to two or more
persons. Therefore, the entire income of such house property is assessable in the hands of such
HUF.
4. Income from House Property Taxable Under the Head 'Income from Business or Profession'

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or 'Income from Other Sources' : The following Income from house property is not taxable under
the head 'Income from house property'–
i) Income from letting out of the property to the assessee's employees if such letting out of the
property is beneficial, incidental and necessary to the main business of the assessee;

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ii) Income from such house property which is let out alongwith some machinery or furniture
fitted with it and the rental value of property cannot be separated from the rental value of the
machinery or furniture so fitted such as cinema, theatre, factory, hotel etc., will be taxable
under the head “Income from other sources'. But if letting out of cinemas, theatres, factories

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or hotels has been the business of the assessee, such income shall be taxable under the
head 'Income from business or profession'.
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iii) Income to non-owners from sub-letting of a house property under his occupation, will be
taxable under the head 'Income from other sources'.
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iv) Income from letting out of open land not attached to a building is taxable under the head

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'Income from other sources'.

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Annual Value : It is worth noting that the income chargeable to tax under the head 'Income from house

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property' is not the rental income of the property rather, it is the notional income of the house property. This

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notional income represents the inherent capacity of the property to earn. The income chargeable to tax

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under this head is termed as 'annual value'.

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Definition : According to section 23 (1), the annual value of any property shall be deemed to be –

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a) the sum for which the property might reasonably be expected to let from year to year; or
b) where the property is let out and the annual rent received or receivable by the owner in respect
thereof, is in excess of the sum referred to in clause (a), the amount so received or receivable.
The words 'might reasonably be expected to let' make clear that the term annual value is a hypothetical
figure and has no physical existence. It is a reasonable or fair rent, not being the factual rent. In
determination of this hypothetical figure of reasonable or fair rent, several factors, such as actual rent,
municipal value, rental value of similar property in the nearby locality, cost of construction of property,
specific location of the property and the historic or artistic importance of the property etc., are to be taken
into consideration.
Determination of Annual Value : Annual value is determined on the basis of the following four
factors:—(1) Rent received, (2) Municipal valuation, (3) Fair rent, and (4) Standard rent.
1. Rent Received or Defacto Rent : It is the actual amount of rent received from a rented property.
But sometimes the owner of the property provides some facilities, under the terms of tenancy, to the
tenant at his own cost such as gardener, maintenance of lift, facility of electricity and water,
arrangement for scavenging parking facility etc. In such a case the rent received is a composite

20
 rent. Out of this composite rent the amount spent by the owner on the above facilities must be
deducted. But the expenditure incurred on provision of air conditioners, furniture and fans for use of
the tenant, cannot be taken into account in determining the annual value of the property on grounds
of improvement to property. Likewise the salary paid to caretaker (chowkidar) by the owner of the
house cannot be taken into account in determination part of the composite rent. In brief,
De facto Rent = Actual rent received for let out portion of the property
or
Composite rent – expenses borne by the owner in connection
with facilities provided with the property
except the facility of caretaker.
Thus, de facto rent is the real rent of the property and it is something different from actual rent.

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Sometimes, actual rent received will be the de facto rent when landlord does not undertake any
obligation towards the tenant's facilities. But, if the tenant has undertaken to bear the cost of repairs,
amount spent by the tenant cannot be added to rent received to arrive at the annual value.
2. Reasonable or Fair Rent : Fair rent is that notional rent which may be received in connection with a

U
property. It is different from the actual rent. Any property may be let out on a rent less than the
fair rent (where owner and tenant are closely related or where the tenant is a person of
status) and sometimes it may be let out on a rent higher than the fair rent (where
tenant's requirement is very intensive and acute). Thus, actual rent and fair rent should
be distinguished. The fair rent is determined on the basis of the location of property, cost of property,

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rental value of neighbourhood properties of similar type and historic or artistic importance of the

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property etc. Thus, fair rent may be taken as rent of a similar property in the same or similar locality.

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3. Standard Rent : Standard rent means the rent fixed or determinable under the Rent Control Act.

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Any landlord cannot receive a rent more than the standard rent under the Rent Control Act. It is,

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thus, very clear from the judgement that if a property is covered under the Rent Control Act, its gross

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annual value cannot exceed the standard rent. But section 23 (1) (b), provides that if actual rent of a

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property is more than the sum for which the property might reasonably, be expected to let from year

a
to year, actual rent shall be gross annual value. This clause has the effect that if actual rent of a

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property is more than the standard rent, actual rent shall be the gross annual value. Thus, the

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following principles are applicable –
a)
d
In the case of a self-occupied house property, gross annual value cannot exceed the

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standard rent determined or determinable under the Rent Control Act.

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b) In the case of a let out property, gross annual value cannot exceed the standard rent or the
actual rent, whichever is greater.

PROFITS AND GAINS OF BUSINESS OR PROFESSION

'Profits and gains of business or profession' is the third amongst the five heads of income. Sections 28 to
43-D of the Income-tax Act, 1961 relate to this head of income. According to section 28, the following
income shall be chargeable to income-tax under the head 'Profits and gains of business or profession'–
1. Profits and Gains of Business or Profession : The profits and gains of any business or profession
which was carried on by the assessee at any time during the previous year, is taxable under this head.
Section 28(i) elucidates the following facts –
a) Profit and Gains Must Relate to Business or Profession : It means that they should be
revenue profits or gains resulting from the business or profession which was carried on, in
India or outside India, at any time during the previous year.

21
 b) Business or Profession was Carried on During the Previous Year at any Time : It means
that a single transaction of business or profession will amount to as carrying on the business
or profession at any time during the previous year. Thus, profits or gains from a single
transaction are also taxable under this head.
c) Business or Profession was Carried on by the Assessee : It means that assessee is the
owner of the business or profession. Manager or agents, though carrying on the entire
business or profession, are not chargeable to tax on the profits or gains of such business or
profession. It is only the owner who is chargeable to tax on its profits. Actual carrying on of the
business or profession does not matter. The only thing that matters is the right to carry on and
this vests in the owner only.
2. Any Compensation or Other Payments Due or Received : As per section 28 (ii), any
compensation or other payment due to or received by any of the persons mentioned below is

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chargeable to tax under this head–
a) Any person managing the whole or substantially the affairs of an Indian company, at or in
connection with the termination of his services or the modification of the terms and conditions
relating thereto;

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b) Any person managing the whole or substantially the whole of the affairs of any other company
in India, at or in connection with the termination of his office or the modification of the terms
and conditions relating thereto;
c) Any person, holding a business agency in India, at or in connection with the termination of the

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agency or the modification of the terms and conditions relating thereto;
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d) Any person, for or in connection with the vesting in the Government, or in any corporation
owned or controlled by the Government, under any law for the time being in force, of the
management of any property or business.
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3. Income of Trade or Professional Associations : As per section 28 (iii), income derived by a trade,

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professional or similar association from specific services performed to its members, is chargeable to

a
tax under the head 'Profits and gains from business or profession'. In order to charge the income

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under this section two conditions be satisfied–

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a) Income should be derived by a trade, professional or similar association; and
b) d
It should be from specific services performed by it to its members.

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It must be noted here, that 'trade association' is an association of tradesmen, businessmen or

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manufacturers for the protection and advancement of their common interest. Thus, an association formed
for carrying on business is not a trade association, rather it is a trading association. Similarly, social clubs
are also not trade association. Any income derived by a club, even from rendering specific services to its
members is not chargeable under this section.
Income from a commercial asset is also included in business. For example, cinema is a commercial asset
and any profit derived therefrom by letting out the same would be assessable as business profits. Similarly,
income arising from letting out other commercial or business assets is also assessable as profits and gains
from business or profession.
'Business' includes 'trade', as it is clear from section 2 (13); trade means buying and selling of the goods or
exchange of goods for money on other goods. The primary object of these activities of buying and selling
and of exchanging the goods or money is to earn profits. Justice Shah has defined the term as, 'Trade in its
primary meaning is exchanging of goods or for money; in its secondary meaning it is repeated activity in the
nature of business carried on with a profit motive, the activity being manual or mercantile, as distinguished
from the liberal arts or learned profession or agriculture.
'Business' also includes 'manufacture'. Manufacture means making or producing goods or commodity etc.

22
by manual or mechanical force. Making or producing goods or commodity means transforming the shape of
commodity or goods in such a way that it becomes a new commercial commodity for trading purposes.
Thus, when raw material is changed into finished goods, it is manufacture. The term has been elaborated in
a leading case in the following words. 'Manufacture is a process which results in an alteration or change in
goods which are subjected to such manufacture. A commercially new different article is produced, may be
that is produced by manual labour or mechanical force or even by nature's own process, such as drying by
heat of the sun as in saltpan or formation of toddy. The essential question is whether a commodity which, in
commercial sense, is different from raw material, has resulted. Changing the or form cloth by sewing it is
also manufacture. The tailoring shop is the place of manufacture or factory and the process of tailoring is
the manufacturing process. It must be noted that not only making something from raw material or changing
the form of an article but also extraction of minerals from the earth, or construction of roads, dams, houses
etc., are also termed as 'manufacture'.
Business also includes any adventure in the nature of trade, commerce or manufacture. It means any

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activity that is undertaken with a view to earn profits. But the profit motive is not the sole criterion of deciding
an adventure as trade, commerce or manufacture. To determine whether a transaction is an adventure in
the nature of trade, the court in each case has to determine the nature of transaction, its volume, frequency,
continuity and regularity and there is hardly any abstract rule, principle or test for application. No individual

U
or single fact can be taken as decisive in finding out the correct character of the transaction. The cumulative
effect of all the facts and circumstances has to be taken into consideration for the said purpose. Thus,
where the transactions of purchase and sale are in large numbers and the commodity purchased is such
which is neither capable of yielding income nor capable of being used as an asset and if such commodity is
kept in stock-in-trade for the purpose of trading, it is treated as an adventure in the nature of trade.

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Profession : As per section 2 (36) profession includes vocation. This definition is not clear and it does not
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give any idea about the term 'profession'. Ordinarily, profession refers to all such human activities which are

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undertaken to earn a living and which are performed on account of one's intellectual skill or knowledge,

.
acquired only after patient study and application. For example, Chartered Accountants, Advocates,
Engineers, Architects, Management Advisers, Financial Managers and Accounts Advisers etc. are the
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persons whose activities are termed as profession. 'Vocation' includes such activities which are performed

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by a person on account of his natural ability for some particular work. A person can have more than one

a
vocation. Vocation need not be for making any income, nor need it involve any systematic and organized
activity. If an assessee is giving discourses on vedanta philosophy without any motive or intention of

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making a profit out of such activity, this giving of discourses is a vocation. Actually the primary object of
vocation is not always to earn profits. But if a person passes his life by such activities for which he has

d
natural abilities and some profits arise therefrom, such profits are treated as professional income such as

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income of singers, artists, actors, worshippers etc.

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Distinction Between 'Business', 'Profession', or 'Vocation' is Insignificant : Any income or profit due

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to or receivable by an assessee from the exercise of any business or profession or vocation is chargeable to
tax under the head 'Profits and gains of business or profession'. Therefore, the distinction between these
three is insignificant. What does not amount to 'profession' may amount to 'business' and what does not
amount to 'business' may amount to 'vocation'.
Basic Principles : The following general principles are to be kept in mind by the assessee while computing
income chargeable under the head 'Profits and gains of business or profession –
1. Business or Profession Carried on by the Assessee : As per section 28 of the Act, profits and
gains of only those businesses or professions are chargeable under the head 'Profits and gains of
business or profession' which are carried on by the assessee. Carrying on by the assessee means
the ownership of the assessee. It is not necessary that the assessee should actually carry on the
business or profession but he must have legal right to carry it on. He may carryon the business or
profession through his agents, employees and managers. The very essence is that the assessee
has right to carry on the business or profession. If this right of the assessee has been terminated by
the court, the assessee would not be chargeable to tax as he does not have right to carry on his
business or profession. But the guardian or trustee or receiver of a minor or, of a person of unsound

23
 mind or, of an insolvent has right to carryon his business or profession. Hence, they are chargeable
to tax under the Act. Thus, if the non-owner has the right to carry on the business or profession he
would be taxable under this head and if the owner, by virtue of his incapacity or depriving him of this
right to carry on the business or profession, does not have right to carry on the business or
profession, he would not be chargeable to tax under this head.
2. Legal or Beneficial Ownership : Under section 28, not only the legal ownership but also the
beneficial ownership is to be considered. Beneficial ownership means the receiver of the profits.
The person who actually receives or enjoys the profits of a business or profession shall be
chargeable to tax on such profits and gains. For example, the pre-incorporation profits of a
company, earned through its business carried on by its promoters during pre-incorporation period,
belong to the company after incorporation. Thus, the company is the beneficial owner of such pre-
incorporation profits and therefore, chargeable to tax under the Act.

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3. Business or Profession Should be Carried on During the Previous Year : As per section 28, the
profits and gains of only those business or professions are chargeable to tax under this head, which
were carried on at any time during the previous year. It is not necessary that the business or
profession should be carried on throughout the previous year or upto the end of the previous year. It
is sufficient that it was carried on at any time during the previous year.

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4. Illegal Business or Profession : For tax-incidence, it is sufficient that any business or profession
was carried on and profits were earned out of it. The income-tax law is not concerned with the
legality or illegality of such a business or profession. Profits of even illegal business or profession
are chargeable to tax under the Income-tax Act.

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5. Real, Anticipated or Notional Profits : As per section 28, only real profits are chargeable to tax.
Anticipated or notional profits are not subject to tax liability, but anticipated losses are deducted. For

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example, stock is valued at cost price or market price (whichever is less). This valuation

.
automatically adjusts the anticipated losses but ignores the anticipated profits. Notional Profits are

a
the profits which are shown in the books as profits, although they are not actual profits such as

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profits arising from trading with himself. An assessee purchased some commodities from his own

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business. The profit arising on this transaction is not real profit as it has not arisen from any outside

a
source. Thus, Profits should not only be real but they must also accrue or arise from an outside

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source.

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6. Profits From All Business or Professions of an Assessee to be Taxed Under One Head : An

d
assessee may own several businesses or professions. Every business or profession is a separate

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source of income under the head 'Profits and gains from business or profession'. Profits of every
business or profession are computed separately and, then, aggregated in one head. If there is loss

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in any business or profession it will be adjusted from profits of other businesses or professions. The
assessee does not pay tax on the profits of every business separately but the profits (after adjusting
losses) of all the businesses are aggregated and taxed under the head “Profits and gains from
business or profession'. However, the profits and losses of speculation business are treated
separately.
7. Speculation Business : As per explanation 2 to Section 28, speculative transactions are like other
business transactions and profits from speculation business are taxable under the head 'Profits and
gains business or profession'. But the profits or losses of speculation business are treated and
taxed separately.
8. Business or Profession Established Outside India : Profits and gains of a business or
profession, established outside India, are taxable in the hands of a resident assessee and are also
chargeable to tax under the head 'Profits and gains from business or profession'. Profits of a
business established in India or established outside India are equally taxable under section 28 of
the Act.
9. The Purpose of Business or Profession is not Necessarily to Earn Profit : It is not necessary

24
 that the purpose of a business or profession carried on by an assessee, is to earn profits or that such
business or profession yields profit. Co-operative societies and mutual insurance companies come
under the perview of business, though they may or may not earn profit.
10. Profit of Closed Business or Profession : Where a business or profession is closed down, any
profit, arising on the sale of the assets of such business or profession, is not business profit, rather it
is capital gains. But if the assets include stock, the profit arising on the sale of stock shall be
business profit.
11. Computation of Profits on Commercial Principles : Profits or losses of a business or profession
should be computed on the basis of general commercial principles. Generally, accepted accounting
and commercial principles should be followed while calculating business or professional profits.
Capital gains and capital expenditures should be separated from revenue profits and revenue
expenses. Actual due amount of expenses should be recorded and considered whether it is actually

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paid or not. Expenses relating to earlier years and not relating to business or profession should not
be deducted whereas the outstanding expenses should be deducted. Personal expenses, non-
trading expenses should not be deducted. Thus, only such profits from business or profession are
chargeable to tax as are computed after keeping the generally accepted commercial and
accounting principles. It is sufficient that profits have accrued. It is immaterial that they are received

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or not received.
12. Business Incomes not Taxable Under This Head : The following income, though arisen from
business, are not taxable under the head 'Profits and gains of business or profession.

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a) Rent from house property is taxable under the head 'Income from house property' even if the

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assessee is dealing in the business of buying, selling, constructing or letting on hire of

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houses and the house property is kept with him as stock. But income derived by the
company by letting out its property to its employees is considered as business income,

.
because letting out property to the employees of the business is treated as incidental to the

a
business carried on by the assessee company.

13.

14.
b)

A M m
Dividend on share is taxable under the head 'Income from other sources' even if the
assessee is dealing in purchase and sale of such shares on which dividend has arisen.

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a
Interest on Securities : If the securities are kept by the assessee as stock-in-trade (when he deals
in the purchase and sale of securities), any interest on such securities will be taxed under the head

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d
'Profits and gains of business or profession'. Generally, interest on securities is taxable under the
head 'Income from other sources'.
Rewards to Players : Any reward received by a professional player is his income from profession
S

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and taxable under this head. Any reward received by a non-professional player is deemed to be a
personal gift and is not taxable.
15. Underwriting Commission : Commission received or receivable by an underwriter on shares
subscribed by him is not his business or professional income. The cost of shares subscribed by him
is reduced by the amount of commission earned by him. Hence, it is not treated as his income
chargeable under this head.
16. Conversion of Agricultural Land for Commercial Purposes : If an agricultural land is divided
into commercial plots which are sold for construction of houses on it, the additional profit arising
from such activity is treated business profits and not capital profits.
What is Included in Business or Profession?
Business : According to Section 2 (13) of the Act, 'business' includes any trade, commerce or manufacture
or any adventure or concern in the nature of trade, commerce or manufacture. This definition of business is
neither exhaustive nor complete. Although it covers every aspect of a transaction carried on by the
assessee with a view to earn profit, there are so many aspects which are not covered by this definition. The

25
term 'business' is a wide term which includes all such functions, activities or efforts which are meant to earn
profits. The word 'business' connotes some real, substantial, systematic or organised course of activity or
conduct with set purposes of earning profits. Business does not include the activities of trade, commerce or
manufacture only but it also includes the activities of rendering services. It should be remembered that no
person can trade with himself. Business arises out of commercial transactions between two or more
persons. Profits or gains cannot arise by trading with oneself. Generally, continuity of transactions or
activities is required in order to constitute business, but even a single activity or transaction may be called a
business. The only criterion is the profit motive. But sometimes this criterion is also not the main test for
business. For example, mutual concerns and societies do carry on business, but they seldom have profit
motive.
1. The debit side may show the expenses which are not admissible under the Income-tax Act;
2. Any expenditure may have been debited by more or less the admissible amount;

S
3. Such expenses may have been debited to profit and loss account, which does not relate to the
previous year or the concerned business or profession or which relate to any earlier year other than
the previous year;
4. Capital expenses may have been debited;
5.
6.
7.
8.
9.
Personal expenses may have been debited;

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Expenses expressly disallowed under the Income-tax Act, may have been debited;

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Incomes not taxable under this head may have been credited;
Incomes taxable under this head may not have been credited;
Such losses may have been debited which are not allowed; and

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m
a
10. Such receipts may have been credited which are of capital nature.

M
These anomalies are to be rectified in order the arrive at the profits or losses chargeable to tax under the
m
Income-tax Act. According to section 29, profits chargeable to tax as per section 28 shall be computed in
a
accordance with the provisions contained in sections 30 to 43-D. These sections contain the deductions to

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be allowed, the deductions not to be allowed and also other points to be taken into account while computing

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the taxable income from a business or profession.
CAPITAL GAINS d
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Chargeability : 'Capital gains' is the fourth head of income. Sections 45 to 55-A of the Income-tax Act deal
S

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with this. According to section 45 any profit or gain arising from transfer of a capital asset effected in the
previous year shall be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be
the income of the previous year in which the transfer took place. Thus, from a plain reading of section 45,
capital gains may be defined as 'profits or gains arising from the transfer of a capital asset'. As per this
section, following are included in capital gains –
1. Profit on Direct Transfer of Capital Asset [Sec. 45 (1)] : Profit or gain arising from transfer of a
capital asset effected during the previous year shall be chargeable to tax under the head 'capital
gains'. Such capital gains shall be income of the previous year in which the transfer has taken place.
2. Capital Gains in Respect of Insurance Claims [Sec. 45 (1-A)] : If during any previous year, any
person receives an insurance claim on account of damage to, or destruction of, any capital asset,
then any profit or gain arising on account of such claim shall be chargeable to tax under the head
'Capital Gains'. It shall be deemed to be the income of such person of the previous year in which the
insurance claim is received in cash or in assets. The damage or destruction may due to the following
factors –
a) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

26
 b) Riot or civil disturbance; or
c) Accidental fire or explosion; or
d) Action by an enemy or action taken in combating an enemy (whether with or without a
declaration of war).
For computing capital gains value of any money or the fair market value of other assets received
from the insurer as insurance claim shall be the full value of consideration received or accruing as a
result of the transfer of such capital asset.
3. Profit on Conversion of Capital Asset into Stock [Sec. 45 (2)] : When the owner of a capital
asset has converted it into stock-in-trade of business carried on by him or he had sold such capital
asset treating it as stock-in-trade, any profits or gains arising to him from such transfer or sale shall
be chargeable to income-tax as his income of the previous year in which such capital asset is

S
converted into stock-in-trade or such stock-in-trade is sold. In order to calculate the amount of
capital gains arising on conversion of capital asset into stock-in-trade, the fair market value of the
asset on the date of such conversion shall be deemed to be the full value of the consideration
received or accruing as a result of such conversion.
4. Profit on Transfer Made by the Depository [Sec. 45 (2A)] : If a person had at any time during the

U
previous year, any beneficial interest in any securities and a transfer is made by the depository or
participant of such beneficial interest in respect of such securities, then, any profits or gains arising
from such transfer shall be chargeable to tax as the income of the beneficial owner of the previous
year in which such transfer took place. The depository is not assessed to capital gains, although he

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is deemed to be the registered owner of the securities. The cost of acquisition and the period of

m
holding of any security shall be determined on the basis of first-in-first-out method.

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5. Profit on Transfer of Capital Asset to a Firm Etc. [Sec. 45 (3)] : When a person transfers his

.
capital asset to a firm, or other association of persons or body of individuals (not being a company or
co-operative society) in which he is or becomes partner or member, as his share of capital or
a

M
otherwise and some profit arises from such transfer, the profits so arising shall be chargeable to tax

m
as his income of the previous year in which such transfer takes place. In order to calculate capital
gains on such transfer, the amount recorded in the books of account of the firm, association or body
a
as the value of the capital asset shall be deemed to be the full value of consideration on such

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A
transfer.

d
6. Profits on the Distribution of Capital Assets on the Dissolution of Firms Etc. [Sec. 45

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(4)] : When a firm, association of persons or body of individuals is dissolved and the capital assets
are distributed among partners or members on such dissolution, the profits or gains arising from

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such distribution, shall be chargeable to tax as capital gains of the firm, association of persons or

K
body of individuals of the previous year in which the said distribution is made. Fair market value of
the assets on the date of distribution shall be deemed to be the full consideration on such transfer.
7. Solitary Transaction of Purchase and Sale of Shares : Where an assessee purchased some
shares in a block with the intention to invest his funds and earn a profit out of it and sold the entire
share holding in one block as he could not get the expected profits on them, any profit arising as a
result of such sale are liable to be assessed as capital gains and not as business income.
8. Profit on Compulsory Acquisition of Assets [Sec. 45 (5)] : Where a capital asset is compulsorily
acquired under any law or is transferred for a consideration determined or approved by the Central
Government or the Reserve Bank of India, and the compensation or the consideration for such
acquisition or transfer is enhanced or further enhanced by any court, tribunal or other authority, the
capital gains arising as a result of such acquisition or transfer shall be dealt with as follows :-
9. Profit on Re-purchase of Units Issued Under Mutual Fund or Equity Linked Savings Scheme
of UTI [Sec. 45 (6)] : Where an assessee has purchased units of a mutual fund or of Equity Linked
Saving Scheme of UTI and such fund or UTI has repurchased such units or the assessee has

27
 returned them to the fund or UTI on termination of such scheme, the re-purchase price or the price
at which such units are taken back by the fund or UTI, is the consideration for such units. If the
consideration received on such units exceeds the amount invested in such units, the excess is the
capital gain. In brief,
Capital gain = Consideration on transfer of units – amount invested in units
Capital gain is chargeable to tax during the previous year in which such units are repurchased or the
scheme is terminated.
Meaning of Capital Asset : According to section 2 (14), 'Capital asset' means property of any kind held by
an assessee, whether or not connected with his business or profession, but does not include the following –
1. Any stock-in-trade, consumable stores or raw materials held for the purposes of his business or
profession.

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2. Personal effects, that is to say, movable property (including wearing apparel and furniture, but
excluding jewellery) held for personal use by the assessee or any member of his family dependent
on him.

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3. Agricultural land in India, not situated under the following limits –
a) Within the jurisdiction of a municipality, municipal corporation, notified area committee, town
area committee, or a cantonment board which has a population of not less than 10,000
according to the last preceding census; or

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b) Within 8 kilometers, from the local limits of any municipality or cantonment board (referred
as above).
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It must be noted here that agricultural land which is situated in urban area (i.e., within the

.
jurisdiction of a municipality or a cantonment board having a population of 10,000 or more or

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within 8 kilometers of their local limits) is a capital asset. But other agricultural lands in India,
not situated in any area falling in above (a) or (b) are not capital assets. Thus, agricultural

m
lands situated in rural areas are not capital assets.

a
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4. 6.5% Gold Bonds, 1977; or 7% Gold Bonds, 1980; or National Defence Gold Bonds, 1980, issued

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by the Central Government.
5.
d
Special Bearer Bonds, 1991, issued by Central Government.

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6. Gold Deposit Bonds, 1999 issued under the Gold Deposit scheme, 1999 notified by the Central
Government.
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a)

b)
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Note : 'Jewellery' includes the following –
Ornaments made of gold, silver, platinum or any other precious metal or any alloy, whether or not
containing any precious or semi-precious stone, and whether or not worked or sewn into any
wearing apparel;
Precious or semi-precious stones, whether or not set in any furniture, utensils or other article or
worked or sewn into any wearing apparel.
Personal Effects : Personal effects means the personal assets in the personal use of the assessee or any
other person dependent upon the assessee and which have been purchased for personal use only, and not
for sale, such as furniture, refrigerator, motor-car, scooter or other vehicle and personal library etc. But gold
and silver coins and bars used for puja of deities as a matter of pride or ornamentation and normally not
intended for personal or household use are not 'personal effects' and are, therefore, treated as 'capital
assets'.
The value or price of an asset is immaterial for determining whether or not such asset is a personal asset. If

28
an asset is for personal use, it shall be deemed to be a personal asset even though it is very costly. Any
personal asset will not be treated as capital asset merely because it is very costly. Thus, silver utensils,
beds made of silver, chairs and stools of silver etc. are personal assets and any profit on their transfer shall
not be treated as 'capital gain'. Similarly, profit arising on sale of silver utensils is also not capital gain.
'Capital assets' as per different legal decisions are as follows–
1. Goodwill is capital asset. Any amount received or receivable on sale of goodwill in excess of its book
value is capital gain.
2. Right to purchase share.
3. Share of a partner in the firm.
4. Leasing rights in mines and a licence to produce any article.

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Types of Capital Assets and Capital Gains : There are two types of capital assets. These are explained
as follows –
1. Short-Term Capital Asset : According to section 2(42-A), short-term capital asset means a capital
asset held by an assessee for not more than 36 months immediately preceding the date of its

U
transfer. But in the case of a share held in a company or any other security listed in a recognized
stock exchange in India or a unit of the Unit Trust of India or a Unit of a Mutual Fund specified u/s 10
(23-D), the period of 36 months has been reduced to 12 months. Thus, share, listed security or unit
held by an assessee is a short-term capital asset if it is held by him for not more than 12 months

K
immediately preceding the date of transfer. If an asset is transferred within 36 months of its date of

m
acquisition or a share, a listed security or a unit is transferred within 12 months of its date of
acquisition, it is the transfer of short-term capital asset. According to section 2 (42-B), 'Short-term

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capital gain' means capital gain arising from the transfer of a short-term capital asset.
2.
.
Long-Term Capital Asset : An asset which is not a short-term capital asset as per section 2 (42-A),
a

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may be called a long-term capital asset. Thus, an asset acquired before more than 36 months

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immediately preceding the date of transfer or a share, a listed security or a unit acquired before
more than 12 months immediately preceding the date of transfer, is termed as long-term capital
asset.
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'Long-term capital gain' means capital gain arising from the transfer of a long-term capital asset.
Transfer
d
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Meaning : According to section 2 (47), 'transfer' in relation to a capital asset, includes–

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1. the sale, exchange or relinquishment of the asset; or
2. the extinguishments of any right therein; or
3. the compulsory acquisition thereof under any law; or
4. the conversion or treatment of the asset into stock-in-trade; or
5. any transaction allowing the possession of any immovable property in part performance of a
contract (Under section 53-A of the Transfer of Property Act, 1882), even though the legal
ownership may not have been transferred under the general law of the land; or
6. Any transaction which has the effect of transferring or enabling the enjoyment of any immovable
property (by becoming a member of, or acquiring shares in, a co-operative society, company or
other association of persons or by way of any agreement or any arrangement or in any other
manner whatsoever).
'Capital gains' are chargeable to tax in the year in which the capital asset is transferred, even though its
compensation is settled later on. Sale by a commissioner or receiver under the court's order is also deemed

29
to be transfer. Purchase of a firm's running business by a company is also deemed to be transfer.
Computation of Capital Gains
According to section 48, the income chargeable under 'Capital gains' shall be computed by deducting the
following amounts from the full value of the consideration received or receivable on the transfer of a capital
asset–
1. Expenditure Incurred in Connection with Such Transfer : Expenditure incurred wholly and
exclusively in connection with the transfer of capital assets shall be deducted from the full amount of
consideration received on such transfer such as commission on sales, brokerage, advertising
expenses, traveling expenses, stamp expenses, legal expenses and any other expenses which are
incurred wholly and exclusively in connection with such transfer.
2. Cost of Acquisition and Improvement : The cost of acquisition of the asset transferred and the

S
cost of any improvement thereto shall also be deducted from the full value of consideration.
Note: Where shares, debentures or warrants are transferred, under a gift or an irrevocable trust,
by a company to its employees under the Employee's stock option scheme or employees' stock
purchase scheme, the market value on the date of such transfer shall be deemed to be the full value

U
of consideration received or accruing as a result of such transfer for computing capital gains.
Cost of Acquisition of an Asset : Capital gain is computed after deducting from the full value of
consideration of capital asset, the cost of acquisition thereof. Cost of acquisition is the amount which has
been actually spent by the owner of a capital asset in acquiring that asset. Cost of acquisition under

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different circumstances is as follows–
1.
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Cost to the Previous Owner : According to section 49(1), where the assessee has acquired the

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capital asset under any of the following circumstances, the cost of acquisition of the asset shall be

.
deemed to be the cost for which the previous owner of the property acquired it. It will be increased by

a
the cost of any improvement to the asset incurred or borne by the previous owner or the assessee,

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as the case may be :-
a)
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Assets acquired on any distribution of assets on the total or partial partition of a Hindu
Undivided Family; or
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b) Assets acquired under a gift or will; or
c)
d
Assets acquired by succession, inheritance or devolution; or
d)
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Assets acquired on any distribution of assets on the dissolution of a firm, body of individuals,

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or other association of persons, if such dissolution had taken place before 1 April, 1987; or
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e) Assets acquired on any distribution of assets on the liquidation of a company; or

f) Assets acquired under a transfer to a revocable or an irrevocable trust; or
g) Assets acquired by a fully owned Indian subsidiary company from its holding company; or
h) Assets acquired by an Indian holding company from its fully owned subsidiary company; or
i) Assets acquired by an amalgamated Indian company, under a scheme of amalgamation
from amalgamating company; or
j) Share of an Indian company acquired by a amalgamated foreign company from an
amalgamating foreign company; or
k) Conversion by a HUF member of his self-acquired property into HUF property.
Note : 'Previous Owner', as per explanation to this section, means the last previous owner of the
capital asset who actually acquired it by a mode other than the modes discussed above. Thus, the

30
 last person who acquired the capital asset by purchase or construction is the last previous owner.
The cost of acquisition to the last previous owner would be that actual cost of purchase or
construction incurred or borne by such previous owner. According to section 55 (3), if such cost of
acquisition to the previous owner is not ascertainable, the cost to the previous owner would be the
market value of the capital asset on the date he became the owner thereof.
2. Cost of Share in Amalgamated Company : According to section 49 (2), where the capital asset
acquired by an assessee are shares in an amalgamated Indian company in consideration of his
shares in amalgamating company, the cost of acquisition of such capital asset shall be the cost of
acquisition to him of the shares in the amalgamating company.
3. Cost of Converted Shares or Debentures : According to section 49 (2-A) where bonds or
debentures, debenture-stock or deposit certificates of a company are converted into shares or
debentures of that company, the cost of acquisition of such shares or debentures to the assessee

S
shall be the amount for which the assessee had acquired such bonds or debentures, debenture-
stock or deposit certificates before conversion.
4. Cost of Acquisition of Shares, Debentures or Warrants Allotted to Employees by a
Company : According to Section 49 (2AA), the cost of acquisition of shares, debentures or

U
warrants, the value of which has been taken into account while computing the value of perquisite u/s
17 (2), shall be the value under that clause. It means the value of such shares, debentures or
warrants for the purpose of perquisite shall be the cost of its acquisition for capital gains, if these are
transferred.
5. Cost of Acquisition of Shares in the Resulting Company : As per section 49 (2-C), cost of

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acquisition of the shares in the resulting company shall be the amount which bears the cost of
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acquisition of shares held by the assessee in the demerged company the same proportion as the

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net book value of the assets transferred, in a demerger, bears to the net worth of the demerged

.
company immediately before such demerger.

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6. Cost of Acquisition of Original Shares : As per section 49 (2-D), the cost of acquisition of the
original shares held by the shareholder in the demerged company shall be deemed to have been
reduced by the amount so arrived in (5) above.
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7. Cost of Capital Assets Transferred in Between Holding and Subsidiary Companies :

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According to section 49 (3), where the capital assets have been acquired by a holding company
from its subsidiary company or vice versa, and the subsidiary company is not fully owned by the
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holding company or the transferee company is not an Indian company, the cost of acquisition of

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such assets to the transferee company shall be the cost for which such assets have been acquired
by such transferee company.
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8. Cost of Acquisition of Depreciable Assets Forming Part of a Block of Assets : According to
section 50 (1) and (2), cost of acquisition of depreciable assets is the sum of the following–
a) Written-down value of all the assets in the block of assets in the beginning of the previous
year; and
b) Actual cost of the assets acquired, during the previous year, within the block of assets.
Thus, the cost of acquisition of a block of assets is the sum of the cost of acquisition of individual
assets within the block of assets. If a particular asset within the block of assets is sold during the
previous year, the cost of acquisition of that particular block of assets shall be reduced by the
amount of selling price of the assets sold. In brief, the cost of acquisition of depreciable assets will
be:-
Cost of acquisition of W.D.V. of all assets within the block the block of assets
= the beginning of the previous year.
+

31
 Actual cost of assets acquired during the previous year within the block
–
Selling price of the assets sold within the block during the previous year.
Note : Capital gains arising on the transfer of depreciable assets are short-term capital gains. The
date of acquisition of assets is immaterial.
9. Cost of Acquisition in Case of Depreciable Asset : According to section 50-A, where the capital
asset is an asset for which depreciation u/s 32 (1) (i) has been obtained by the assessee in any
previous year, its cost of acquisition for the purpose of computation of capital gain shall be its
adjusted written down value as defined in section 43 (6).
Note : Assets which are depreciated u/s 32 (1) (i) are –

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a) buildings, machinery, plant or furniture, being tangible assets;
b) know-how, patents, copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets.
10. Cost of Acquisition in Case of Slump Sale : As per Section-50 B, if a capital asset being an

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undertaking is transferred by way of slump sale, the 'net worth' of the undertaking shall be deemed
to be the cost of acquisition and the cost of improvement. Thus, benefit of indexation will not be
available to the assessee.
11. Cost of Acquisition in Case of Advance Money Received : According to Section 51, if, on any

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previous occasion, some negotiations were carried for transfer or sale of any capital asset and any

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advance or other money, received in respect of such negotiations, was forfeited by the assessee,

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the cost of acquisition of such asset would be the cost for which the asset was acquired or the
written-down value or the fair market value of the asset, as the case may be, as reduced by the
amount of advance so forfeited. Thus,
.
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Cost of acquisition = Actual cost or written-down value or fair market value of the asset
– Advance money forfeited by the assessee
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12. a
Cost of Acquisition of Goodwill : According to section 55 (2) (a), if the goodwill has been acquired

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by the assessee by purchase from a previous owner, its cost of acquisition shall be the purchase
price of it but if it is self-generated in the business, its cost of acquisition shall be taken to be Nil.

d
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13. Cost of Acquisition of a Right to Manufacture, Produce or Process any Article or Thing, or of
Tenancy Rights, Route Permits or Loom Hours : According to section 55 (2) (a), cost of

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acquisition of a capital asset being a right to manufacture, produce or process any article or things,
or of tenancy rights, route permits or loom hours shall be:-
a) where such asset has been acquired by the assessee by purchase from a previous owner,
the amount of the purchase price;
b) where the previous owner has transferred such asset to the assessee under section 49 (1)
(i) to (iv), the cost for which the previous owner had acquired such asset; and
c) in any other case, it shall be taken to be Nil.
14. Cost of Acquisition of Asset Acquired Before April 1, 1981 : According to section 55(2)(b), if any
capital asset (including a financial asset but excluding depreciable assets) has been acquired by
the assessee before April 1, 1981, its cost of acquisition to the assessee would be the actual cost of
acquisition of the asset to the assessee or the fair market value of the asset on April 1, 1981 at the
option of the assessee.
But when the assessee has acquired the capital asset by any of the modes as given in section 49
(1), i.e., on partition of HUF, by succession or inheritance, on dissolution of firm or body of

32
 individuals, on liquidation of company, under a revocable or irrevocable trust etc., and such capital
asset became the property of the previous owner before April 1, 1981, the cost of acquisition of such
asset would be the actual cost of acquisition to the previous owner or the fair market value of the
asset as on April 1, 1981 at the assessee's option.
15. Cost of Acquisition of the Capital Asset Acquired on Liquidation of Company : According to
section 55(2) (b) (iii), if the assessee has acquired the capital asset on the distribution of the capital
assets of a company on its liquidation and the assessee has been assessed to income-tax under
the head 'capital gains' in respect of that assets, the cost of acquisition of that asset would be its fair
market value on the date of distribution.
16. Cost of Acquisition of a Share or a Stock of a Company Acquired in Certain Circumstances:
According to section 55 (2) (b) (v), if the assessee has acquired the capital asset in the form of a
share or a stock of a company under any of the following circumstances, its cost of acquisition would

S
be the cost of acquisition of the share or stock for which such a share or a stock has been acquired –
a) The consolidation of shares of smaller amount into the shares of larger amount;
b) The conversion of shares into stock;

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c) The re-conversion of any stock into shares;
d) The sub-division of shares of larger amount into shares of smaller amounts;
e) The conversion of one kind of shares of the company into another kind.

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17. Cost of Acquisition of Bonus Shares : According to section 55 (2) (aa) (iii-a), where some

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financial asset has been allotted to the assessee without any payment and on the basis of holding of
any other financial asset, the cost of acquisition of such financial asset shall be taken to be Nil in the

.
case of such assessee. Thus, if an assessee has acquired bonus shares in relation to his present

a
shareholdings, the cost of acquisition of such bonus shares shall be taken as Nil.

18.
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But, where any bonus shares were acquired before April 1, 1981 the assessee shall have the option

a
to adopt the fair market value as on April 1, 1981 of such shares as their cost of acquisition and the
benefit of indexation shall also be available.

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Cost of Acquisition of Right Shares or Right Entitlements termed as Additional Financial

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d
Assets : According to section 55(2)(aa), where, by virtue of holding a share or any other security,
i.e., financial asset, the assessee becomes entitled to purchase any additional financial asset (right
share or right entitlement), the cost of such additional financial asset shall be as below–

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a) Cost of the original financial asset (a share or a security), on the basis of which the assessee
becomes entitled to any financial asset, shall be the amount actually spent by the assessee
for acquiring such asset;
b) Cost of the right entitlement to subscribe the financial asset, shall be taken to be Nil for the
assessee;
c) Cost of the financial asset (a right share), to which the assessee has subscribed on the basis
of his right entitlement, shall be the amount actually paid by him for acquiring such asset;
d) Cost of any financial asset (right share or security), purchased by any person in whose
favour the right to subscribe to such asset has been renounced, shall be the aggregate of
the following –
i) the amount paid for purchasing the right entitlement, i.e., the amount paid by him to
the person who has renounced such right; and
ii) the cost of the right share or security, i.e., the amount paid by him to the company or
institution for acquiring such financial asset.

33
19. Cost of Acquisition in Case of Devaluation of Rupee : Where a capital asset has been
purchased from outside India for a certain specific amount, but before making the full and final
payment of such an agreed amount, the Indian rupee is devalued and the assessee has to pay more
than the agreed amount, the excess payment, thus, made by the assessee would be added to the
cost of acquisition of such asset.
Cost of Improvement : As per Section 55 (1) (b), cost of any improvement in relation to a capital asset will
be as follows –
1. Cost of improvement in relation to goodwill of a business or a right to manufacture, produce or
process any article or thing shall be taken to be Nil.
2. In relation to any capital asset which became the property of the previous owner or the assessee
before April 1, 1981, and the fair market value of the asset as on that date is taken as the cost of

S
acquisition, the cost of improvement would be the sum of all expenditures of a capital nature,
incurred by the previous owner or the assessee on any additions or alterations to the capital asset
on or after the said date, i.e., April 1, 1981.
3. In relation to any other capital asset, the cost of improvement would be the sum of all expenditure of
a capital nature incurred by the assessee or the previous owner on any additions or alterations to

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the capital asset after the date such capital asset became the property of the assessee of the
previous owner, as the case may be.
Thus, every expenditure which increases the value of property or which improves the property by additions
or alternations is termed as cost of improvement. But this does not include any such expenditure which is

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allowable as deduction in computing the income chargeable to tax under the head 'Income from house
m
property', 'Profits and gains of business or profession', or 'Income from other sources'.

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Fair Market Value : As per section 55-A, with a view to ascertaining the fair market value of a capital asset,

.
the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer under the following

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circumstances –
1.
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Where the value claimed or declared by the assessee, though it is in accordance with the estimate

a
of a registered valuer is, in the opinion of the Assessing Officer, less than its fair market value.

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2. Where in the opinion of the Assessing Officer–
a)

b)

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The fair market value of the asset exceeds by 15% or more of the value claimed or declared
by the assessee or by Rs. 25,000; or

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It is necessary to refer the asset to the Valuation Officer looking into the nature of the asset
and other relevant circumstances. Opinion of Assessing Officer is necessary before
referring to the Valuation Officer.
Indexed Cost of Acquisition : Long-term capital gain is computed by deducting from the full value of
consideration, received or receivable on transfer of a long-term capital asset (except long-term capital
asset being bonds and debentures), the indexed cost of acquisition and not the actual cost of acquisition.
This is done for the benefit of the assessee, because there is, generally, a long gap between the date of
acquisition and the date of transfer and during this gap period the real value of the rupee falls down due to
increase in price. Therefore, the original cost of acquisition of an asset is linked with the cost inflation index
of the year of transfer and indexed cost of acquisition is ascertained. This 'indexed cost of acquisition'
means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the
year of transfer bears to the Cost Inflation Index for the year of acquisition or for the year 1981-82,
whichever is later. In brief –
In the case where the asset is acquired before April 1, 1981

34
In the case where the asset is acquired after April, 1, 1981

Here,
Year of transfer, means the year in which the asset is transferred
Year of acquisition, means the year in which the asset is acquired,
purchased or constructed etc.
Note : If an asset is acquired before April 1, 1981, then, the fair market value of the asset as on April 1, 1981
shall be the cost of acquisition, at the option of the assessee. But if it is acquired, or constructed after April 1,

S
1981, its cost of acquisition shall be the actual cost for which it is acquired, purchased or constructed.
Indexed Cost of Any Improvement : Indexed cost of improvement is ascertained by linking the actual cost
incurred on improvements in the assets transferred with the Cost Inflation Index of the year of transfer. It
means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index of the

U
year of transfer bears to the Cost Inflation Index of the year of improvement or years of improvements.
Thus, actual cost of improvement is converted into the indexed cost of improvement by using the following
formula:-
In the case where the asset is acquired before April 1, 1981

In the case where the asset is acquired after April 1, 1981

a K . co
m

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Here,
Year of improvement,
m
means the year in which improvement in the asset takes place.
Year of transfer,
a
means the year in which the asset is transferred.

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A
INCOME FROM OTHER SOURCES

d
'Income form other sources is the fifth and the last head amongst the five heads of income. Section 56 to 59

tu
of the Income-tax Act, 1961 deal with this head. According to section 56 (1), income of every kind which is
includible in the total income under this Act, but which is not chargeable to income-tax under any of the four
S

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heads discussed in the preceding chapters, shall be chargeable to income-tax under the head 'Income
from other sources'. Thus, any income which satisfies the following two conditions will be taxed under this
head:-
1. Income is chargeable to tax under this Act; and
2. Such income is not chargeable to tax under any of the following four heads–
Income from salaries; Income from house property; Profits and gains of business or profession; or
Income from capital gains.
Chargeability : Income chargeable under this head shall be computed either on 'due' basis or 'receipt'
basis depending upon the method of accounting regularly employed by the assessee. The assessee may
keep his accounts either on mercantile or cash basis. The assessee must also follow the Accounting
standards notified by the Central Government.
According to Section 56 (2), the following income shall be chargeable to income-tax under the head
'Income from other sources –

35
1. Dividends;
2. Incomes of casual nature such as winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or income from gambling or betting of any from or
nature etc.;
3. Any of the following sums received by the assessee from his employees, if such sum is not
chargeable to income-tax under the head 'Profits and gains of business or profession –
a) Contribution to any provident fund,
b) Contribution to Superannuation fund,
c) Contribution to any fund set up under the provisions of the 'Employee State Insurance Act,
1948,

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d) Contribution to any other fund set up for the welfare of such employee.
4. Income by way of interest on securities if such income is not chargeable to income-tax under the
head 'Profits and gains of business or profession'. If the assessee is engaged in the business of
purchase and sale of securities any income by way of interest on securities shall be chargeable

U
under the head 'Profits and gains of business or profession';
5. Income from letting on any machinery, plant or furniture, belonging to the assessee, if such income
is not chargeable under the head 'Profits and gains of business or profession';

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6. Income from letting on any machinery, plant or furniture, belonging to the assessee, alongwith the

m
buildings where the letting of the buildings cannot be separated from the letting of the said

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machinery, plant or furniture provided such income is not chargeable to income-tax under the head
'Profits and gains from business or profession'. Such incomes are from letting of a factory, rice or

.
pulse mills, restaurants, fully equipped hotels, cinema halls etc.

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7. Income in the nature of family pension. Family pension means a regular monthly amount payable by

m
the employer to a person belonging to the family of an employee in the event of his death. Such

a
income is chargeable to tax under the head 'Income from other sources.

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Description of Some Important Income
I)

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Dividends :

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Meaning of Dividend : Dividend in common parlance means the amount paid by a company to its
shareholders in proportion to their shareholdings in the company. Dividend receivable by a
shareholder is taxable in his hands under the head “Income from other sources'. Even where
shares constitute stock-in-trade of the business of an assessee, dividend from such share shall be
chargeable under this head. But, where a money-lender acquires shares in lieu of advances made,
dividends form such shares is assessable as his business income. Company pays dividend out of
its current profits, undistributed profits of the previous years and the amount provided by the Central
or State Government for the payment of dividends in pursuance of guarantee given by the
Government. Generally, dividend is paid in cash, but it can also be paid in the from of shares or
commodity. Dividend payable in the form of shares is termed as 'Capital bonus' or 'Capital dividend'
and shares received as such are called 'Bonus shares'. Dividend income is taxable irrespective of
the fact that it is paid in cash or in kind or it is paid out of taxable income or tax-free income of the
company. Thus, dividend paid out of agricultural income is also taxable in the hands of recipient.
Similarly, it is also immaterial whether the dividend is paid out of revenue profits or capital profits.
Income-tax Act, 1961 does not define dividend. But under section 2 (22), the following are included
in dividend–
1. Any distribution of accumulated profits, whether capitalized or not, by a company to its

36
 shareholders if it entails the release of all or any part of its assets;
2. Any distribution of debentures, debenture stock or deposit certificate in any form, whether
with or without interest, made by a company to its shareholders to the extent of its
accumulated profits (whether capitalized or not);
3. Any distribution of bonus shares made by a company to its preference shareholders to the
extent of its accumulated profits (whether capitalized or not);
4. Any distribution made by a company to its shareholders on its liquidation to the extent to
which the distribution is attributable to the accumulated profits (whether capitalized or not)
of the company immediately before its liquidation;
5. Any distribution by a company to its shareholders on the reduction of its capital to the extent

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to which the company possesses accumulated profits, whether capitalized or not;
6. Any payment by way of loan or advance, made by a closely held company after 31 May, st

1987 to a shareholder who is the beneficial owner of at least 10% equity shares of the
company, or to any concern (HUF, firm, company, AOP or BOI), in which such shareholder is

U
a member or a partner or has substantial interest (beneficial owner of at least 20% profits of
the concern), or any payment by any such company on behalf of or for the benefit of such
shareholder, to the extent of the company's accumulated profits.
Dividend does not include the following –

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1. Any distribution made by a company out of its accumulated profits in the event of winding up

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or reduction of capital, in respect of preference shares issued for full cash consideration, as

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these shareholders are not entitled to participate in surplus assets in the event of liquidation;
2.
.
Any distribution made by a company in the event of winding up or reduction of capital if such

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distribution is attributable to the capitalized profits of the company representing bonus
shares allotted to its equity shareholders during the financial year 1964-65;

m
a
3. Any advance or loan given to a shareholder by a company in the ordinary course of its

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business where money-lending is a substantial part of the business of the company;

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4. Any dividend paid by a company which is set-off by the company against the whole or any

d
part of any sum previously paid by it and treated as dividend as per provisions of this Act, to

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the extent to which it is so set-off. But if the dividend is not so set-off, rather, it is paid to a
shareholder, even when the loan is outstanding against him, it would be treated as dividend.

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5. Any loan taken by an assessee, who is shareholder in a company doing only money lending
business, cannot be treated as deemed dividend even though the company had
accumulated profits.
Assessment of Dividends : Dividends may be of three types–
1. Dividends declared by a domestic company.
2. Dividends declared by a foreign company.
3. Dividends declared by a body corporate or any other concern other than a domestic
company such as UTI, Co-operative Society etc.
II. Winnings from Lotteries, Crossword Puzzles, Races, Card Games Etc. : Any income by way of
winnings from lottery or crossword puzzles or race including horse race or card game or game of
any sort or from gambling or betting of any form or nature is 'casual income' and is, therefore,
exempt from tax upto the aggregate of Rs. 5,000 or Rs. 2,500 if such casual income is related to a
race including horse race. If such income exceeds Rs. 5,000 or Rs. 2,500 as the case may be, the

37
 excess shall be chargeable to tax under the head 'Income from other sources'. It should be noted
that as per section 58 (4), no deduction is allowed in respect of any expenditure or allowance in
connection with such income. But in the case of an assessee having income from activity of owning
and maintaining race horses, any expenditure incurred by him in the maintenance of race horses,
shall be allowed as deduction from such income.
III. Interest on Securities :
Meaning of 'Securities' : The word 'security' has not been defined in the Act. In common parlance
security is meant by safety of a commodity or loan or guarantee for repayment of a loan, debt or
liability. But from income-tax point of view, 'security' is a documentary evidence of a debt which is
issued by a debtor in favour of his creditor in which the amount of loan, rate of interest, conditions for
the repayment of loan and the time of repayment are specifically and clearly noted and which is
signed by the debtor himself or any other person authorized on his behalf. Governments,

S
companies, corporations, banks, insurance companies and co-operative societies obtain loan from
time to time from the public by issuing several types of securities such as debentures, bonds or
promissory notes etc. Thus, security is an acknowledgement of a debt in writing. A mere debt, not
secured by a document in writing, is not a 'security'.

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'Share' is not a security because –
a) it is an acknowledgement of ownership in the company and not an acknowledgement of
debt.

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b) the amount of share is not refunded during the life time of the company (except the

m
preference shares), and

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c) there is no certainty of regular income on shares.

.
'Interest on securities' is chargeable to tax under one of the following two heads–

M
1) Under the Head 'Profits and Gains of Business or Profession' : If assessee is indulged

m
in the purchase and sale of securities and securities are held by him as 'stock-in-trade,

a
interest thereon shall be chargeable to tax under the head 'Profits and gains of business or

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profession'.

A
2) Under the Head 'Income from Other Sources' : If the securities are held by an assessee

d
as investment, interest from such securities shall be chargeable to tax under the head

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'Income from other sources'.

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Kinds of Securities : From income-tax point of view, the securities may be classified as under–

K
1. Government Securities : Any security issued by the Central Government or a State
Government is known as Government security. Government securities can be classified
into two categories –
a) Tax-free government securities : Tax-free Government security means
the security, issued by the Central Government or a State Government, the interest
on which is fully excluded from the total income u/s 10 (15) of
There are certain securities interest on which is not chargeable to tax
the Act–
u/s 10
(5) of the Act. Interest on these securities is neither included in the total income nor
any tax is paid thereon.
b) Less-tax Government Securities : All the securities issued by the Central
Government or a State Government except those the interest on which is exempt
from tax u/s 10 (15) or which are declared as tax-free, are less-tax Government
securities.

38
 Interest on such securities is taxable in the hands of the assessee. It is included in his total
income and chargeable to tax. But As per section 193 (iv), no tax shall be deducted from any
interest payable on any security of the Central Government or a State Government. Hence,
interest received on Government securities is the gross interest.
2. Non-Government Securities : Any security which is not a Government security is known
as Non-Government security. These are also known as 'commercial securities'. These are
issued by or on behalf of any local authority, or a corporation established by a Central, State
or Provincial Act or by a company etc. These may be listed or unlisted. Securities which are
registered in a recognized stock exchange for their purchase and sale are known as listed or
registered commercial securities. The securities which are not so registered are called
unlisted commercial securities. Both the securities are known as commercial securities.
Commercial securities may be of two types –

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a) Tax-Free Non-Government Security : Income-tax is levied and collected by the
Central Government. No authority, body, institution or concern except the
Government can issue security bearing tax-free interest. Only the Government can
issue tax-free security. In case any non-Government body issues such security, it
simply means that the security issuing authority shall pay income-tax to the

U
Government from its own pocket on behalf of the security-holder on the amount of
the interest paid or payable to him. The following provision should be kept in mind in
this connection –
The entire interest due is paid to the security-holder without making any deduction of

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tax at source therefrom. Thus, the amount of interest due and interest received is the
same.
m
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b) Less-tax non-Government security : Such security is similar to less-tax

.
Government security. Any security which is not issued as tax-free, is known as less-

a
tax regarding chargeability of interest on such security–

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Interest due (% interest) is the gross interest.

a
Deduction of Tax at Source : According to section 193 of the Act, the person who pays any interest

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on security to any person must deduct income-tax there from. Such deduction of tax is called

A
'deduction of tax at source'. Such amount deducted as income-tax at the time of the payment of

d
interest is deposited in Government treasury. Tax so deducted and deposited is treated as tax
deposited on behalf of the person from whose interest it has been deducted at source. Such person

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at the time of his own assessment gets rebate of this amount from his income-tax liability. The
person responsible for deduction of tax at source issues a certificate, mentioning therein the
S

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amount of tax deducted, to the person from whose interest such deduction is made. The rates of
deduction of tax at source are determined by the Finance Act passed every year. The following
provisions relate to the deduction of tax at source–
1. As per section 193, the person responsible for paying any income by way of interest on
securities shall deduct income-tax, at the rates given in Part II of the First Schedule to the
Finance Act, on the amount of interest payable at the time–
a) When such interest is credited to the account of the payee, or
b) When such interest is paid in cash or by issue of a cheque or draft or by any other
mode (whichever is earlier).
2. As per section 203, every person who deducts tax at source shall furnish to the person from
whom such deduction is made, a certificate to the effect that tax has been deducted
specifying therein the amount so deducted, the rate at which the tax has been deducted and
such other particulars as may be prescribed. Such certificate is issued in Forms 16 and 16-
A.

39
 3. When there are two or more joint owners of a security, the payment of interest and the
deduction of tax at source shall be deemed to be in the proportion of their ownership.
IV. Contributions Received from Employees : According to the section 2(24)(x), if an assessee
receives any of the following amounts from his employees, he is chargeable to tax on such amount
under the head 'Income from other sources' –
1. Contribution to any provident fund;
2. Contribution to superannuation fund;
3. Contribution to any fund set up under the Employees' State Insurance Act, 1948;
4. Contribution to any other fund for the welfare of employees.
The employer deducts some amount from the salary of his employee and deposits the same to any
one or more of these funds. The amount so deducted is deemed income of the employer under the

S
head 'Income from other sources'. But, when the employer deposits the amount within the
prescribed time in the fund, for which it is deducted, he becomes entitled for claiming deduction of
such amount. Thus, the amount which is first included in the total income is, thereafter, deducted
from the total income when it is deposited within the prescribed time, in the fund for which it has

U
been deducted.
V. Income from Machinery, Plant or Furniture Let on Hire : As per section 56(2)(ii), any income
arising to an assessee from letting on hire of any machinery, plant or furniture belonging to the
assessee is chargeable to tax under the head 'Income from other sources', if such income is not

K
chargeable to income-tax under the head 'Profits and gains of business or profession'. If the

m
assessee trades in letting on hire of machinery, plant or furniture, any income arising therefrom shall
be chargeable to tax under the head 'Profits and gains of business or profession'. In any other case,

co
it is chargeable under the head 'Income from other sources.'

.
If the assessee lets on hire the building also, alongwith the machinery, plant or furniture belonging to
a

M
him and the letting of the buildings is inseparable from the letting of the said machine, plant or

m
furniture, the income from such letting shall be chargeable to tax under the head 'Income from other
sources', provided such income is not chargeable to income-tax under the head 'Profits and gains of
a
business or profession'. For example, income from letting a factory, restaurant or hotel, theatre or

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cinema hall, rice or pulse mill, etc. is taxable under the head 'Income from other sources'. Such hired

A
income includes the hire of buildings as well as of plants, machinery and furnitures equipped within

d
such buildings. The rent of buildings cannot be separated from the rent of machinery, plant or

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furniture. It is, therefore, taxable under the head 'Income from other sources'. If an assessee carries
on a business of letting on hire of factories, cinemas, restaurants or hotels, such income would be

K
taxable under the head 'Profits and gains of business or profession'.
VI. Interest on Kisan Vikas Patra : Interest on Kisan Vikas Patra is included in the total income of the
assessee under this head. Interest accrued every year on these Vikas Patra is calculated on the
basis of a table issued by the Department of Economic Affairs. Such interest is not eligible for
deduction u/s 80-L.
VII. Interest on Social Security Certificates : These certificates are issued in denominations of Rs.
500 and Rs. 1,000 for 10 years. On expiry of maturity period of 10 year, the holder of a certificate of
Rs. 500 gets Rs. 1,500 and a holder of Rs. 1,000 certificate gets Rs. 3,000 inclusive of interest.
Interest accrued every year is chargeable to tax under this head. But deduction u/s 80-L is available.
VIII. Interest on Indira Vikas Patra : Interest on Indira Vikas Patra is included in the assessee's total
income under the head 'Income from other sources'. Interest, accrued every year, is calculated on
the basis of a table. Deduction u/s 80-L is not available to such interest.
IX. Interest on National Savings Certificates : Interest on NSC is chargeable to tax under the head
'Income from other sources'. Interest, accrued every year, is calculated on the basis of a table. Such
interest is entitled to deduction u/s 80-L.

40
X. Receipt under Keyman Insurance Policy : Any sum received under a keyman insurance policy
including the sum allocated by way of bonus on such policy is chargeable under 'Income from other
sources' if not charged under the head 'Income from salaries' or 'Profits and gains of business or
profession'.
Deductions : According to section 57, the income chargeable under the head 'Income from other sources'
is computed after making the following deductions–
1. In the Case of Dividends or Interest on Securities : 'Dividends' and 'interest on securities' are
chargeable to income-tax under this head. Gross dividends and gross interest on securities are first
included in assessee's total income and then, the following deductions are allowed there from:-
a) Collection Charges : Any reasonable sum paid by way of commission, remuneration or
any other expenditure paid to a banker or any other person for the purchase of realizing

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such dividend or interest on behalf of the assessee shall be allowed as deduction. For
example, bank commission for collecting the money or cheque or bank draft, salaries due to
employees engaged in the collection of interests or dividends and expenses of the
collection office, if the assessee maintains it separately etc. Collection charges are
allowable as deduction only when these have been actually incurred. If the assessee

U
himself collects his interests or dividends, he is not entitled to this deduction.
b) Interest on Loan : Where the assessee has taken loan specifically to purchase shares or
securities, the interest on such loan shall be allowed as deduction even though the shares or
securities purchased out of this loan do not yield any income by way of interest or dividend.

K m
Exception : Any interest chargeable under the Act which is payable outside India, on which

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tax has not been paid or deducted in India and there is no legal representative of the
recipient of such interest who may pay tax on such interest, shall not be allowed as
deduction.
.
a

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c) Any other expenditure, not being of a capital nature and specifically incurred to earn such
interest or dividend.
m
2.
a
In Case of Contribution Received from Employees : Where any sum, received by the assessee

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A
from his employees as contributions to any provident fund or superannuation fund or any other fund
set up for the welfare of employees, is included in his total income under this head, a deduction

d
equal to the sum credited by the assessee to the employee's relevant fund account on or before due

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date, shall be allowed. Thus

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Income = contribution received from his employees towards these funds.
Deduction = The amount deposited by the assessee to the employee's relevant funds on or
before due date.
Due date means the date, by which the assessee is required to credit employee's contribution in the
fund, as per the Act by which the fund is governed.
3. In Case of Income Derived from Letting : When the assessee is in receipt of the income from
letting on hire of any machinery, plant or furniture along with the buildings where the letting of the
buildings, cannot be separated from the letting of the said machinery, plant or furniture, the following
deductions shall be allowed in respect of such income–
a) Current repairs to the plant, machinery, furniture or building;
b) Insurance premium paid to get these assets insured against risk of damage or destruction;
c) Depreciation and unabsorbed depreciation as per Income-tax Act.
4. In the Case of Income in the Nature of Family Pension : If the assessee is in receipt of an income

41
 in the nature of family pension, he shall be entitled to a deduction of a sum equal to 1/3 of such
income or Rs. 15,000 whichever is less.
5. In the Case of Other Incomes : Any other expenditure, not being in the nature of capital
expenditure, incurred wholly and exclusively for the purpose of making or earning such income,
shall be allowed as deduction. Thus, the following conditions should be fulfilled in order to allow an
expenditure as deduction under this head–
a) Expenditure is incurred wholly and exclusively for the propose of earning income or making
profit;
b) It is not of a capital nature;
c) It is not a personal expenditure;

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d) It should relate to the accounting year to which the relevant income belongs. It should not be
incurred prior to or after that accounting year;
e) There must be a clear nexus between the expenditure incurred and the income sought to be
earned.

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If any expenditure has been incurred to make or earn an income chargeable to tax under this head, but no
income is earned, such expenditure shall be allowed as deduction under this head. Thus, interest on loan
taken to invest in shares is an allowable deduction even if the shares do not yield any dividend income.
SET OFF AND CARRY FORWARD OF LOSSES

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Meaning of Set Off and Carry Forward of Losses : It is not necessary that there should, necessarily, be

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income from every source of income or under every head of income. If there is loss from any source and
profit from the other source or sources under the same head, the loss of a source is adjusted or written-off
.
against the income of the other source or sources under the same head. The net result of the head (profit or

M
loss) is obtained after adjusting inter-source losses against inter-source profits. Similarly, if there is a loss in
any head and profit in the other head or heads, such loss is adjusted against the income of other heads.
m
This process of adjusting or writing-off of losses against income is termed as 'set off of losses'. When loss of

a
one source is set off against the income of other source or sources within the head, it is termed as 'set off of

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losses within the sources'. When loss of one head is set off against the income of any other head or heads, it

A
is termed as 'set off of losses within the heads'. Where the losses of any previous year are greater than the

d
profits/incomes of that previous year, the entire loss cannot be written-off against the profits of the previous

tu
year. The losses not written-off, i.e., excess of losses over income, shall be carried forward and written-off
against the income of the subsequent years. This process is termed as 'carry forward of losses'.

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Provisions Regarding Set Off of Losses : The law relating to set off of losses is given hereunder–
1. Inter-Source Set Off : If there is a loss in any source falling under any head of income, the
assessee shall be entitled to set off such loss against his income from any other source under the
same head of income. For example, A is the owner of two businesses– cloth business and
foodgrains business. He incurred a loss of Rs. 20,000 in his foodgrains business and earned a profit
of Rs. 50,000 from his cloth business. He can set off his loss of Rs. 20,000 against the profits of Rs.
50,000 and thus, the taxable income of the head 'Profits and gains of business or profession', after
setting off of loss of one source against the income of other source under the same head, will be Rs.
30,000. If the business revealing loss was carried on only for a few months during the previous year
and thereafter it was closed down, even then its loss will be set off against the profits of other
businesses during the same previous year.
Exception –
a) Loss from a speculation business can be set off only against the profits in a speculation
business.

42
 b) Loss from a source whose income is tax-free cannot be set off against profits in any other
source. For example, agricultural loss cannot be set off against income in any other source.
c) Loss from activity of owning and maintaining race horses cannot be set off against any
income from any other source or business except income from such business. Loss from
this source can be set off against income from such source only.
It should be noted that losses of non-speculation business can be set off against profits of
speculation business; and losses of other businesses can be set off against the income of the
business of owning and maintaining race horses.
2. Inter-Head Set Off [Sec. 71] : If there is loss in any head of income, the assessee is entitled to set
off such loss against his income, if any, assessable for that assessment year under any other head
of income. The law in this respect is as under–

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a) Loss under the head 'Income from house property' can be set off against incomes under
other heads of income.
b) Speculation losses cannot be set off against other incomes. Losses of a speculation
business can be set off against the profits of speculation business.

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c) Losses under the head 'capital gains' cannot be set off against income under other heads of
income.
d) Losses from the business of owning and maintaining race horses cannot be set off against

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any other income.
e)
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Any loss cannot be set off against winnings from lotteries, crossword puzzles, races

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(including horse races), card games and other games of any sort or from gambling or betting
of any form or nature.
.
a

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f) Loss from a source, income of which is exempt from tax, cannot be set off against income
chargeable to tax. For example, agricultural loss cannot be set off against any other income.
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g)
a
Losses of the head whose income is taxable can only be set off.

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A
3. Set Off of Losses of General Business [Sec. 72] : General business, here, means any non-
speculation business. If there is any loss under the head 'Profits and gains of business or
d
profession', not being a loss of a speculation business, such loss can be set off against income

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under other heads of income. Thus, losses of non-speculation business can also be set off against
speculation profits.

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If any business is discontinued during the previous year, the loss of such discontinued business can
be set off from the income of any other business or profession of the same year or of any other
subsequent assessment year.
Losses of illegal business can only be set off against profit of illegal business. Losses of illegal
business can not be set off against profits of a legal business.
4. Set-Off of Losses in Speculation Business (Sec. 73) : Any loss of a speculation business,
carried on by the assessee, can be set off only against the profits of another speculation business.
But loss incurred in speculation business in banned items (illegal speculation business) cannot be
set off against the profits of a legal speculation business.
As per explanation to this section, if a company [other than a company whose gross total income
consists mainly of income which is chargeable under the heads 'Income from house property',
'Capital gains' and 'Income from other sources', or a 'Company' which is engaged principally in the
business of granting of loans and advances], is engaged in the purchase and sale of shares of other
companies, such company shall be deemed to be carrying on a speculation business to the extent

43
 to which the business is related with the purchase and sale of shares.
5. Set Off of Losses Against Taxable Income and not Against Exempt Income : The losses can
only be set off against income chargeable to tax. These cannot be set-off against tax-free or exempt
income.
6. Set-Off of Losses under the Head 'Capital Gains' [Sec. 74] : If there is any loss under the head
'capital gains' (long-term or short-term) such loss can be set off against the 'capital gains'
assessable for that assessment year. 'Capital loss' cannot be set off against income under any
other heads.
7. Set Off of Losses from Activity of Owning and Maintaining Race Horses [Sec. 74-A (3)] : If an
assessee is the owner of race horses and any loss is incurred by him in the activity of owning and
maintaining race horses in any assessment year, such loss cannot be set off against any income

S
from any source or head. It shall be set off only against the income, if any, from the activity of owing
and maintaining race horses assessable for that assessment year.
8. Set Off of Losses of Lottery, Crossword Puzzles, Gambling, Cardgames or Betting Etc. :
These losses cannot be set off against any other income.

U
9. Set Off of Losses of Firm [Sec. 75] : If the assessee is a firm, any loss arising to a firm shall be set
off by the firm itself. The rules regarding set off of firm's losses shall be the same as have been
discussed in respect of non-firm assesses.
Carry Forward and Set Off of Losses : Where the loss of any previous year cannot be set off against the

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income of the said previous year, the loss not so set-off is carried forward to be set off against the income of
m
subsequent year of years. This is termed as 'Carry forward and set-off of losses'. The following points are

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worth noting–
1.
.
The following losses can only be carried forward and set off in the subsequent assessment years –

M
a) Loss under house property;
b) Business loss;
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c) Speculation loss;

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d) Capital loss;
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e) Loss from the activity of owning and maintaining race horses.
2. Only the assessee who has suffered the loss is entitled to carry forward such loss. Any other person
S

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or successor of business cannot carry forward the loss. However, in the following circumstances
successor or any other person can also carry forward the business loss for the purpose of set off–
a) If succession of the business is by inheritance.
b) When sole proprietorship business is converted into a partnership firm, and the sole
proprietor is a partner in the firm.
c) If the loss belongs to an amalgamating company.
d) Loss of partnership firm.
The provisions relating to carry forward and set off of loss are discussed as below –
1. Loss from House Property [Sec. 71B] : If there is a loss under the head 'Income from house
property' and such loss cannot be or is not wholly set off in the same assessment year from income
under any other heads, then the amount of loss not so set off shall be carried forward for 8
assessment years immediately succeeding the assessment year for which the loss was first
computed. Such carried forward loss from house property can be set off only against the income

44
 under the head 'Income from house property' in subsequent years.
2. Losses of General Business [Sec 72] : General business here, means any non speculation
business. If there is any loss in any general business or profession of an assessee which cannot be
set off against the profits of another general business or profession or incomes under other heads,
such 'not set-off losses' can be carried forward and set off against the profits of subsequent year or
years.
3. Accumulated Loss and Unabsorbed Depreciation in Certain Cases of Amalgamation [Sec.
72-A] : The accumulated loss and the unabsorbed depreciation of the amalgamating company
shall be deemed to be the loss or allowance for depreciation of the amalgamated company for the
previous year in which the amalgamation was effected. The provisions of set off and carry forward of
losses and depreciation shall apply accordingly in a case of amalgamation of a company provided
the following conditions are fulfilled–

S
a) Amalgamating company owns an industrial undertaking or a ship;
b) Amalgamated company holds continuously for 5 years from the date of amalgamation at
least three-fourth (3/4) in the book value of fixed assets of the amalgamating company
acquired in amalgamation.
c)

d)
years from the date of amalgamation.

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Amalgamated company continues the business of the amalgamating company for at least 5

Amalgamated company fulfils such other conditions as may be prescribed to ensure the

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revival of the business of the amalgamating company or to ensure that the amalgamation is
for genuine business purpose.

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If the above conditions are not complied with, the set off of loss or depreciation made in any previous
year by the amalgamate company shall be deemed to be the income of the amalgamated company

a
of the year in which such conditions are not complied with.

M m
4. Accumulated Loss and Unabsorbed Depreciation in Certain Cases of Demerger [Sec. 72-
A] : In the case of a demerger the accumulated loss and the unabsorbed depreciation allowance of
a
the demerged company shall be allowed to be carried forward and set off in the hands of resulting

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company, if such accumulated loss or allowance for unabsorbed depreciation is directly relatable to

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the undertakings transferred to the resulting company.

d
If such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to

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the resulting company, then it will be apportioned between the demerged company and the

S
resulting company in the same proportion in which the assets of the undertakings have been

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retained by the demerged company and transferred to the resulting company, and it will be allowed
to be carried forward and set off by the demerged company or the resulting company, as the case
may be.
5. Accumulated Loss and Unabsorbed Depreciation in Case of Succession of a Firm or a
Proprietary Concern by a Company [Sec. 72A (5)] : If a firm or a proprietary concern is
succeeded on account of reorganization of business by a company fulfilling the conditions of
section 47 (xiii) (xiv) [Discussed herebefore], then the accumulated loss and the unabsorbed
depreciation of such firm or the proprietary concern, as the case may be, shall be deemed to be the
loss or the allowance for depreciation of the successor company for the previous year in which the
reorganization was effected. Other provisions of this Act relating to set off and carry forward of loss
and allowance for depreciation shall apply accordingly.
But in case any of the conditions laid down in section 47 (xiii) (xiv) are later on not complied with, the
set off of loss or depreciation made in any previous year by the successor company shall be
deemed to be the income of the company chargeable to tax in the year in which such conditions are
not complied with.

45
6. Set Off of Losses of Discontinued Business [Sec. 41 (5)] : According to section 72(1)(i), the
business or profession for which the loss was originally computed may or may not be continued to
be carried on by the assessee in the previous year in which not-set-off loss is to be set off. If such
business or profession is discontinued, its not set off losses can be set off out of the profits or gains
of any other continued business or profession. Similarly, not-set-off losses of discontinued business
can also be set off out of its following deemed profits–
a) When there is any recovery of any allowance or deduction which was allowed previously
[Sec. 41(1)];
b) When there are deemed profits on sale of capital asset used for scientific research, without
having been used for other purposes [Sec. 41(3)];
c) When there are deemed profits arising on recovery of a debt which was allowed as bad

S
debts previously [Sec. 41(4)];
d) When there are deemed profits arising on account of withdrawal from special reserve
created previously [Sec. 41(4A)].
It must be made clear that not-set-off losses of discontinued business can be set off out of any other

U
profits or gains or a continued business or profession, or out of the deemed profits of the
discontinued business or profession.
6. Losses in Speculation Business [Sec. 73 (2)] : If any loss of a speculation business cannot be
fully set off against the profits of another speculation business, such are to be set off against the

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profits of speculation business of those assessment years. Such losses may be carried forward for

m
a maximum period of 8 assessment years immediately succeeding the assessment year for which

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the loss was first computed. But losses of speculation business in banned items cannot be carried
forward to be set off against the profits of a legal speculation business.

.
a
7. Capital Losses [Sec. 74] : If 'capital loss' of any previous year cannot be set off against the capital

M
profits of the same previous year in which such loss is first computed, such loss may be carried

m
forward to be set off against the 'capital gains' arising in eight (8) subsequent years. Capital loss

a
means the capital loss as computed under the head 'capital gains' after setting-off of long-term or

yn
short-term capital gains.

A
8. Losses From the Activity of Owning and Maintaining Race Horses [Sec. 74-A (3)] : If any loss

d
is incurred by the assessee in the activity of owning and maintaining race horses which cannot be

tu
set off out of the profits of another same business or activity, such not set off losses may be carried
forward for a maximum period of 4 assessment years immediately succeeding the assessment

K
year in which such loss was first computed. Such carried forward loss can be set off, during the
subsequent assessment years, only out of the profits from the activity of owning and maintaining
race horses. But the business whose loss is being carried forward must have been continued till the
losses are carried forward. As soon as the business is discontinued losses of such discontinued
business cannot be carried forward.
9. Carry-Forward of Losses in Case of Change in Succession of Business by Inheritance : If the
business or profession of any person is succeeded by another person by inheritance, the successor
can carry forward and set off the losses incurred by the concern before such succession.
10. Losses Relating to Lottery, Crossword Puzzles, Gambling, Betting Etc. : These incomes are
chargeable to tax separately at 40%. As per section 58 (4), no allowance or deduction is admissible
in respect of these incomes. Hence, any loss from any of these sources cannot be set off against
any other income except the income from any of these sources. Thus, there does not arise any
question of carry forward of the losses.
11. Submission of Return of Losses [Sec. 80] : Any loss cannot be carried forward and set off unless
it is determined in pursuance of a return filed before the Assessing Officer within the time prescribed

46
 for it or within the extended time.

IMPORTANT QUESTIONS
Q.1. Give the definitions of the following –
a) Agricultural income
b) Assessee
c) Assessment year

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d) Previous year
Q.2. What are the different heads which are liable for income tax?
Q.3. What includes salaries under the Income Tax Act?

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Q.4. What are the exemptions in the salaries for Income Tax?
Q.5. Discuss the concept of income from house property for the purpose of Income Tax.
Q.6. What do you mean by capital gains?

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Q.7. Discuss the concept of goodwill with regard to capital gains under the Income Tax.
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Q.8. What do you mean by income from other sources in the Income Tax?
Q.9.
.
Discuss the status of dividend under the head of income from other sources.

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Q.10. What do you mean by set off and carry forward of losses?

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Q.11. What includes business and professions for the purpose of Income Tax?

a
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KA S
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d

47
 UNIT - III

INCOME-TAX AUTHORITIES

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The following income-tax authorities have been constituted under Section 116 of the Act to ensure efficient
administration and to discharge executive and other appellate functions under the Income-tax Act, 1961 –
1. The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963;
2. Directors General of Income-tax or Chief Commissioners of Income-tax;
3.

4.

5.
6.
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Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax
(Appeals);
Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional
Commissioners of Income-tax (Appeals);

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Joint Directors of Income-tax or Joint Commissioners of Income-tax.

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Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners
of Income-tax (Appeals);
.
a

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7. Assistant Directors of Income-tax or Assistant Commissioners of Income-tax;
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8. Income-tax Officers;

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9. Tax-Recovery Officers;
10.

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Inspectors of Income-tax.

information.
I.
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Provisions of the Income-tax Act with regard to income-tax authorities may be classified into
following four categories-(I) Appointment and Control, (II) Jurisdiction, (III) Powers, and (IV) Disclosure of

Appointment and Control [Sections 117 To 119]

Appointment [Section 117] :
1. Appointment by Central Government : The Central Government may appoint such
persons as it thinks fit to be income-tax authorities. Members of the Central Board of Direct
Taxes (CBDT) are also appointed by the Central Government. Besides, the Central
Government may appoint income-tax authorities of any rank.
2. Appointment by Income-Tax Authorities : Subject to the rules and orders of the Central
Government regulating the conditions of Service of persons in public services and posts,
the Central Government may authorize the Board, or a Director General, a Chief
Commissioner or a Director or a Commissioner to appoint income-tax authorities below the
rank of an Assistant Commissioner or Deputy Commissioner. Thus, Income-tax Officers,
Tax Recovery Officers and Inspectors of Income-tax may be appointed by any of the above
income-tax authority, if authorized by the Central Government.

48
 3. Appointment by an authority authorized by the Board-Subject to the rules and orders of
the Central Government regulating the conditions of service of persons in public services
and posts, an income-tax authority authorized in this behalf by the Board (CBDT) may
appoint such executive or ministerial staff as may be necessary to assist it in the execution
of its functions.
Control [Section 118 & 119] :
1. The CBDT may by notification in the Official Gazette, direct that any income-tax authority or
authorities specified in the notification shall be subordinate to such other income-tax
authority or authorities as may be specified in such notification.
2. The CBDT may, from time to time, issue orders, instructions and directions to other Income-
tax authorities for the proper administration of the Act. The authorities and all other persons
employed in the execution of this Act shall observe and follow the orders, instructions and

S
directions of the Board.
II. Jurisdiction [Section 120 to 130-A]
Jurisdiction of income-tax authorities [Section 120] :

U
1. Income-tax authorities shall exercise all or any of the powers and perform all or any of the
functions conferred on or assigned to such authority by the Central Board of Direct Taxes.
2. The Board may authorize any other income-tax authority to issue orders in writing for the
exercise of the powers and performance of the functions by all or any of the income-tax

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authority who are subordinate to it.
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3. The Board of other income-tax authority authorized by the Board to issue directions, may
take into consideration the following points while issuing directions for the determination of
jurisdiction and powers:
.
a

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a) Territorial area;
b) Persons or classes of persons;
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c) Income or classes of income;

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d) Cases or classes of cases.
4.
d
The Board may, subject to such conditions, restrictions or limitations, issue general or

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specific order to the following effect:-

K
a) The Board may authorize any Director General or Director to perform such functions
of any other income-tax authority as may be assigned to him by the Board.
b) The Board may empower the Director General or Chief Commissioner or
Commissioner to delegate the powers of the Assessing Officer to a Joint
Commissioner or a Joint Director. Such delegation of power shall be done by an
order in writing.
5. The Board or any other income-tax authority authorized by the Board may, by its directions
and orders, required two or more Assessing Officers (whether or not of same class) to
exercise and perform, concurrently, the powers and functions in respect of any area of
persons or classes of persons or incomes or classes of income or cases or classes of cases.
Where such powers and functions are exercised or performed concurrently by the
Assessing Officer of different classes, any authority lower in rank amongst them is required
to follow the directions of any higher authority amongst them in exercising the powers and
performing the functions.
6. The Board is empowered to notify in Official Gazette the jurisdiction of different authorities in

49
 the matters of furnishing the return of income or doing any other act or thing under the Act or
any rule made thereunder.
III. Powers [Sections 131 to 135] :
1. Power Regarding Discovery and Productions of Evidence Etc. [Section 131]- During
the proceedings under the Act, the Assessing Officer, Deputy Commissioner (Appeals),
Joint Commissioner, Commissioner (Appeals), and Chief Commissioner or Commissioner
shall have the same powers as are vested in a civil court in respect of the following matters:
a) Discovery and inspection;
b) Enforcing the attendance of any person, including a bank officer and examining him
on oath;

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c) Compelling the production of books of accounts and other documents; and
d) Issuing commissions.
If the assessee has produced any books of accounts or other documents before the Director
General or Director or Joint Director or Assistant Director or Deputy Director or any other

U
authorized officer in any proceeding under the Act, it may impound and retain in its custody
for such period as it thinks fit any book of account or other documents so produced before it.
But an Assessing Officer or an Assistant Director shall not:
a) impound any books of account or other documents without recording his reasons for

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so doing; or
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b) retain in his custody any such books or documents for a period exceeding 15 days
(exclusive of holidays) without obtaining the approval of the Chief Commissioner,

.
Director General or Commissioner or Director.

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2. Enquiry into Concealment [Section 131 (I-A) : If the Director General or Director or

m
Deputy Director or Assistant Director has reason to suspect that any person or class of

a
persons, within his jurisdiction, he is empowered to make any enquiry or investigation

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relating to it although no proceedings with respect to such persons or class or persons are

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pending before him.
3.
d
Search and Seizure [Section 132] : Where the Director General or Director, or the Chief

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Commissioner or Commissioner or any such Joint Director or Joint Commissioner who has
been empowered by the Board in this regard, on the basis of information he possesses, has

K
reason to believe that:-
a) any person has omitted or failed to produce such books of account, or other
documents as required from him through a notice or summons; or
b) any person, to whom a summon or notice as aforesaid is issued, would not produce
any books of account or other documents which will be useful for or relevant to any
proceeding under the Act; or
c) any person is in possession of any money, bullion, jewellery or other valuable article
or things which represent either wholly or partly such income or property which is not
disclosed for the purposes of this Act or which will not be disclosed in any of the
proceedings under the Act;
then,
The Director General or Director or the Chief Commissioner or Commissioner may
authorize any Joint Director, Joint Commissioner, Assistant Director or Deputy Director,
Assistant Commissioner or Deputy Commissioner or Income-tax Officer for the search and

50
seizure proceedings. Such Joint Director or Joint Commissioner, as the case may be, may
authorize any Assistant Director or Deputy Director, Assistant Commissioner or Deputy
Commissioner or Income-tax officer. During the search and seizure proceedings the
'Authorised Officer' is empowered to do the following –
a) He can enter and search any building, place, vessel, vehicle or aircraft where he has
reason to suspect that such books of account, other documents, money, bullion,
jewellery or other valuable articles or things are kept;
b) He can break open the lock of any door, box, locker, safe, almirah or other receptacle
if the keys thereof are not available;
c) He can search any person who has got out of, or is about to get into or is in, the
building, place, vessel, vehicle or aircraft if it is suspected that such person has

S
secreted any such books of account, other documents, money, bullion, jewellery or
other valuable article or things;
d) He can seize any such books of account, other documents, money, bullion, jewellery
or other valuable articles or things found as a result of such search;

U
e) He can place marks of identification on any books of account or other documents or
make or cause to be made extracts or copies therefrom;
f) He can make a note or an inventory of any such money, bullion, jewellery or other
valuable articles or things.

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The following provisions of section 132 are applicable in respect of search and seizure–
a)
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The authorized officer has the power to requisition the services of any police officer

.
or of any officer of Central Government, or of both, to assist him in the work of search

a
and seizure. It shall be the duty of every such officer to comply with such requisition.
b)

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c)
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If it is not practicable to seize any such books of account, other documents, money,
bullion, jewellery or other valuable articles or things, the authorized officer may
serve an order on the owner or the person who is in immediate possession or control

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thereof that he shall not remove, part with or otherwise deal with it except with the
previous permission of such officer.

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d
The 'authorised officer' may, during, the course of search and seizure, examine on
oath any person who is found to be in possession or control of any books of account,

K
documents, money, bullion, jewellery or other valuable article or thing and the
statement of such person may thereafter be used in any proceeding under the Act.
d) If any books of account, money, bullion, jewellery or other valuable articles or things
are found in the possession or control of any person in the course of search, it may
be presumed:
i) That these belong to such person;
ii) That the contents of such books of account and other documents are true;
and
iii) That the signature and every other part of such books or accounts and other
documents which purport to be in the handwriting of any particular person
are assumed in the person's handwriting and if a document is stamped,
executed or attested, it presumed that it is duly stamped, executed or
attested by the person by whom it purports to have been so executed or
attested.

51
 e) The Assessing Officer can retain in his custody such assets or part thereof as are, in
his opinion, sufficient to satisfy the aggregate of the amount demanded by him and
forthwith release the remaining portion, if any, of the assets to the person from
whose custody they were seized.
4. Powers to Requisition Books of Account [Section 132-A] : If the Director General or
Director of the Chief Commissioner or Commissioner, on the basis of his information, has
reason to believe that –
a) any person has omitted or failed to produce the books of accounts or other
documents in spite of a notice or summon being issued to him for it and the said
books of account or other documents have been taken into custody by any officer or
authority under any other law for the time being in force (such as Sales-tax Officer,
Excise-duty Officer etc.); or

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b) any books of accounts or other documents will be useful for, or relevant to, any
proceeding under this Act and the assessee, in spite of a notice or a summon, from
any officer or authority in whose possession such books of account or other
documents are kept for the time being in force; or

U
c) any assets represent either wholly or partly income or property which has not been
disclosed by any person from whose possession or control such assets have been
taken into custody by any officer or authority any other law for the time being in force,
The Director General or Director or Chief Commissioner or Commissioner may authorize

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any Joint Director, Joint Commissioner, Assistant Director or Deputy Director, Assistant
m
Commissioner or Deputy Commissioner or Income-tax Officer to require the officer or

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authority who is in possession of such books of account or other documents or assets, to

.
deliver these to the requisitioning officer.

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On such requisition, the officer or authority shall deliver the books of account, other
documents or assets to the requisitioning officer either immediately or when the purpose of
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these being kept in his custody by such officer or authority is fulfilled.

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5. Application of Retained Assets [Section 132-B] : The asset seized can be applied in the

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following manner–
a)
d
It can be used or applied in the satisfaction of existing liability under direct taxes Act

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and any liability determined on the completion of the regular assessment or
reassessment for the assessment year relevant to the previous year to which the

K
undisclosed income relates. This liability also includes any penalty levied or interest
payable in connection with such assessment or reassessment.
b) If the seized assets consist solely of money, or partly of money and partly of other
assets, the Assessing Officer may apply such money in discharge of the assessee's
liabilities.
c) The assets other than money many also be applied for the discharge of any liability
under the Act. For this purpose the assets shall be sold as per provisions of this Act.
Any asset or proceeds thereof which remain after all the liabilities are discharged shall be
forthwith returned or paid to the person from whose custody the assets were seized.
6. Power to Call for Information [Section 133] : The Assessing Officer, the Deputy
Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), may call
for information from the following for the purposes of this Act:-
a) From any firm, the names and addresses of its partners and their respective shares;
b) From any Hindu undivided family, the guardian or agent, the names and addresses

52
 of the persons for or of whom he is trustee, guardian or agent;
c) From any person who is trustee, guardian or agent, the names and addresses of the
person for or of whom he is trustee, guardian or agent;
d) From any assessee the names and addresses of all persons to whom he has paid in
any previous year rent, interest, commission, royalty or brokerage, or any annuity
(not being any annuity taxable under the head salaries) amounting to more than Rs.
1000 together with particulars of all such payments made;
e) From any dealer, broker or agent or any person managing a stock or commodity
exchange, the names and addresses of all persons to whom he or the exchange has
paid any sum in connection with sale, exchange has received any such sum,
together with particulars of all such payments and receipts;

S
f) From any person including a bank or any officer thereof, the information or the
statement of accounts and affairs which will be useful for, or relevant to any
proceeding or inquiry under the Act.
Such powers may also be exercised by the Director-General, the Chief Commissioners, the

U
Director and the Commissioner. But the power to make inquiry, in a case where no
proceeding is pending, shall be exercised by the Director or Commissioner or any authority
with the prior approval of the Director or the Commissioner.
7. Power of Survey [Section 133-A] : An income-tax authority is empowered to make survey.

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In this regard it has the following powers –

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(A) (i) He may enter any place within the limits of the area assigned to him; or (ii) He may

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enter any place occupied by any person in respect of whom he exercises jurisdiction; or (iii)

.
He may enter any place for which he has been authorized by the income-tax authority within

a
whose jurisdiction such place is situated or who exercises jurisdiction over the person

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occupying such place.
8.
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Power to Collect Certain Information [Section 133-B] : A Joint Commissioner, an
a
Assistant Director or a Deputy Director or an Assessing Officer or an Income-tax Inspector

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authorized by Assessing Officer is empowered to collect any information for the purposes of

A
this Act. For collecting such information –
a) d
he can enter any building or place within the jurisdiction of such authority; or
b)
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he can enter any building or place occupied by any person who is under the

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jurisdiction of such authority;
The building or place must be such in which business or profession is carried on
whether such place be the principal place or not of such business or profession;
c) he can acquire from any proprietor, employee or any other person, who is engaged
in the carrying on of such business or profession in any capacity and ask him to
furnish such information as may be prescribed;
d) he can enter any such building or place wherein he has entered, any books of
account or other documents or any cash, stock or other valuable article or thing.
9. Power to inspect registers of companies [Section 134] : The Assessing Officer, the
Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals),
or any person subordinate to him authorized in writing in this behalf, may inspect and if
necessary take copies, of any register of members, debenture holders or mortgages of any
company or of any entry in such register.
10. Power to Make Enquiries [Section 135] : The Director General or Director, the Chief

53
 Commissioner or Commissioner and the Joint Commissioner shall be competent to make
any enquiry under this Act, and for this purpose shall have all the powers that are
possessed by an Assessing Officer under this Act in relation to making of enquiries.
11. Judicial Powers [Section 136] : Any proceeding under this Act before an income-tax
authority shall be deemed to be a judicial proceeding and every income-tax authority shall
be deemed to be a civil court and shall enjoy all the powers a judicial officer or court has.
IV. Disclosure of Information [Section 138] : The Board or any other income-tax authority specified
by it by a general or special order in this behalf may furnish information, received or obtained by an
income-tax authority in the performance of his functions under the Act, in respect of any assessee to
the following authorities:
1. Any officer, authority or body performing any function under any law relating to imposition of

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any tax, duty or cess, or to dealings in foreign exchange; or
2. Any officer, authority or body performing functions under any other laws as the Central
Government may notify for this purpose.
Such information shall be supplied only when the Board or other income-tax authority is satisfied

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that these informations are necessary for the purpose of enabling the officer, authority of body to
perform his or its functions under the law.
If a person makes an application to the Chief Commissioner or Commissioner in the prescribed
form for any information relating to any assessee, received or obtained by any income-tax authority

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in the performance of his functions under the Act, he may furnish the informations asked for if he is
satisfied that disclosure is in the public interest.
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PROCEDURE OF ASSESSMENT

.
Assessment : As per Section 2 (8) 'Assessment' includes reassessment for income escaping
a

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assessment. The word assessment is used in different senses. Sometimes, it is used to mean the

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computation of income and sometimes the determination of the amount of tax payable. In a number of
provisions of the Act, it is used in a comprehensive sense of the whole procedure laid down in the Act for
a
ascertaining and imposing liability upon the tax-payer. Thus, to understand the correct meaning of the word

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'assessment' the context in which it has been used must be referred to.

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Return of income : Return of income means a statement furnished by an assessee regarding his total
income. The provisions of the Act in connection with return of income are as follows –
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Period for Filing the Return [Section 139 (1)] : Every person, being a company or other than a
company, has to file voluntarily a return of his total income or the income of any other person in
respect of which he is assessable under this Act, if such total income during the previous year
exceeds the exemption limit. The return of income must be filed in the prescribed form and verified
in the prescribed manner containing all the particulars as may be prescribed. But if a person, other
than a company, not furnishing return u/s 139 (1) and residing in an area notified by the Board and
who, at any time during the previous year, fulfils any one of the six condition given hereunder, shall
furnish a return of his income of the previous year on or before the due date in the prescribed form
and verified in the prescribed manner and containing all the particulars as may be prescribed. Such
six conditions are as follows :-
a) He is in possession of an immovable property exceeding a specified floor area, whether as
owner, tenant or otherwise, as may be specified by the Board in this behalf; or
b) He is the owner or lessee of a motor vehicle other than a two wheeled motor vehicle,
whether having any detachable side car having extra wheel attached to such two-wheeled
motor vehicle or not; or
c) He is a subscriber to a telephone; or

54
 d) He has incurred expenditure for himself or any other person on travel to any foreign country
except travel to neighbouring countries or to the notified places or pilgrimage; or
e) He is the holder of the credit card, not being an “and or' card, issued by any bank or
institution; or
f) He is member of a club where entrance fee charged is Rs. 25,000 or more.
But the Central Government may notify that these provisions shall not apply to any class or class of
persons.
Every company shall furnish on or before the due date the return in respect of its income or loss in
every previous year.
The return of income must be filed with the income-tax department on or before the due date given

S
as under –
a) Where the assessee is :-
i) a company; or

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ii) a person, other than a company, whose accounts are required to be audited under
this Act or under any other law; or
iii) a working partner of a firm whose accounts are required to be audited under this Act
or under any other law, the 31 day of October of the assessment year.
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b) Where the assessee is a person, other than a company, the 31 October of the assessment
st

year;
c)
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in the case of any other assessee, the 31 day of July of the assessment year.
.
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2.
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Return of Loss [Section 139 (3)] : If any person who has sustained a loss in any previous year

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under the heads 'Profits and gains of business or profession' or 'Capital gains' and wants to carry-

m
forward such loss or part thereof, he may furnish within the time allowed u/s 139 (1), a return of loss

a
in the prescribed form duly verified in the prescribed manner and containing such other particulars

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as may be prescribed. The Assessing Officer may accept such return of loss. When such return of

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loss is accepted by the Assessing Officer the assessee may carry-forward the losses so shown in

d
the return.

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3. Late Filing of Return of Income [Section 139 (4)] : A person, who has not furnished a return within
the time allowed u/s 139 (1) or within the time allowed under a notice issued under section 142 (1),

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may furnish a return for any previous year at any time within one year from the end of the relevant
assessment year or before the completion of the assessment, whichever is earlier.
4. Return of Income of Charitable or Religious Trusts [Section 139 (4-A)] : Any person who is in
receipt of income derived from property held under trust or other legal obligation wholly for
charitable or religious purposes or of income being voluntary contributions for such purposes and
his total income for which he is assessable as a representative assessee exceeds the exemption
limits, he shall furnish a return of such income of the previous year in the prescribed form, verified in
the prescribed manner and setting forth such other particulars as may be prescribed.
5. Return of Political Parties [Section 139 (4-B)] : The Chief Executive Officer (by whatever
designation he may be called) of every political party, shall file a nature for the assessable total
income of the previous year in the prescribed form and verified in prescribed manner and setting
forth such other particulars as may be prescribed.
6. Revised Return of Income [Section 139 (5)] : If any person who has furnished a return either u/s
139 (1) or under a notice issued u/s 142 (1), discovers any omission or any wrong statement therein,
he may furnish a revised return at any time before the expiry of one year from the end of the relevant

55
 assessment year or before the completion of the assessment, whichever is earlier.
7. Prescribed form of Return of Income [Section 139 (6) and (6-A)] : Prescribed form of return of
income shall contain the following information–
a) Particulars of incomes exempted from tax;
b) Assets of the prescribed nature and their value belonging to the assessee;
c) The bank account of the assessee and credit card held by him;
d) Expenditure incurred on prescribed limits; and
e) Such other outgoing as may be prescribed.
In the case of an assessee engaged in any business or profession he shall have to furnish the

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following information also–
a) The report of any audit or if the report has been furnished before filing the return then, a copy
of such report together with proof of filing the report;

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b) Location and style of the principal place of business or profession and all the branches
thereof;
c) Names and addresses of his partners or members; and
d) The extent of the share of the assessee and of all his partners or members.

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8. Liability for interest [Section 139 (8) (a)] : If the return for an assessment is furnished after the

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specified date, or is not furnished, then, the assessee shall be liable to pay simple interest at 15%
per annum, reckoned from the next day following the specified date upto the day on which return is

.
furnished or upto the date of completion of the assessment (in the case where no return has been

a
furnished). The interest shall be calculated on the amount of the tax payable on the total income as

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determined on regular assessment, as reduced by the advance tax, if any, paid and any tax
deducted at source.
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a
The Assessing Officer may, in such cases and under such circumstances as may be prescribed,

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reduce or waive the interest payable by any assessee under this sub-section. As per rule 117-A
of the cases and circumstances under which the interest may be reduced or waived are as follows –

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a) Where the return of income is furnished by a person as an agent of a non-resident and is
assessed for latter's income;

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b) Where the return of income is furnished by an assessee whose only source of income is a
share in the income of an unregistered firm which has been assessed u/s 183 (b);
c) Where the return of income of a deceased individual is furnished by his legal representative
satisfies the Assessing Officer that he had sufficient cause for not furnishing such return
within time;
d) Where the return of income has been furnished in pursuance of a notice issued under
section 148;
e) In any case in which the assessee satisfies the Assessing officer that he had sufficient cause
for not furnishing the return within time.
If the amount of interest reduced or waived exceeds Rs. 1,000, the previous approval of Assistant
Director or Assistant Commissioner has to be obtained by the Assessing Officer.
9. Defective Return of Income [Section 139 (9)] : If the Assessing Officer thinks that the return of the
assessee is defective, he has to give him an opportunity to rectify the defect within 15 days from the
date of such intimation or within such extended times as may be allowed by the Assessing Officer on

56
 an application made by the assessee for such extension. If the assessee fails to rectify the defects
within the time allowed, the return shall be treated as an invalid return and it shall be presumed that
the assessee had failed to furnish the return. But if the assessee rectifies the defects after the
prescribed period but before the assessment is made, the Assessing Officer may condone the
delay and treat the return as a valid return.
10. Return by Whom to be Signed [Section 140] : The return of income furnished u/s 139 shall be
signed and verified by the following –
a) In the case of an individual –
i) by the individual himself;
ii) where he is absent form India, by himself or by some person duly authorized by him;

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iii) when he is mentally incapacitated, by his guardian or any other person competent to
act on his behalf; and
iv) by any person duly authorized to sign, a valid power of attorney must be attached
with the return.

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b) In the case of a Hindu undivided family, by the Karta and if Karta is out of India or mentally
incapacitated by any other adult member of such family;
c) In the case of a company, by the managing director thereof or by any director thereof. But if
the company is non-resident in India, the return may be signed and verified by a person who

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holds a valid power of attorney from such company to do so, which shall be attached to the

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return. Similarly, in case of a company being wound up the return may be signed, by the

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liquidator thereof on where the management of the company has been taken over by
Central or State Government under any law, by the principal officer thereof.

.
a
d) In the case of a firm, by the managing partner thereof or by any partner thereof;

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e) In the case of a local authority, by the principal officer thereof;
f)
a
In the case of political party, by the chief executive officer thereof;

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g) In the case of any other association, by any member of the association or the principal
officer thereof; and
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h) In the case of any other person, by that person or by some other person acting on his behalf.
Types of Assessment : Assessment consists of four types:- (1) Self assessment; (2) Regular assessment;
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(3) Best Judgement assessment; and (4) Re-assessment.
I. Self Assessment [Section 140-a] :
1. If any tax is payable on the basis of any return furnished under section 139 or 142 or 148 or
158 BC after deduction the amount of tax already paid under this Act, the assessee shall pay
such tax, together with any interest for any delay in filing in the return. The return so filed
shall accompany the proof of payment of such tax and interest.
If the amount paid by the assessee falls short of the aggregate of tax and interest as
aforesaid, the amount so paid shall first be adjusted towards the interest and balance, if any,
shall be adjusted towards the tax payable.
2. Interest payable u/s 234A shall be computed on the amount of tax on the total income as
declared in the return as reduced by the advance tax paid and tax deducted at source.
3. Interest payable u/s 234B shall be computed on an amount equal to the assessed tax or, as
the case may be, on the amount by which the advance tax paid falls short of the assessed

57
 tax.
“Assessed tax” means the tax on total income as declared in the return as reduced by the
amount of tax deducted at source on any income which is included in the total income.
4. When regular assessment has been made under section 143 or 144 or an assessment u/s
158 BC, any amount paid as above shall be deemed to have been paid towards such regular
assessment or assessment u/s 158 BC.
5. If any assessee fails to be an assessee in default in respect of the tax or interest or both as
above, he shall be deemed to be an assessee in default in respect of the tax or interest of
both remaining unpaid and all the provisions of this Act shall apply accordingly.
II. Regular Assessment [Section 143] : An assessment made under the provisions of section 143 is
termed as regular assessment. The following provisions shall apply in this regard –

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1. Where a return has been filed under section 139 or in response to a notice under section
142(1) –
a) If any tax or interest is found due on the basis of such return (after adjustment of any

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tax deducted at source, any advance tax paid, any tax paid on self assessment and
any amount paid as tax or interest), then, a notice of demand shall be sent to the
assessee specifying the balance sum so payable.
b) If any refund is due on the basis of such return, it shall be granted to the assessee,

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and an intimation to this effect shall be sent to the assessee.

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Provided that the acknowledgement of the return shall be deemed to be intimation as above

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where either no sum is payable by the assessee or no refund is due to him. But no such
intimation shall be sent after the expiry of one year from the end of the assessment year in
.
which the income was first assessable. But if the return is made in respect of the income first

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assessable in the assessment year 1999-2000, then, such intimation may be sent at any
time upto 31 March, 2002.
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2. If, in connection with the return filed by the assessee, the Assessing Officer shall in order to

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ensure himself of the following facts–

A
a) that the assessee has not understated the income; or
b) d
has not computed excessive loss; or
c)
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has not underpaid the tax in any manner;

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serve to the assessee a notice requiring him, on a specified date, to attend his office or to produce
any evidence on which the assessee may rely in support of the return. But such notice shall not be
served on the assessee after the expiry of 12 months from the end of the month in which the return is
furnished.
1. On the day specified in the above notice or as soon afterwards as may be, after taking into
account all the evidences produced by the assessee and after taking into account all
relevant material which he has gathered, the Assessing Officer shall make an assessment
order in writing and determine the sum payable by him or refund of any amount due to him
on the basis of such assessment.
2. Where a regular assessment has been made, then–
a) any tax or interest paid by the assessee shall be deemed to have been paid towards
such regular assessment;
b) if no refund is due on regular assessment or the amount refunded exceeds the
amount refundable on regular assessment, the excess amount so refunded shall be

58
 deemed to be tax payable by the assessee and it shall be recovered as per
provisions of the Act.
III. Best Judgement Assessment [Section 144] : It is an ex-parte assessment. It is made by
Assessing Officer on his own accord acting honestly and with utmost good-faith without any
prejudice to the assessee. During the course of assessment when the Assessing Officer does not
get the required informations and material evidences from the assessee in response to a notice
served on him, he may proceed on the basis of the information and material evidences on record
and may pass such order he may deem fit in the best interest of revenue and without prejudice to the
assessee. Such judgement is called as 'compulsory best judgement assessment:-
Consequences of Compulsory Best Judgement Assessment : The following shall be the
consequences when an assessment has been made to the best of his judgement by the Assessing
Officer–

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1. The penalty under section 271 may be imposed on the assessee;
2. If he has not filed his return of income or has not produced his books of account or other
documents in pursuance to a notice, he may be prosecuted and punished with
imprisonment or penalty or both;

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3. If the assessee is a firm, it can be refused grant of registration or if it be a registered firm its
registration may be cancelled;
4. The assessee is prevented from producing fresh evidences on material facts in the course

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of an appeal being made against a best judgement assessment before Deputy

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Commissioner (Appeals).

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5. Refund of tax may be disallowed.

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Appeal Against Best Judgement Assessment : If the assessee is not satisfied by the best

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judgement assessment of the Assessing Officer, he may file an appeal against Assessing Officer,
he may file an appeal against such judgement to the Deputy Commissioner (Appeals) or the

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Commissioner (Appeals). If the best judgement assessment has been passed by Deputy

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Commissioner in the capacity of the Assessing Officer, the appeal shall lie to the commissioner

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(Appeals). If the assessee is not satisfied with the order of the Deputy Commissioner (Appeals) or

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the Commissioner (Appeals), he may appeal to the Tribunal, whose judgement shall be final as

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regards the facts. But if any legal point is involved in the case, the Tribunal, on the application by the
assessee, may refer the case to the High Court.

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Discretionary Best Judgement Assessment : As per section 145 (3) if the Assessing Officer is

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not satisfied about the correctness or the completeness of the accounts of the assessee, or if the
assessee has not employed a regular method of accounting, the Assessing Officer may make a
best judgement assessment in his own discretion. Such assessment is also appealable.
IV. Re-assessment or Income Escaping Assessment [Section 147] : It is also termed as
assessment of income escaping assessment. If the Assessing Officer has reason to believe that
any taxable income has escaped assessment for any assessment year, he may assess or re-
assess such income and also other taxable income which has escaped assessment and which
comes to his notice subsequently in the course of the proceedings under this section. He may also
recompute the loss or the depreciation allowance or any other allowance.
The re-assessment shall not be done after expiry of four years from the end of the relevant
assessment year unless–
1. Any taxable income has escaped assessment for such assessment year on account of the
fact that the assessee has not filed return u/s 139; or
2. Any taxable income has escaped assessment as the assessee has not filed any return
under section 142 (1) or 148; or

59
 3. Any taxable income has escaped assessment as the assessee has failed to disclose fully
and truly all material facts necessary for his assessment for that assessment year.
Issues of Notice [Section 148] : Before making assessment, re-assessment or recomputation under
section 147, the Assessing Officer shall serve on the assessee a notice of filing by him, within the time
specified in the notice, a return of his total income or the total income of any other person for whom he is
assessable. The Assessing Officer shall, before issuing any notice under this section, record his reasons
for doing so.
Time-Limit for Notice [Section 149] : A notice under section 148 shall not be issued for the relevant
assessment year in the following cases–
Rectification of Mistakes [Section 154]
1. When any mistake is apparent from the record, an income-tax authority may–

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a) amend an order passed by it under the provisions of this Act;
b) amend any intimation or deemed intimation u/s 143 (1).
2. Where any matter has been considered and decided in any appeal or revision relating to an order

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under section 143 (1), the authority passing such order may amend that portion or matter of the
order which has not been considered and decided in appeal or revision.
3. Rectification of mistake may be done by the income-tax authority concerned –
a) On its own accord; or
b)
c)

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When it has been brought to its notice by the assessee; or

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when the order which is to be rectified is of the Commissioner (Appeals), has been brought
to its notice by the Assessing Officer.

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.

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4. If the amendment has the effect of enhancing an assessment or reducing a refund or otherwise
increasing the liability of the assessee, it shall be made only after giving the assessee a reasonable
opportunity of being heard.
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5. Order of rectification shall be passed in writing by the income-tax authority concerned.

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6. If the amendment has the effect of reducing the tax-liability of the assessee, the Assessing Officer
shall make a refund.
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7.
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If the amendment has the effect of enhancing the tax-liability of the assessee or reducing his refund

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amount already made, the Assessing Officer shall serve on the assessee a notice of demand.
8.

9.

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No rectification shall be made after the expiry of 4 years from the end of the financial year in which
the order sought to be amended was passed.
If an application of an amendment under this section is made by the assessee on after Ist June,
2001 to relevant Income-tax authority it shall pass an order for making the amendment or refusing to
allow the claim. Such an order shall be passed within a period of six months from the end of the
month in which the application is received by it.
REFUND OF TAX
Refund : As per Section-237, if any person satisfies the Accessing Officer that tax paid by him or on his
behalf for any assessment year exceeds the amount with which he is properly chargeable under the Act for
that year, he shall be entitled to a refund of the excess. In brief, if the tax paid or deposited by a person is
more than the tax due on him, he is entitled to get refund of the excess amount paid or deposited by him.
An assessee may claim refund under the following circumstances –
1. Deducting tax at source at higher rate;

60
2. Depositing excess amount as advance tax;
3. Total income of an assessee being reduced in an appeal or other proceedings under the Act;
4. Reduction in the amount of tax as a result of rectification of mistake;
5. Deducting tax at source at a higher rate in case of a non-resident;
6. In case of double taxation relief.
Person Entitled to Claim Refund : As per section 238, following persons may claim refund –
1. Where the income of one person is included in the total income of any other person, the other
person alone shall be entitled to a refund in respect of such income.
2. Where on account of death, incapacity, insolvency, liquidation or other cause, a person is unable to

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claim or receive any refund due to him, his legal representative, or guardian or receiver, as the
case may be shall be entitled to claim or receive refund for the benefit or such person or his
estate.
Procedure for Claiming Refund : Procedure for claiming refund is explained in Sections 239 and 240. It is

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as follows –
1. Every claim for refund shall be made in the prescribed form (Form No. 30) and verified in the
prescribed manner. The Claim shall accompany the following documents as per Section-41 of the
Income–tax Rules, 1962–

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a) Return of income;

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b) Certificate of deduction of tax at source.
2.
.
Claim should be made within one year from the last day of such assessment year in respect of which
the claim is made.
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3.

4.

5.
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If refund of any amount becomes due to the assessee as a result of any order passed in appeal or
other proceedings, the Assessing Officer shall refund such amount to the assessee. The assessee
is not required to put his claim for such refund.

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If, in an appeal or other proceeding, an assessment is set aside or cancelled and an order of fresh

assessment.

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assessment is passed, the refund if any, shall become due only on the making of such fresh

If, in an appeal or other proceeding, the assessment is annulled, only such amount of tax paid would
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be refunded which is in excess of the tax chargeable on the total income returned by the assessee.
Correctness of Assessment not to be Questioned : As per Section-242, the assessee, at the time of
making claim for refund, shall not question the correctness of any assessment or other matters which have
been finally decided. He shall not ask even for a review of the claim, and the assessee shall not be entitled
to any relief on such claim except refund of tax wrongly paid or paid in excess.
Interest on Refunds : As per section 244-A. provisions dealing with the calculation of interest on refunds –
1. If any refund becomes due to the assesse, he shall, subject to the provisions of this section, be
entitled to receive the amount of refund along with simple interest thereon calculated in the following
manner–
a) If the refund is out of the tax deducted at source or advance tax paid, during the calculated at
¾% for every month or part of a month for the period from Ist April of the assessment year to
the date on which the refund is granted. But if the amount of refund is less than 10% of the
tax determined on regular assessment, no interest shall be payable on it;

61
 b) In any other case, such interest shall be calculated at ¾% for every month or part of a month
for a period beginning from the date on which the tax or penalty was paid, to the date on
which the refund is granted.
2. If the proceedings relating to refund are delayed by the assessee, whether wholly or in part, the
period of delay caused by him shall be excluded from the period for which interest is payable. The
question of exclusion of the period shall be decided by the Chief Commissioner or Commissioner
whose decision shall be final.
3. If, as a result of an appeal of revision or an order of the settlement commission, the amount on which
interest was payable has been increased or reduced, the interest shall be increased or reduced
accordingly. In a case where the interest is reduced, the Assessing Officer shall serve on the
assessee a notice of demand requiring him to pay the amount of excess interest paid to him.

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Appeals and Revisions : An assessee who is aggrieved by an order of income – tax authorities, has the
remedy of appeals and revision against such order. Such assessee can file appeals at different levels and
get justice done to him. Rules regarding appeals, their nature, scope etc. are discussed herewith in this
chapter.
Meaning of Appeal : Appeal is complaint to a superior court against an injustice, done by an inferior one. A

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person who files an appeal i.e., the aggrieved party is called as the 'appellant' and the other party against
whom appeal is filed is called 'respondent'. Aggrieved party, in the Income-tax Act, 1961, is generally the
assessee. Hence, he has the first right to file an appeal. But if the decision of the Tribunal or High Courts is
against the Government, the Government, being an aggrieved party, may also file appeal before the

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superior court. The right to appeal is not implied. This is a right by enactment expressly. If the right to appeal

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is not given expressly, in any Act, in respect of a particular matter, appeal cannot be filed in that matter.

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Appellate Authorities : Appeal lies before the following authorities against an order of the inferior authority

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–

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1. Deputy Commissioner (Appeals);
2. Commissioner (Appeals);
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3. Appellate Tribunal;
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4. High Court;
5. Supreme Court;
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6.
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Revision by Chief Commissioner or Commissioner.

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Appellate Hierarchy : Appeal against the order of the Assessing Officer lies with the Deputy
Commissioner (Appeals) or Commissioner (Appeals). Any party aggrieved by the order of Deputy
Commissioner (Appeals) or Commissioner (Appeals) may file appeal before the Appellate Tribunal. Appeal
against the order of the Appellate Tribunal can be filed, by the aggrieved party, before the High Court. The
order of the High Court can be challenged in the Supreme Court. The order of the Supreme Court is final.
Appellate hierarchy can be explained through the chart given below –
Assessing Officer

Deputy Commissioner (Appeals)

or
Commissioner (Appeals)

Appellate Tribunal

High Court

62
 Supreme Court
I) Appeals to the Deputy Commissioner (Appeals) : As per section 246(1) any assessee
aggrieved by any of the following orders of an Assessing Officer (other than the Deputy
Commissioner) may appeal to the Deputy Commissioner (Appeals) before Ist June against such
order –
1. An order against the assessee when–
a) he denies his liability to be assessed under this Act; or
b) he objects to the amount of income assessed;
c) he objects to the amount of tax determined; or

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d) he objects to the amount of loss computed; or
e) he objects to the status under which he is assessed.
2. An order for assessment, re-assessment or re-computation under section 147 or section
150.

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3. An order u/s 154 enhancing the assessment or reducing a refund or refusing to allow the
claim made by the assessee under either of the said sections.
4. An order u/s 163 treating the assessee as the agent of a non-resident.

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5. An order u/s 170 (2) or (3) relating to the succession to business or profession.

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6. An order u/s 171 relating to partition of a Hindu undivided family.

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7. An order u/s 201 in which the assessee is deemed to be an assessee in default.

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8. An order u/s 237 refusing to grant refund.
9. An order imposing a penalty under –
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a)
a
Section – 221 : for not paying the amount of tax;

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b) Section – 271 : for not furnishing the return of income not complying with the notice

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or concealment of income;

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c) Section – 271-A : for failure to keep, maintain or retain books of accounts,
documents etc;
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d) Section – 271-B : for failure to get accounts audited;
e) Section – 272-A : for failure to answer questions, sign agreements, furnish
information, returns or statements, allow inspections etc;
f) Section – 272-AA : for failure to comply with the provisions of section 133-B;
g) Section – 272-BB : for failure to comply with the provisions of section 203-A.
II) Appeal to the Appellate Tribunal – Formulation of Appellate Tribunal : As per section 252(I),
the Central Government shall constitute an Appellate Tribunal Consisting of as many judicial and
accountant members as it thinks fit to exercise the powers and discharge the functions conferred on
the Appellate Tribunal by this Act.
Members of the Tribunal : The Tribunal shall consist of some judicial members and some
accountant members. As per section 252(2), a judicial member shall be a person–
1. Who has held a judicial office in India for at least last 10 years; or

63
2. Who has been a member of the Indian Legal Service and has held a post in Grade II of that
service or any equivalent or higher post for at least 3 years; or
3. Who has been an advocate for at least 10 years.
As per section 252(2-A), an account member shall be a person–
1. Who has been in the practice of accountancy as a Chartered Accountant or as a registered
accountant under any law for at least 10 years; or
2. Who has been a member of the Indian Income-tax Service, Group A and has held a post of
Additional Commissioner of Income-tax or any equivalent or higher post for at least 10
years.
Office Bearer : The Central Government shall ordinarily appoint a judicial member of the Appellate

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Tribunal to be the Presidents thereof and one or more members of the Appellate Tribunal to be the
Vice-Presidents. One of the Vice-Presidents may be appointed as the Senior Vice-President. The
Senior Vice-Presidents or the Vice-Presidents shall exercise such powers and perform such
functions of the President as may be delegated to him by the President by a general or special order
in writing.

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Rules for appeal in the Tribunal :
1. If the Commissioner objects to any order passed on or before 1-10—1998 by a Deputy
Commissioner (Appeals) or by a Commissioner (Appeals) u/s 154 or u/s 250, or by a
Commissioner (Appeal) on or before 1-10-1998 u/s 246 A (1) or (2), he may direct the

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Assessing Officer to appeal to the Appellate Tribunal against such order.
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2. Every appeal shall be filed within 60 days of the date on which the order sought to be
appealed against is communicated to the assessee or to the Commissioner, as the case
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may be. But for filing an appeal against the order of the Assessing Officer in respect of the

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Assessment for the block period, the period of 60 days is reduced to 30 days.
3.
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The Assessing Officer or the Assessee, as the case may be, may, within 30 days of the

a
receipt of the notice that an appeal has been filed with, file a memorandum of cross

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objections, verified in the prescribed manner.

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4. The Appellate Tribunal may admit an appeal or permit the filing of a memorandum of cross

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objections even after the expiry of 30 days, if it is satisfied that there was sufficient cause for

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not presenting it within that period.
5. An appeal to the Appellate Tribunal shall be in the prescribed form (form 36) and shall be
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verified in the prescribed manner and shall, in the case of an appeal made on or after Ist
October, 1998, irrespective of the date of initiation of the assessment proceedings thereto,
be accompanied by a fee of–
a) Rs. 500, if the total income of the assessee as computed by the Assessing Officer in
the case to which the appeal relates is upto Rs. 1,00,000:
b) Rs. 1,500, if the total income of the assessee computed by the Assessing Officer in
the case to which the appeal relates exceeds Rs. 1,00,000, but does not exceed Rs.
2,00,000;
c) 1% of the assessed income or Rs. 10,000 (whichever is less). If the total income of
the assessee computed as aforesaid, in the case to which the appeal relates
exceeds Rs. 2,00,000.
d) Rs. 500, if the subject matter of an appeal relates to any matter, other than those
specified in (a), (b) and (c) above.
No such fee is payable in the case of an appeal made by the Assessing Officer as per the

64
 direction by the commissioner.
6. An appeal for stay of demand shall be unaccompanied by a fee or Rs. 500.
Order of Appellate Tribunal (Section 254) :
1. The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of
being heard, pass such orders thereon as it thinks fit.
2. The Appellate Tribunal may, at any time within four years from the date of order, amend its
previous order to rectify any mistake which is apparent from the record and the mistake is
brought to its notice by the assessee or by the Assessing Officer.
But if the amendment has the effect of enhancing an assessment or reducing a refund or
otherwise increasing the liability of the assessee, the assessee shall be given a notice of its

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intention to do so and he shall be given a reasonable opportunity of being heard before any
order is so amended by the Tribunal.
But any application filed by the assessee in this section on or after 1-10-1998, shall be
accompanied by a fee of Rs.50 (Fifty rupees).

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3. In every appeal, the Tribunal, if possible, may decide such appeal within 4 years from the
end of the financial year in which such appeal is filed.
But if a stay order is made in any appeal proceedings, the Appellate Tribunal shall dispose
off the appeal within a period of 180 days from the date of such stay order.

4.
the expiry of the said period.

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If such appeal is not so disposed off within 180 days, the stay order shall stand vacated after

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The cost of any appeal to the Appellate Tribunal shall be at the discretion of that Tribunal.

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5. The Appellate Tribunal shall send a copy of any order passed to the assessee and to the
Commissioner.
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6.
a
The order passed by the Tribunal is final so far as facts are concerned.

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Procedure of Appellate Tribunal (Section 255) :
1.
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Powers and functions of the Appellate Tribunal may be exercised and discharged by

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Benches constituted by the President of the Appellate Tribunal from among the members
thereof.

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2. A Bench shall consist of one judicial member and one accountant member.
3. The President or any other member of the Appellate Tribunal authorized in this behalf by the
Central Government may, sitting singly, dispose of any case which has been allotted to the
Bench of which he is a member and which pertains to an assessee whose assessed income
does not exceed Rs. 5,00,000. The President may constitute a Special Bench of three or
more persons for the disposal of any particular case. Of the three members of the Bench
one shall be judicial and one accountant member.
4. If the members of a Bench differ in opinion on any point or points, the point or points shall be
decided according to the opinion of the majority. But if the members are equally divided, the
point or points shall be referred by the President to one or more members of the Tribunal for
hearing and such point or points shall be decided according to the opinion of the majority of
all the members of the Tribunal who have heard the case including those who first heard.
5. The Appellate Tribunal is empowered to regulate its own procedure and the procedure of
benches thereof in all matters arising during the exercise of its powers or the discharge of its
functions, including the places at which the Benches shall hold their sittings.

65
 6. The Appellate Tribunal shall have all the powers which are vested in Income-Tax authorities
and any proceeding before the Tribunal shall be deemed to be a judicial proceeding.
III) Revision by the Commissioner :
1. Revision of orders prejudicial to revenue (Section 263) – The Commissioner may call
for and examine any proceeding under the Act, if he thinks that order passed by the
Assessing Officer.
a) is erroneous, and
b) is prejudicial to the interest of revenue.
He may, after giving the assessee an opportunity of being heard and after making such
inquiry as he thinks necessary, pass necessary orders including an order enhancing or

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modifying the assessment, or cancelling the assessment and directing a fresh assessment.
2. Such order in revision shall not be made after the expiry of 2 years from the end of the
financial year in which the order sought to be revised was passed.
3. But an order in revision may be passed at any time in the case of an order which has been

U
passed in consequence of any finding or direction by an order of the Appellate Tribunal, the
High Court or the Supreme Court. Thus, the Tribunal, the High Court or the Supreme Court
may issue direction to the Commissioner for revision of any order and in such a case the
limitation of 2 years shall not be effective.

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SETTLEMENT OF GRIEVANCES (Section 245A-245L)
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Sections provides for settlement of cases pending under this act or under the Indian income tax act,1922 in
connection with the assessment or reassessment of any person in respect of any year or years which may

.
be pending before an income tax authority on the date on which such an application is pending.

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The settlement commission shall consist of a chairman and many vice-chairman and other members as the

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central government thinks fit and shall function within the department of the central government dealing
with direct taxes.
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According to section 245C(1) an assessee may at any stage of a case relating to him, make an application

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in such form and in such manner as may be prescribed , and containing a full and true disclosure if his

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income which has not been disclosed before the assessing officer, the manner in which such income has
been derived, the additional amount of income tax payable on such income and such other particulars as

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may be prescribed, to the settlement commission to have the case settled and any such application shall be

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disposed of in the manner hereinafter provided. However, no such application shall be made unless-

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a) The assessee has furnished the return of income which he is or was required to furnish under any of
the provisions of this act; and
b) The additional amount of income-tax payable on the income disclosed in the application exceeds
one hundred thousand rupees.
The provisions relating to the settlement of cases has been enacted for those assesses who want to
disclose income not disclosed till then together with the manner in which that income is derived.
On receipt of application, the settlement commission shall call for a report from the commissioner and on
the basis of the materials contained in such report and having regard to the nature and circumstances of the
case or the complexity of the investigation involved therein, the settlement commission may by order allow
the application to be proceeded with or reject the application.
Where am application is allowed to be proceeded with under sub-section(1) the settlement commission
may call for the relevant records from the commissioner and after examination of such record, if the
settlement commisision is of opinion that any further enquiry or investigation in the matter is necessary, it
may direct the commissioner to make or cause to be made such further enquiry or investigation and furnish

66
a report on the matters covered by the application and any other matter relating to the case.
After examination of the records and the report of the commissioner, received under sub-section (1), and
the report, if any of the commissioner received under sub-section (3) and after giving an opportunity to the
applicant and to the commissioner to be heard, either in person or thorugh a representative duly authorized
in this behalf and after examining such further evidence as may be placed before it or obtained by it, the
settlement commission may in accordance with the provisions of this act, pass such order as it thinks fit on
the matters covered by the application but referred to in the report of the commissioner under sub-section
(1) or sub-section (3) .

IMPORTANT QUESTIONS
Q.1.
Q.2.
Q.3.
Q.4.
Q.5.
Discuss the various income tax authorities.
What do you mean by refund of tax?

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What are the powers and functions of Income Tax authorities?
Discuss the essentials and types of assessment.
Discuss the procedure and concept of refund of tax.

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 UNIT - IV

WEALTH TAX

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Assets and Deemed Assets – Net Wealth : The term net wealth means taxable wealth. Broadly speaking,
it represents the excess of assets over debts. Assets include deemed assets but do not include exempt
assets.
Assets [Section 2(ea)] : Following assets are included in the term 'assets' –

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1. Guest House, Residential House or Commercial Building [Section 2(ea)(i)] : The following are
treated as “assets”–
a) Any building or land appurtenant thereto whether used for commercial or residential

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purpose or for the purpose of guest house.
b)
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A farm house situated within 25 kilometers from the local limits of any municipality (whether

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known as a municipality, municipal corporation, or by any other name) or a cantonment

.
board.

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In the following cases a guest house/residential house/farm house or commercial building is not
treated as “Assets” –
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a
a) A Residential House [Section 2(ea)(i)] : A house if the following conditions are satisfied, is

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not treated as “asset”–

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i) it is meant exclusively for residential purposes;

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ii) it is allotted by a company to an employee, officer or a director who is in whole-time
employment;

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iii) the gross annual salary of such employee, officer or director is less than Rs.
5,00,000 [the term “gross annual salary” is not defined; as per common parlance it
could mean salary, bonus, commission including dearness and other allowances
(whether taxable or not), but excluding perquisites and before giving standard
deduction].
b) A house held as stock-in-trade [Section2(ea)(i)(2)]-Any house (may be residential house or
used for commercial purposes) which forms parts stock-in-trade of the assess is not treated
as “asset”.
c) A house used for own business or profession [Section 2(ea)(i)(3)]- Any house which the
assessee may occupy for the purpose of any business or profession carried on by him is not
treated as “asset”.
d) A let out property [Section 2(ea)(i)(4)- A residential property which is let out for a minimum
period of 300 days in the previous year is not treated as an “asset”.
e) A commercial complex [Section 2(ea)(i)(5)]- Any property in the nature of commercial

68
 establishment or complex is not treated as an “asset”.
2. Motor cars [Section 2(ea)(ii)] : Except the following two, any other motor car is an “asset”–
a) motor cars used by the assessee in the business of running them on hire;
b) motor cars treated as stock-in-trade
For this purpose, “motor car” covers all motor vehicles other than heavy vehicles.
In the case of a leasing company, motor car is an asset.
3. Jewellery, Bullion, Utensils of Gold, Silver, Etc. [Section 2(ea)(iii) : Jewellery, bullion, furniture,
utensils and any other article, made wholly or partly of gold, silver, platinum or any other precious
metal or any alloy containing one or more of such precious metals are treated as “assets”.

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For this purpose, “jewellery” includes the following–
Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or
more of such precious metals, whether or not containing any precious or semiprecious stones, and
whether or not worked or sewn into any wearing apparel; precious or semiprecious stones, whether

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or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel.
Where any of the above assets (i.e. jewellery, bullion, utensils of gold etc.) is used by an assessee
as stock-in-trade, then such asset is not treated as “assets” under section 2(ea) (iii). Section 2(ea)
has been amended with effect from the assessment year 2000-01 to clarify that “jewellery” does not
include the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the

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Central Government.
4.
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Yachts, Boats and Aircraft [Section 2(ea)(iv)] : Yachts, boats and aircraft (other than those used

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by the assessee for commercial purpose) are treated as “assets”.
5. Urban Land [Section 2(ea)(v)] : Urban land is an “asset”–
.
a

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a) in any area which is comprised within the jurisdiction of a municipality (whether known as

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municipality, municipal, notified area committee, town area committee, town committee, or

a
any other name) or a cantonment board and which has a population of not less than 10,000

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according to the last preceding census of which relevant figures have been published

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before the valuation date; or
b)
d
in any area within such distance (not being more than 8 kilometers) from the local limits of

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any municipality or cantonment board referred to above, as the central Government may,
having regard to the extent of any scope for, urbanization of that area and other relevant

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consideration, specify [Notification No. SO 871(E), dated November 9, 1993-Taxmann's
Direct Taxes Circulars, Vol. 2, 2002 edition].
In the following cases land is not treated as “assets”–
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 the approval of the
appropriate authority.
c) Any unused (i.e., not put to any use) held by the assessee for industrial purposes for a
period of 2 years from the date of its acquisition by him.
d) Any land held by the assessee as a stock-in-trade for a period of 10 years from the date of its
acquisition by him.
6. Cash in Hand [Section 2(ea) (vi) :
a) In case of individual and Hindu undivided families, cash in hand on the last date of the

69
 valuation date in excess of Rs. 50,000 is treated as asset.
b) In case of any other person, any amount not recorded in the books of accounts is treated as
asset.
Net Wealth of an Individual : The assets which belong to others but are included in the net wealth of an
individual are called deemed assets. By virtue of section 4 of Wealth Tax Act, following assets are deemed
assets–
1. Assets Transferred by One Spouse to Another [Section 4 (1)(a)(i)] : Section 4(1)(a)(i) is
applicable if the following conditions are satisfied –
The asset is transferred by an individual after March 31, 1956.
a) It is transferred to his spouse.

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b) The transfer may be direct to indirect.
c) The asset is transferred otherwise than for adequate consideration or in connection with an
agreement to live apart.

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d) The asset may be held by the transferee on the relevant valuation date in the same form in
which it is transferred or otherwise.
If all these conditions are satisfied then the asset is included in the net wealth of the transferor.

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The value of the assets cannot be included in the net wealth of the transferor.

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The value of the assets cannot be included in the net wealth of the transferor under Section 4((1) (a)

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if –
a)
.
The assets are transferred during the accounting years relevant to the gift-tax assessment
years 1964-65 to 1971-72; and
a
b)

a)

b)

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The following points can also be noted – a
chargeable under section 5 of that Act. m
The assets so transferred are either chargeable to tax under the Gift Tax Act or are not

The expression “to live apart” is of wider connotation and even the voluntary agreements to
live apart will fall within the exceptions of this sub-clause.

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Provisions of subsection (1) (a) (i) are not applicable to a case where HUF effects a transfer

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in favour of one of its members.
c) The expression “adequate consideration” cannot be equated to sufficient consideration,
good consideration or valid consideration; it means something more than good or valid
consideration, “Adequate consideration”, within the meaning of subsection (1) (a) must be
construed as valuable consideration capable of being compared and measured with money
or money's worth –CWT vs Khan Saheb Dost Mohd, Alladin (1973) 91 ITR 179 (AP).
d) ”Spouse” means lawfully wedded person only. Relationship of husband and wife should
exist between transfer and transferee both on date of transfer and on valuation date- CWT
vs Khan Saheb Dost Mohd. Alladin (supra). A widow or widower is not a spouse-
Vinodkumar Ratilal Vs CIT (1975) 100 ITR 564 (Guj).
e) The assessee gifted Rs. 90,000 to his wife and with the said money the latter constructed a
house in which both of them resided. For the purpose of wealth-tax assessment, the
assessee claimed that the value of the asset to be included in the 90,000 only and not the
actual value of the house as on the valuation date. It was held that the sum of Rs. 90,000
which was transferred by the assessee to his wife had now been converted into the existing

70
 asset, i.e., the house, and it was the value of the house, which alone was existing as an
asset as on the valuation date. Accordingly, the value of the house alone had to be included
in the net wealth of the assessee-V. Vaidya Subramaniam vs CWT (1977) 108 ITR 538
(Mad.).
f) Discharge of dower debt during the subsistence of marriage is not transfer for adequate
consideration- CWT vs Khan Saheb Dost Mohd. Alladin (1973) 91 ITR 179 (AP).
g) For the purpose of section 4, the expression “transfer” includes any disposition, settlement,
trust, covenant, agreement or arrangement.
h) “Individual” includes both males and females- M. Sulochanamann vs CTW (1972) 85 ITR
2001 (AP).
i) If the properties held by the spouse are “assets” under section 2(ea) on the valuation date

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and if they are found to have been transferred by the assessee to the spouse (directly or
indirectly) otherwise than for adequate consideration, the requirements of section 4 are
satisfied and, accordingly, value of such assets would be included in the net wealth of the
transferor. However, it is not necessary that the properties concerned should have been
“assets” [under section 2(ea)] on the date of the transfer –M.G. Kallankulam vs CIT (1978)

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115 ITR 160 (Ker.).
2. Assets Held by Minor Child [Section 4(1)(a)(ii)] : In computing the net wealth of an individual,
there shall be included the value of assets which on the valuation date are held by a minor child
(including step child/adopted child but not being a married daughter) of such individual. One should

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also keep in view the following points–
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a) The net wealth of minor child will be included in the net wealth of that parent whose net
wealth [excluding the assets of minor child so includible under section 4(1)] is greater.

.
Where, however, the marriage of parents does not subsist the net wealth of minor child shall

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be included in the net wealth of the that parent who maintains the minor child during the
previous year ending on the valuation date.
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a
b) Where any such assets are once included in the net wealth of either parent, any such asset

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shall not be included in the net wealth of the other parent in any succeeding year unless the

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Assessing Officer is satisfied (after giving that parent an opportunity of being heard) that it is
necessary to do so.
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c) The aforesaid provisions of clubbing of net wealth of minor with the wealth of his parent is
not applicable in respect of assets which have been acquired by the minor child out of the

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following income and which are held by him on the valuation date–
i) income which arises or accrues to the minor child on account of any manual work
done by him; and
ii) income which arises or accrues to the minor child on account of any activity involving
application of his skill, talent or specialized knowledge and experience.
d) The aforesaid rule of clubbing is not applicable in the case of minor child who is suffering
from any disability of the nature specified in section 80U of the Income-tax Act (see para
267).
e) The aforesaid rule of clubbing is not applicable, if on the valuation date child has become
major.
f) If it is provided under a trust deed that so long as the beneficiaries are minor, the assets are
not being held for the benefit of a charitable trust, the aforesaid clubbing provisions are not
attracted –CWT Vs H.H. Yeshwant Rao Ghorpade (1978) 115 ITR 232 (Kar.).

71
3. Assets Transferred to a Person or an Association of Persons [Section 4(1)(a)(iii)] : One has to
satisfy the following conditions for the applicability of section 4(1)(a)(iii) –
a) An asset is transferred by an individual after March 31, 1956 to a person or an association of
person.
b) The transfer may be direct or indirect.
c) It is transferred for the benefit of the transferor, his or her spouse.
d) It is transferred for the immediate or deferred benefit of persons mentioned in iii supra.
e) It is transferred otherwise than for adequate consideration.
f) The asset may be held by the transferee on the relevant valuation date in the same form in

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which it was transferred or otherwise.
If all these conditions are satisfied, then the asset is included in the net wealth of the transferor.
The following points can also be noted –

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a) The provisions of section 4(1)(a)(iii) would be applicable even if the spouse was given only a
right to enjoy the income of settled properties for her life. There is no reason why any
restricted meaning should be given to the expression “for the benefit of' occurring in that
section to mean only that transfer vests in the wife absolute ownership in the properties
transferred –Chandulal Shivlal vs CWT(1965) 55 ITR 441 (Guj).

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b) To attract the provisions of section 4(1)(a)(iii), the beneficiary must have derived some
benefit under the trust, either in income or corpus or both.
4.
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Assets transferred under Revocable Transfers [Section 4(1)(a)(iv)] : Section 4(1)(a)(iv) is
applicable if the following conditions are satisfied–
.
a

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a) The asset if transferred by an individual.

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a
b) It is transferred to a person or an association of persons.

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c) It is transferred after March 31, 1956.
d)
e)

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section 4] –
a)
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d
It is transferred under a revocable transfer.
The asset may be held by the transferee on the relevant valuation date in the same form in
which it is transferred or otherwise.
If all the conditions are satisfied, then the asset is included in the net wealth of the transferor.
For this purpose, the following transactions are treated as revocable transfers (b) of Explanation to

if the transfer is revocable within a period of 6 years or if it is revocable during lifetime of the
beneficiary; or
b) if the transferor derives any benefit, directly or indirectly, from the assets transferred; or
c) if the transferor has a right of re-transfer, directly or indirectly, in respect of the whole or any
part of the assets or the income from the assets so transferred.
Following points can also be noted –
a) The rule of section 4(1)(a)(iv) is based upon the general principle that there is no transfer of
assets when a person purports to give and at the same time retains the right of revoking the
transfer at his will.

72
 b) The value of any assets transferred under an irrevocable transfer shall be liable to be
included in computing the net wealth of the transferor as and when the power to revoke
arises to him.
c) The karta of the assessee-HUF gifted cash to seven divided members of the family. The
department initially took the stand that, since the impugned gift was void, title to the amount
vested with the assessee and hence it was includible in its net wealth. When this contention
was turned down on the ground that the amount ceased to be the asset of the assessee,
irrespective of whether the gift was void or voidable, the department contended that, since
the transfer was liable to be questioned by the family members, it was a revocable transfer,
and on this score, the amount was includible under section 4(1)(a)(iv). It was held that the
mere fact that the family members were liable to question the transfer, would not make it a
revocable transfer under section 4(1)(a)(iv)-CWT vs Motilal Ramswaroop (1970) 76 ITR43
(Raj.).

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5. Assets Transferred to Son's Wife [Section 4(1)(a)(v)] : The following conditions should be
satisfied for the applicability of section 4(1)(a)(v)–
a) The asset is transferred by an individual.

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b) The transfer should take place after May 31,1973.
c) The asset is transferred to son's wife.
d) The transfer may be direct or indirect.

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e) The asset is transferred otherwise than for adequate consideration.

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f) The asset may be held by the transferee on the relevant valuation date in the same form in
which it is transferred or otherwise.
.
a

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If these conditions are satisfied, then the asset is included in the net wealth of the transferor.

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Points given below can also be kept in view–
a)
a
The relationship between father-in-law/mother-in-law and daughter-in-law should subsist

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between transferor and transferee both on the date of transfer and on valuation date.

6.
b)

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a)
b)

c)
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d
Any gift made prior to June 1, 1973 is not covered by section 4(1)(a)(v).
Assets transferred for the benefit of son's wife [Section 4 (1)(a)(vi)] : One has to satisfy the
following conditions for the applicability of section 4(1)(a)(vi)–
The asset is transferred by an individual after May 31, 1973.
It is transferred to a person or an association of the immediate or deferred benefit of son's
wife.
The transfer may be direct or indirect.
d) The transfer is without adequate consideration.
e) The asset may be held by the transferee in the same form in which it is transferred or
otherwise.
If all these conditions are satisfied, then the asset is taxable in the hands of the transferor–
a) Interest of Partner [Section 4(1)(b)] : Where the assessee (may or may not be an
(individual) is partner in a firm or a member of an association of persons, the value of his
interest in the assets of the firm or an association determined in the manner laid down in
Schedule III to the Wealth-tax Act, will be includible in his net wealth.

73
 b) the assessee (may or may not be an individual) is partner in a firm or a member of an
association of persons, the value of his interest in the assets of the firm or an association
determined in the manner laid down in Schedule III to the Wealth-tax Act, will be includible in
his net wealth.
Minor Admitted to the Benefits of a firm –Where a minor is admitted to the benefits of partnership in a
firm, the value of his interest in the firm (determined in the manner laid down in Schedule III) shall be
included in the net wealth of parent of minor in accordance with the provisions of section 4(1)(a)(ii).
7. Conversion by an Individual of his Self-acquired Property into Joint Family Property
[Section 4(1A)] : Section 4(1A) is applicable if the following conditions are satisfied–
a) An individual is a member of a Hindu undivided family.
b) He converts his separate property belonging to his Hindu undivided family through the act of

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impressing such property with the character of property belonging to the family or throwing it
into common stock of the family. Alternatively, he transfers his separate property to his
Hindu undivided family, directly or indirectly, without adequate consideration.
c) The property is converted or transferred after December 31, 1969.

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Consequence Before Partition : If all the aforesaid conditions are satisfied, then the converted or
transferred property shall be deemed to be the property of the individual and the value of such
property is includible in his net wealth.

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Consequences After Partition : If all the aforesaid conditions are satisfied and the converted or

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transferred property becomes the subject-matter of a total or a partial partition among the members
of the family, the converted or transferred property or any part of thereof, which is received by the

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spouse of the transfer or is deemed to be the asset of the transferor and is includible in his net

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wealth.

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8. Gifts by Books Entries [Section 4(5A) : Where a gift of money from one person to another is made

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by means of entries in the books of account maintained by the person making the gift, or by an
individual, or a Hindu undivided family, or a firm or an association of persons, or a body of individuals
a
with whom he has business connection, the value of such gift will be included in the net wealth of the

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person making the gifts unless he proves to the satisfaction of the Wealth-tax Officer that the money

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had actually been delivered to the other person at the time the entries were made.

d
Gift by book entries is valid if there is evidence to show that (i) there is sufficient cash balance

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(including bank balance and bank overdraft limit) on the date of gift; and (ii) gift was made by donor

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and accepted by donee-CIT vs Dr. R.S. Gupta (1987) 165 ITR 36 (SC), CIT vs Dharsey Keshvaji

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(1983) 143 ITR 509 (Bom.).
9. Impartible Estate [Section 4(6)] : For the purpose of the Wealth-tax Act, the holder of an impartible
estate shall be deemed to be the owner of all the properties comprised in the estate.
Wealth Tax Authorities : The functions and the powers of the Wealth Tax Authorities work under
the same pattern as that of income tax.

IMPORTANT QUESTIONS
Q.1. What do you mean by Wealth Tax?
Q.2. What is included while calculating the wealth of individual for the purpose of Wealth Tax?
Q.3. What is the status of Jewellery, bullion, Urban Land and cash in hand for the Wealth Tax?

74
Q.4. How is the self acquired property of individual converted into property of joint family?
Q.5. Discuss the powers and functions of wealth tax authorities.

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 UNIT - V

CENTRAL SALES TAX

–
1.

2.

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Object of the Central Sale Tax (CST) Act : The objects of the Act, as stated in preamble of the CST Act are

To formulate principles for determining (i) when a sale or purchase takes place in the course of inter-
state trade or commerce (ii) when a sale or purchase takes place outside a State (iii) when a sale or
purchase takes place in the course of imports into or export from India.
To provide for levy, collection and distribution of taxes on sales of goods in the course of inter-state

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trade or commerce.
3.
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To declare certain goods to be of special importance in Inter-State trade or commerce and specify

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the restrictions and conditions to which State laws imposing taxes on sale or purchase of such

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goods of special importance (called as declared goods) shall be subject.

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Scheme of the CST Act : Basic scheme of the Act is as discussed below –
1.
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Sales Tax Revenue to States : The CST Act provides for levy on inter-state sales and also defines

a
what is 'Inter-State' sale. However, the concept that revenue from sales tax should be collected by

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States has been retained. Thus, though it is called Central Sales Tax Act, the tax collected under the

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Act in such State is kept by that State only. CST in each state is administered by local sales tax

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authorities of each State.

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2. Tax Collected in the State Where Movement of Goods Commences : The scheme of CST Act is
that Central Sales Tax is payable in the State from which movement of goods commences (i.e. from

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which goods are sold). The tax collected is retained by the State in which it is collected. CST Act is
administered by Sales Tax authorities of each State. Thus, the State Government Sales Tax officer
who collects and assesses local (State) sales tax also collects and assesses Central Sales Tax.
3. Tax on Inter State Sale of Goods : CST is tax on inter State sale of goods. Sale is inter-state when
(a) sale occasions movement of goods from one State to another or (b) is effected by transfer of
documents during their movement from one State to another.
4. State Sales Tax Law Applicable in Many Aspects : CST Act makes provisions for very few
procedures and rules. In respect of provisions like return, assessment, appeals etc., provisions of
General Sales Tax law of the State apply.
5. CST Act Defines Some Concepts : Under the authority of Constitution, the CST Act defines
concepts of 'Sales Outside the State' and 'sale during the course of import/export'.
6. Declared Goods : Some goods are declared as goods of special importance and restrictions are
placed on power of State Governments to levy tax on such goods.
Appropriate State [Section 2(a)] : In relation to a dealer who has one or more places of business situated

76
in the same State, “appropriate State” means that State in which such business is situated. If, however,
dealer has places of business situated in different States, every such State with respect to the place (or
places) of business situated within its territory shall be treated as “appropriate State”.
Business [Section 2(aa)] : Business includes the following –
1. any, trade, commerce or manufacture, or any adventure or concern in the nature of trade,
commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or
concern is carried on with a motive to make gain or profit and whether or not any gain or profit
accrued from such trade, commerce, manufacture, adventure or concern, and
2. any transaction in connection with or incidental or ancillary to, such trade, commerce, manufacture,
adventure or concern.
The following conclusions one can draw from the aforesaid definition of the term “business” –

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1. It is not necessary that business should be carried on with a view to earning profits.
2. Adventure being a part of business implies that the element of regularity of transactions need not
always be present.

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3. Incidental or ancillary transaction are also covered in business, i.e. if a dealer sells old machinery,
he will be liable to pay central sales tax on this sale.
4. It is not necessary that the business should be legal.
Crossing the Customs Frontiers of India [Section 2(ab)] : It means crossing the limits of the area of a

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custom station in which imported goods or export goods are ordinarily kept before clearance by customs
authorities.
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“Customs Station” and “Customs authorities” shall have the same meaning as in the Customs Act, 1962.

.
a
Customs Station : Section 2(13) of the Customs Act, 1962 defines customs station as any customs port,

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customs airport or land customs station (customs port shall be for vessels, customs airport for aircrafts and

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land customs station for trucks and other vehicles). Custom authorities shall specify the customs area

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within such customs station where imported goods and export goods are to be kept.

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Custom Authorities : As per Section 3 of the Customs Act, there shall be the following classes of officers of

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customs, namely –
1.
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Principal Collectors of Customs;
2.
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Collectors of Customs;

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3. Collectors of Customs (Appeals);
4. Deputy Collectors of Customs;
5. Assistant Collectors of Customs; and
6. Such other class of officers of customs as may be appointed for the purposes of this Act.
Goods [Section 2(d)] : Sale of “goods” is liable to sales tax. As per Section 2(d), “goods” include all
material, articles or commodities and all kinds of movable property. The term does not, however, include
newspapers, actionable claims, stocks, shares or securities.
The term “goods” includes all movable property. The word “movable”, as applied to property, is defined as
that which may be lifted, carried, drawn, turned, or conveyed, or in any way made to change place or
position- Monarch Loundry vs Westbrook 63 S.E. 1070,109 Va. 382. Things are either immovable or
movable. 'Immovable' includes land and all that is so attached to land as to be legally regarded as a part of
it. All other things are movable. Whether a thing is so attached to the land as to be regared as a part of it is
determined by the law of the place where the land is. The nature of a “movable” is generally such that its
identity is not lost if it moved from one location to another – Bailey vs Kruithoff, La. App. 280 So. 2d 262, 264.

77
Vide Section 2(7) of Sale of Goods Act, goods includes standing crop, grass and things attached to and
forming part of the land, which is agreed to be served before sale or under contract of sale, and
consequently, liable to sales tax. In other words, standing crops/trees are generally not goods, if they are
sold alongwith land. However, standing timber or crop will be taxable under the CST Act if timber or crop is
identified, contract is unconditional and timer or crop is in deliverable state. In such case, it is “movable
property” and liable for sales tax.
Newspapers are not goods only for the purpose of the CST Act, i.e., no tax is levied in case of inter-state
sale of newspapers.
Dealers are not liable to sales tax on sale of newspapers but if they buy raw material for newspapers at
concessional rate, they can do so on submission of Form C.
If old newspaper is sold as newspaper, then it is not taxable. Suppose a Bombay book shop sells an old

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newspaper (Times of India, Bombay edition) of September 6, 1936 to a researcher in Delhi for Rs. 1,500, it
is not chargeable to tax. Conversely, however, if old newspapers are sold as scrap (for instance, sale to a
raddiwala of old newspaper @ Rs. 4.50 per kg.) it is chargable to central sales tax, if it is an inter-state sale.
Place of Business [Section 2(dd)] : It is important to know the dealer's place of business because central

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sales tax is collected by the Government of that State only where the place of business is situated. The term
place of business includes the following –
1. In any case where a dealer carries on business through an agent (by whatever name called), the
place of business of such agent;

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2. A warehouse, godown or other place where a dealer stores his goods; and
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3. A place where a dealer keeps his books of account.

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Turnover [Section 2(j)] : It is the aggregate of the sale prices received and receivable by the dealer in

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respect of sales of any goods in the course of interstate trade or commerce made during any prescribed

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period. Prescribed period is the period in which sales tax return is filed as per the local sales tax law of the
state.
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a
Year [Section 2(k)] : It means the year applicable in relation to a dealer under the general sales tax law of

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the appropriate state, and where there is no such year applicable, it is the financial year. While the sales tax
returns are submitted quarterly/monthly, as the case may be, sales tax assessment is always done for the

d
whole year and the tax payable is calculated accordingly

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Definition and Essentials of Sale : Section 2 (g) defines that sale with its grammatical variations and

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cognate expressions, means any transfer of property in goods by one person to another for cash or for

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deferred payment or for any other valuable consideration, and included a transfer of goods on hire-
purchase or other system of payment by instalments, but does not include a mortgage or hypothecation or a
charge or pledge on goods.
Essentials of Valid Sale : As per Section 4 of Sales of Goods Act, where under a contract of sale, the
property in the goods is transferred from buyer to seller (for a price), the contract is called 'sale'. Where the
transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an 'agreement to sale'.
Thus essential element of sales are as given below –
1. There must be transfer of Goods : In state of Tamilnadu vs Sri Srinivasa Sales Corporation (1996
(7) SCALE 421 (SC)] it was held-“In order to constitute a sale under the Sale of Goods Act, it is
essential to establish that there is an agreement between the parties for transfer of title to the goods
and that such agreement should be supported by money consideration and as a result of the
transaction, the goods, article or the property must actually pass to the purchaser. It is settled law
that the expression 'sale' under the Sale Tax Act has to be understood with reference to the

78
 definition of 'sale of goods' under the Sale of Goods Act. But, if the title of goods passes without any
contract between the parties, express or implied, there is no sale. Similarly, if the consideration of
the transfer is not money, but some other valuable consideration, it may amount to exchange or
barter but not sale in the strict sense of the law for the purposes of taxation.
Sale of goods is a 'contract', hence as per normal provisions of Contract Act, both parties to contract
must be competent to contract. A valid mutual consent of both parties is essential for any contract.-
Bhopal Sugar Industries Ltd. Vs D.P. Dube (1963) 14 STC 406 (SC). However, in Food Corporation
of India vs State of Kerala, AIR 1997 SC 1252 (SC 3 member bench), it was held that levy
procurement under Government order is a sale and purchase and hence taxable.
Ascertained Goods : A seller may agree to sell part of his stock of goods. However, unless the part
which he intends to sell is segregated, these remain 'unascertained goods' and there is no sale. The
sale takes place only when goods are segregated i.e. 'ascertained' and property is passed on to

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buyer.
Sale of Illegal Goods : Sale of illegal goods (like hashish, ganja) are also liable to sales tax (like
income from illegal business is taxable under Income Tax Act).

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2. Transfer of 'Property' Essential : There is no sale unless there is 'transfer of property'. 'Property'
means a thing over which a person has a domain. This implies transfer of ownership. Mere
'agreement to sale' does not mean sales as there is no transfer of property. 'Property' is different
from 'possession'. Property can pass even before handing over possession. Conversely, transfer of
possession does not necessarily mean that it is a transfer of property.

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3. Valuable Consideration Essential : The consideration is something akin to cash payment or
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deferred payment. Otherwise, it is an exchange and not a sale – Devidas Gopal Krishna vs State of

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Punjab (1967) 20 STC 430 (SC). Thus, where Kansa finished utensils were transferred for equal

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weight of raw material in the form of old Kansa utensils plus making charges, it was held as

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'exchange' and not 'sale' –CTO vs Kansari Udyog Sahakari Samiti (1979) 43 STC 176 (MP DB).

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It is obvious that free gifts given by Company cannot be taxed as there is no 'consideration'.
m
a
Sales tax is attracted as soon as a sale takes place and payment of such tax becomes statutorily

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due irrespective of the fact whether they are credit sales or cash sales –ACC vs CTO (1981)48 STC

A
466 (SC).

d
In 'hire purchase', possession of goods is delivered by 'owner to hirer on condition of payment of

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agreed number of instalments. Hirer has option to purchase the goods as per terms of agreement;
(usually, a nominal payment is provided at the end of hire period). Property in goods is passed on to

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the hirer after all terms of agreement are fulfilled. If the hirer does not fulfill the conditions of hire-
purchase (e.g. does not pay instalments on due dates) possession of goods can be taken back by
owner giving goods on hire purchase. Article 366 (29A) of Constitution has been amended in 1982
to specifically include' hire purchase' in definition of 'sale'. Definition of 'sale' as per CST Act also
states that 'sales' include 'hire purchase'. Thus, hire purchase is 'sale'.
4. Buyer and Seller are Essential : There must be two parties to sale buyer and seller. Transfer of
goods from one branch to another cannot be termed as 'sale' as a sale can be only from one person
to another person. In case of branches, they are only one legal entity. This would be so even if
accounting entries resembling sales are made and they are separately registered under Sales Tax
Act. KCP Ltd. Vs State of A.P.(1993) 88 STC 274 (AP HC DB).
Sale in the Course of Inter-State Trade Commerce : According to Section-3, a sale or purchase of goods
shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase –
1. occasions the movement of goods from one State to another; or
2. is effected by a transfer of documents of title to the goods during their movement from one State to

79
 another.
Occasions Movement of Goods [Section 3(a)] : It implies that there must be a contract of sale/ purchase
in pursuance of which there is a completed sale, whereby goods move from one state to another. Therefore,
when the goods so move from one State to another in the absence of a contract, it shall not be termed as
inter-State sale.
What constitutes a completed sale is explained by the Supreme Court in the case of Bhopal Sugar
Industries Ltd., vs D.P. Dube (1963) 14 STC 406, as a transaction becoming a sale in the presence of the
following four elements –
1. there must be parties competent to contract;
2. mutual consent;

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3. a thing, the absolute or general property which is transferred from the seller to the buyer; and
4. a consideration in money paid or payable.
Essentials Features of Inter-State Sale : The following are the essential features of an inter-State sale –

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1. Transactions should be a completed sale.
2. There should be an agreement to sale (express or implied) with a stipulation (may be express or
implied) regarding movement of goods from one State to another.

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3. Concluded sale must take place in a State which is different from the sate from which movement of

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goods commences.

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4. The movement should be result of a contract (express or implied).
5.
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There should be physical movement of goods from one State to another (such movement must be

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inextricable connected with sale). Mode of transport is not relevant.
6.

7.

8. M m
It is sufficient if movement of goods arises as a result of contract of sale or is incidental to the
contract. The contract may not provide for movement of goods.

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It is not relevant in which State the property (i.e., the ownership), of goods passes from seller to the

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buyer.

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It is not necessary that sale precedes the inter-state movement of goods. Sale can be either before

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or after the movement of goods.

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9. Where the movement of goods commences and terminates in the same State, it shall not be
deemed to be a movement of goods from one state to another by reason merely of the fact that in the
course of such movement the goods pass through the territory of any other state.
In Balabhagas Hulashand vs State of Orissa (1976) 37 STC 207, 215 (SC), the firm used to purchase raw
jute through brokers in forward market in Orissa. The goods were dispatched in bags from Cuttack (Orissa)
to Calcutta by rail. The goods were to be inspected, accepted, and weighed at railway siding at Calcutta by
the buyer and they would accept the same if the goods were according to their specifications. The firm
contended that when the goods were booked from Orissa, there was an agreement to sale. Sale
concluded only at Calcutta after goods were accepted. It was held by the Supreme Court that though
sales took place at Calcutta, movement of goods from Orissa was in pursuance to agreement to sale.
Sale by Transfer of Documents [Section 3 (b)] : By virtue of Section 3 (b), a sale or purchase of goods
shall be deemed to take place in the course of inter-State trade or commerce, if the sale or purchase is
effected by a transfer of documents of title to the goods during their movement from one State to another.
Where, however, goods are delivered to a carrier or other bailee for transmission, the movement of the
goods shall, for the aforesaid purpose, be deemed to commence at the time of such delivery and terminate

80
at the time when delivery is taken from such carrier or bailee [Explanation 1 to Section 3 (b)].
Delivery of “document of title” is, thus considered the same as the delivery of goods themselves- J.V. Gokal
and Co. (P) Ltd., vs Assistant Collector of Sales Tax (1960) 11 STC 186 (SC).
A of Kolkata sells goods to B at Agra and delivers the same to a transport company. The lorry receipt (i.e.,
LR) is sent to B by post. While goods are in transit, B sells the goods to C of Gwalior by making an
endorsement on the LR and goods are diverted to Gwalior. Delivery of goods is taken by C at Gwalior. In this
case there are 2 inter-State sales –first by A to B from Kolkata to Agra and second by B to C from Agra to
Gwalior. The first is chargeable to central sales tax. The second sale is, however, exempt in some cases
under Section 6 (2).
Sale by transfer of document of title of goods may be effected by handing over the document and that
endorsement to that effect on the document is only one of the proof but not necessarily the only way to

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prove the fact- Dy. Commissioner vs ARS Thirumeninatha Nadar Farm (1968) 21 STC 184 (Mod HC DB).
Following sales are not taxable under Central Sales Tax Act :
Sale Inside a State [Section 4(2)] : A sale or purchase of goods shall take place inside a state in the
following situations–

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1. In the case of specific or ascertained goods, if goods are within the State at the time when the
contract of sale is made.
2. In the case of unascertained or future goods, if goods are within the State, at the time of their

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appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is

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prior or subsequent to such appropriation.

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Once a sale is termed as having taken place inside a State according to the aforesaid tests, it will be

.
deemed to be outside sale for all other states. However, the definition of “sale inside State” is subject to a
provision that it should not be inter-state sales. In other words, a sale or purchase which occasions the
a

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movement of the goods from one State to another or is effected by transfer or documents of title to the

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goods during their movement from one State to another is excluded from “inside sale”.

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If the goods are sold with the understanding that the goods will be sent to some place situated outside the

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State, then it will be an inter-state sale chargeable to the central sales tax.

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Explanation to Section 4(2) provides that where there is a single contract of sale or purchase of goods
d
situated at more than one place, the above provisions shall apply as if there were separate contracts in

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respect of the goods at each of such places and where the sale is so fixed in a particular State, then it shall
be sale outside all other States.

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Export sales [Section 5(1)] : A sale or purpose of goods shall be deemed to take place in the course of
export of goods out of territory of India in the following cases –
1. if the sale or purpose occasion such export; or
2. if the sale or purchase is effected by a transfer of documents of title to the goods after the goods
have crossed the customs frontiers of India.
Webster defines “occasions” as follows – 'To cause or to bring about by furnishings the condition or
occasion needed for the action of a principal cause; to cause accidentally or incidentally, or simply to cause
to bring about.'
Occasion means “to be immediate cause of”. In Tata Engg. and Locomotives Co. Ltd. Vs CCT (1970) 26
STC 354, the Supreme Court observed that :
It is possible to have only one sale which can occasion the export. It is the sale between the exporter in India
and the overseas buyer which has a direct nexus with the exporter and only this sale can occasion the
export. Any other sale cannot be treated as sale in the course of export even if it is inter-connected with the

81
export – CCT vs Vasantha Mills Ltd. (1976) 38 STC 366 (Mad.). The only exception is the rule covered by
Section 5 (3).
If goods leave the territorial waters of India and are shipped to a foreign destination, it will make the export
complete, even if the goods do not factually reach the destination. Where, however, the goods are merely
shipped to a foreign country, there being no destination specified, this will not be considered to be sale in the
course of export. In Burmah Shell Oil Storage and Distributing Co. of India Ltd. Vs CTO (1960) 11 STC 764,
the company supplied aviation fuel to foreign country; it was not treated as a sale in the course of export.
Import Sale [Section 5(2)] : A sale or purchase of goods shall be deemed to take place in the course of the
import of the goods into the territory of India only in the following situations–
1. If the sales or purchase occasions such import; or
2. If such sale or purchase is effected by a transfer of documents of title to the goods before the goods

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have crossed the custom frontiers of India.
When the user directly imports for his own use or consumption, no question of any further sales arises. This
is so even if an agent arranges the imports- CST vs Glass Trading and Sales Corporation (1991) 84 STC
195 (Delhi H.C.).

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Sale in duty free shop in airport is not a 'sale in course of import', as there is no inextricable line between
original import of goods and its sale at the airport Re Indian Tourism Development Corporation STR vd 44
No 7 PII-113 (Maharashtra Sales Tax Tribunal).
Kotak and Co. supplied foreign cotton to textile mills in South India on the basis of import licences issued to

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the mills. The letter of authority granted to Kotak and Co. was under a condition that the importer will only act
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as agent and goods on import had to be delivered to licence holders. In this case, sale by Kotak and Co. to

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textile mills in India was held to be sale in course of import and exempt from tax. [Dy. CAIT vs Kotak and Co.

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AIR 1973 SC 2491].

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Penultimate Sale for Export of Goods [Section 5(3)] : According to Section 5(1) sale or purchase of
goods can qualify as a sale in the course of export of the goods out of the territory of India only if the sale or
m
purchase has occasioned such export or is by a transfer of documents of title to the goods after goods have

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crossed the customs frontiers of India. The Supreme Court had held in Mohd. Serajuddin vs State of Orissa

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(1975) 36 STC 126, that the sale by an Indian exporter from India to a foreign importer alone qualifies as a

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sale which has occasioned the export of the goods. According to the Export Control Orders, exports of

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certain goods can be made only by specified agencies such as the State Trading Corporation. In other

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cases also, manufacturers of goods, particularly in the small scale and medium sectors, have to depend on
some experienced export house for exportinig the goods because special expertise is needed for carrying

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on export trade A sale of goods made to an export canalising agency such as the State Trading Corporation

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or to an export house to enable such agency or export house to export those goods in compliance with an
existing contract or order is inextricably connected with the export of the goods. Further, if such sales do not
qualify as sales in the course of export, they would be liable to State sales tax and there would be a
corresponding increase in the price of the goods. This would make Indian exports incompetitive in the
fiercely competitive international markets.
With aforesaid objective in mind, sub-Section (3) was inserted in Section 5 to provide that the last sale or
purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the
territory of India shall also be deemed to be in the course of such export, if the following three conditions are
satisfied–
1. there must have been pre-existing agreement or order to sell the specific to a foreign buyer;
2. the last purchase referred to in Section 5 (3) must have taken place after that agreement with the
foreign buyer was entered into;
3. the last purchase must have been made for the purpose of complying with the pre-existing
agreement or order.

82
Only if these conditions are satisfied, the transaction falls under Section 5(3) and gets the status of “exports
sale” which is not subject to central sales tax- George Maigo and Co. vs State of Andhra Pradesh (1980) 46
STC 41 (AP).
Stock Transfer or Branch Transfer : One of the important conditions to come within the purview of terms
'inter state sale' is that there should be a sale. Transfer of goods to a branch or dispatch of goods to a
consignment agent does not amount to 'sale' and consequently there is no inter state sale or central sales
tax liability, though goods move from one place to another. In both these cases the person dispatching
goods retains ownership of goods. Generally these are known as stock transfer or branch transfer.
Generally in case of stock transfer or branch transfer, there is no inter-state sale even if goods move from
one state to another, because there is no element of sale. If however the movement shall be treated as inter
state sale.

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A company manufacturing silk yarn, had a factory in Tamil Nadu. Government announced a scheme of
allotment of silk yarn to weavers at a concessional rate. The weavers could enter into a contract with the
company for the supply of silk yarn to them on production of allotment cards which were issued to them by
the Government. On doing so, the company sent silk yarn to its depot in Maharashtra where its selling
agents sold it to the allotees in the state of Maharashtra only. The company's contention was that this was

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only a case of 'stock transfer' , but the Supreme Court held that it was not stock transfer but was an inter
state sale since goods were sent from Tamil Nadu to Maharashtra depot from where the goods were further
sold by the selling agents in Maharashtra, the transfer of goods from Tamil Nadu to Maharashtra would be
termed as 'stock transfer'. South India Viscose Ltd. Vs State of Tamil Nadu (1981) 48 STC 232 (SC).

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INCIDENCE OF TAX

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Section 8 (1) of the CST Act defines that every dealer who in the course of inter-state trade or commerce

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sells the goods shall be liable to pay tax under the Act. Thus, liability is on the dealer who sells the goods.

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As per Section 2(b) of CST Act, dealer means any person who carries on (whether regularly or otherwise)
a

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the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash or for deferred

m
payment, or for commission, remuneration or other valuable consideration.

a
By virtue of Section 2(b), dealer includes the following –

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A
1. a local authority, a body corporate, a company, any co-operative society or other society, club, firm,
Hindu undivided family or other association of persons which carriers on such business;
d
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2. a factor, broker, commission agent, del credere agent, or any other mercantile agent, by whatever
name called, and whether of the same description as hereinbefore mentioned or not, who carries on

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the business of buying, selling, supplying or distributing, goods belonging to any principal whether
disclosed or not; and
3. an auctioneer who carries on the business of selling or auctioning goods belonging to any principal,
whether disclosed or not and whether the offer of the intending purchaser is accepted by him or by
the principal or a nominee of the principal.
There are two Explanations to the aforesaid definition –
Explanation I states that a mercantile agent (as defined under the Sale of Goods Act), agent handling goods
or documents of title, agent for collection of payment (or as guarantor for such collection and every branch
of office in a State of a firm or company which is outside the State is also a “dealer”.
Explanation II clarifies certain categories of agents who shall be deemed to be dealers for the purpose of
the CST Act. These dealers only act as intermediaries. They do not directly effect sales but sell on behalf of
their principals.
These agents include a broker, auctioneer, commission agent, and/or del credere agent. They get
commission or brokerage for their services provided to the principal in terms of sale to the buyers. A del

83
credere agent gets additional commissions too, called del credere commission. Thus Explanation I
included all agents who only act as intermediaries. Moreover, it covers local branches and offices of firms
and companies outside the State.
Generally, only those agents who carry on business on own account (like factor or pakka adatiya) are liable
for sales tax. On the other hand brokers (like Kachcha adatiya), auctioneer or agents who only secure
orders are not considered as dealers. Explanation I to Section 2 (b), however, includes all agents who act as
intermediaries as “dealers”. Though aforesaid deeming provision vide Explanation I to Section 2(b) is very
wide, Section 6 of CST Act specifies that every dealer shall be liable to pay tax under the Act on all sale
effected by him. Likewise, Section 7 specifies that “every dealer liable to pay tax should register himself with
appropriate authority”. Consequently, commission agents, auctioneers, or brokers cannot be held as liable
as they do not effect sales. In practice, these intermediaries do not get themselves registered as dealers,
though legally in view of the wide definition, they may be held liable to pay tax and penalty, if principal fails to
pay the tax and penalty due- Pench Valley Coal vs State of MP (1973) 31 STC 64 (MP).

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Explanation 2 to Section 2(b) specifies that Government, which (whether or not in the course of business)
buys, sells, supplies or distributes goods (directly or otherwise), for cash (or for deferred) shall be a “dealer”.
This rule is not applicable in the case of sale, supply or distribution of unserviceable or old stores or old
materials or waste products or obsolete or discarded machinery or parts or accessories by the
Government. This exception is made as all Government departments have to make such sale of old goods.
The exception is, however, applicable only to Government and not for private enterprises.
Public sector undertakings of Government companies are not “Government” and are not eligible for the

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exception.

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Tax Liability on Sale to a Registered Dealer : If the dealer sells goods as specified in Section 8 (3), to a

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registered dealer he shall be liable to pay as follows–
1.
.
Normal Sale : Normally sale to a registered dealer is chargeable to tax @ 4 per cent or at the local
rate, whichever is lower..
a

b)

c)

A M Section 9 (3);

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Not all goods purchased by a registered dealer are eligible for concessional rate. Concessional

a
rates specified above are applicable only if the following conditions are satisfied–
a)

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buyer is a registered dealer;
goods purchased are those goods which are eligible for concessional tax incidence as per

such goods are included in his registration certificate; and

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d) the selling dealer must obtain form 'C'
2. Sale for Manufacturing in Special Economic Zone [Section 8(6)] : If the following conditions are
satisfied, then sale to a registered dealer is taxable at nil rate–
a) sale is made in the course of inter-state trade or commerce by any dealer;
b) sale is made to a registered dealer;
c) such sale is of goods specified in the certificate of registration, repairing, reconditioning, re-
engineering, packaging;
d) sale is made to the registered dealer for the purpose of–
i) manufacture, production, processing, assembling repairing, reconditioning, re-
engineering, packaging;
ii) for use as trading or packing material or packing accessories;

84
 e) such manufacture, etc., should be done in a unit located in any special economic zone, if
such registered by the Central Government in this behalf; and
f) a declaration should be obtained in a prescribed form from the registered dealer by the
selling dealer; it should be submitted to the authority specified by the Central Government.
Tax Liability on Sale to the Government : As per Section 8(1)(a), every dealer who in the course of inter-
state trade or commerce, sells any goods to the government, is liable to pay tax @ 4% provided he obtains a
certificate in form D from the authorised Government Officer and the same is submitted to the authority
specified by the Central Government
REGISTRATION AND/OR RESTRICTION
Registration of Dealers : According to Section 7, there can be two ways in which a dealer can get himself

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registered- compulsory registration [Section 7 (1)]; or voluntary registration [Section 7(2)].
Compulsory Registration : As per Section 7(1), every dealer liable to pay under the CST Act shall (within
such time as may be prescribed for the purpose) make an application for registration under the Act to such
authority in the appropriate State as the Central Government (by general or special order) specify and
every such application shall contain such particulars as may be prescribed. It may be noted that as per

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Section 6 (1) every dealer effecting sale in the course of inter-State trade or commerce is liable to central
sales tax. Every dealer liable to pay central sales tax has to necessarily register himself with the sales tax
authority of the particular State as authorized by the Central Government. If a dealer does not get himself
registered, he would be subject to penalty under Section-10 (i.e., imprisonment which may extend to six

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months or fine or both and in case of continuing offence, a fine of Rs. 50 per day till the default continues).

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Voluntary Registration : As per Section 7(2), any dealer liable to pay tax under the sales tax law of the

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appropriate State, or where there is no such law in force in the appropriate State (or any part thereof), any

.
dealer having a place of business in that State (or part) may (notwithstanding that he is not liable to pay tax
under the CST Act as he does not make inter-State sale), apply for registration under the CST Act, giving
a

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the particulars as prescribed.

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A dealer may apply for registration under Section 7 (2) in the following cases–

a
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1. If he is registered, the sales tax law of the State but is not liable to pay tax under the CST Act.

A
2. If there is no sales tax law in a State (or any part of it) while the dealer carries on business in that
State.
d
3.
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If a dealer deals in tax-free goods in a State.

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4. If he purchases goods from other States but sales are made within the State.
The application for registration can be made at any time by the dealer. In case he does not apply for
registration, he is not subject to any penalty.
Application for Registration : Application for registration should be made in prescribed form 'A' as per
CST (Registration and Turnover) Rules within 30 days from the date when dealer becomes liable to CST.
Application fee of Rs. 25 is payable (by way of court fee stamps). Application has to be signed by (a)
proprietor of business (b) one of the partners in case of business owned, by partnership firm (c)
Karta or Manager of HUF (d) director or principal officer of Company (e) principal office in case of
association of individuals or (f) officer authorized by Government in case of Government Enterprise.
If a dealer has places of business in different States, he has to obtain separate registration in each State.
However, if he has made more than one place of business within the same State, he has to get only one
registration with additional places of business endorsed on the Certificate. Definition of 'place of business'
has already been explained.
Security from Dealer Under CST Act : As per Section 7 (2A) of CST Act, the Registering authority can ask

85
for proper security from the applicant for (a) realization of taxes due and (b) proper custody and use of forms
(like C,E-1/E-II, F and H) which are supplied by Sales Tax authorities for use by the dealer [Section 7 (2A)].
Additional security can also be demanded from a dealer who is already registered [Section 7 (3A)]. Security
cannot be demanded without granting opportunity of personal hearing.
All Items of Purchase and Sale Must be Included in Registration : The 'Registration certificate' is
indeed very important. As per Section 10(c), false representation when purchasing any goods that the class
of goods are covered by the registration certificate, is an offence. As per Section 10(a), furnishing a false
certificate is an offense. Thus, while issuing 'C' form or other forms under the Act, it must be ensured that
goods are covered in the Registration Certificate. This is particularly so because there is no provision to
amend the Registration Certificate with retrospective effect.
Knowingly purchasing goods which are not covered in registration certificate under 'C' form is an offence-
Business Consultancy vs State of Tamil Nadu (1994) 94 STC 176 (Mad. HC DB).

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Refusal of Registration Under CST : Sales Tax Authority can refuse registration for reasons to be
recorded in writing. However, before rejection, personal hearing should be given to applicant and
opportunity to correct or complete required particulars should be given.

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Cancellation of CST Registration:
1. A dealer may apply for cancellation or registration within six months before the end of year. If the
dealer is not liable to pay tax, the registration will be cancelled from end of the year. Thus,
registration cannot be cancelled in middle of the year [Section 7 (5) of CST Act].

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2. Sales Tax authorities may cancel registration after giving notice if the dealer has ceased to exist or
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has ceased to carry on business or has failed to furnish security/additional security as demanded or

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has failed to inform about death/insolvency or surety or failed to pay tax or penalty payable under

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the Act or when dealer who has obtained voluntary registration ceases to sell inside the State or for
any other sufficient reason [Section 7(4)(b) of CST Act]. Opportunity of being heard has to be given
a

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before cancellation. After cancellation, the certificate of registration and its copies should be

m
surrendered to sales tax authorities. The cancellation can be only prospective i.e. from date of
cancellation and not retrospective.
a
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Certificate of Registration Under CST : The registering authority will ensure that application is in

A
conformity with provisions of CST Act. He can make necessary enquiries e.g. (a) particulars given are

d
correct (b) Materials requested for registration are eligible for inclusion and the goods are in fact needed for

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the business. After he is satisfied and after obtaining required security, the dealer will be issued a Certificate
of Registration in prescribed form 'B'. A copy of the same will be issued for every additional place of

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business in the State. This certificate should be kept at principal place of business and a copy of the

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certificate should be kept at each additional place of business in the State.
Effective Date of Registration : Registration is effective from the date on which application for registration
is made, even if registration is granted later. In fact, if registration is made after inter-State sale i.e. earlier
than the date of applications-same view in Rajdhani Waste Cotton Agency vs CST (1991) 83 STC 530 (Del
HC DB).
Amendment of Certificate : The certificate can be amended e.g. change of name, change of business,
change of class of goods in which he carries business, change/addition of place of business, warehouses
etc. This amendment can be made on application from dealer or by sales tax authorities themselves after
giving notice to dealer. In Orient Paper Mills vs CST (1969) 23 STC 308 (MP HC), it was held that the
amendment will be effective from date of application for amendment. In a contrary decision, in Fact Ltd. vs
State of Orissa (1991) 82 STC 62 (Ori' HC DB), it was held that the amendment is with effect from date when
amendment was allowed. With respect, it submitted that it is should be effective from the date of application
for amendment.
Restriction on Taxation : According to Section 2 (c ) of CST Act, declared goods means goods declared

86
under Section 14 to be of special importance in inter state trade or commerce.
Under Section 14, the following goods are declared to be of special importance–
1. Cereals (paddy, rice, wheat etc.)
2. Coal including coke but excluding charocoal.
3. Cotton in unmanufactured form (whether ginned or unginned, baled, pressed or otherwise) but not
cotton waste.
4. Cotton fabrics, cotton yarn
5. Crude Oil
6. Hides and skins

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7. Iron and Steel i.e. pig iron, iron scrap, steel ingots, billets, steel bars, steel structurals, sheets,
plates, discs, rings, tool steel, tubes, tin plats, steel wheels, wire rods; defectives of above etc.
8. Jute

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9. Oil-seeds i.e. groundnut, til, cottonseed, linseed, castor, coconut, sunflower, mahua, kokum, sal
etc.
10. Pulse i.e. gram, tur, moong, masur, urad etc.

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11. Man-made fabrics-fabrics of man-made filament yarn i.e. artificial textile materials, polyester
filament yarn, staple fibres, polyester staple fibre, tyre cord fabric, impregnated textile fabrics etc.
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12. Sugar and Khandsari Sugar

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13. Unmanufactured tabacco, cigars, cigarettes, biris, chewing tabacco, snuff etc.

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14. Woven fabrics of wool.

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Restrictions on Levy of Tax on Declared Goods : Section 15 imposes the following restrictions on sale or
purchase of “declared goods” :
a
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A
Local Sales Tax not to Exceed 4 per Cent [Section 15(a)] : Tax payable under local sales tax law of the
State in respect of sale of goods inside the State shall not exceed 4 per cent of the sale or purchase price

d
thereof. After the amendment made by the Finance Act, 2002, the State Governments can impose tax on

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declared goods at more than one stage in respect of sales of declared goods. It appears that the scheme of
multi-point tax has been introduced to eventually launch value added tax.

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Inter-State Sale of Declared Goods Entitles Reimbursement of Local Sales Tax [Section
15(b)] : where tax has been levied on sale/purchase of declared goods inside or commerce, and tax has
been paid under the CST Act in respect if such inter-State sale, in accordance with conditions (provided in
any law in force in that State). This Section clearly provides that–
1. Inter-State sale of goods must belong to the same sub-entry as in case of local sale, i.e., the goods
must be sold in the same form.
2. Tax must have been paid under the CST Act, i.e., if goods sold in the course of inter-state trade or
commerce are exempt from tax, refund of tax paid on sale of those goods inside the State cannot be
claimed.
3. Tax on sale of goods inside the State also should have been paid, i.e., if tax under the CST Act
comes to Rs. 2,000 while that paid under the local sales tax law of the State is Rs. 500, the whole of
Rs. 2,000 has to be paid as central sales tax subject to reimbursement of Rs. 500 from the State
Government. The dealer cannot pay Rs. 1,500 under the CST Act. Thus only reimbursement (but
not set off of tax) under the CST Act is permissible in case of inter-state sale of declared goods,

87
 except in case of sale of rice obtained from paddy. If in the aforesaid example, inter-state sales of
the goods are exempt from tax, refund of tax paid on intra-state sale is not available.
Goods Must be Sold in the Same Form : Declared goods purchased must be sold in the same form, i.e.
identical goods must be sold. Identity of goods should not be lost, e.g. while mung, channa and masur
converted into dal is the same commodity, round timber logs are different from sized timber, Likewise, (a)
dried coconut and watery coconuts; (b) condensed milk and milk; (c) oil sees and oil extracted from these
seeds; (d) ice and water are different commodities. If, therefore, goods sold after processing are different
commodity, reimbursement of local sales tax is not available.
Tax Paid on Paddy to be Set Off [Section 15(c)] : Where tax has been levied on sale or purchase of paddy
inside the State and subsequently tax is leviable on sale of rice procured out of paddy, tax on rice shall be
reduced by the amount of tax paid on paddy. For instance, if tax of Rs. 4,000 is paid on sale of paddy and tax
payable on sale of rice produced from the paddy comes to Rs. 4,600, then tax of only Rs. 600 will be actually

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payable on rice [Section 15 (c)].
Rice and Paddy to be Treated as a Single Commodity [Section 15(ca)] : Section 15(ca) has been
inserted by the finance (No.2) Act, 1996 to treat paddy and rice as a single commodity provided rice
procured out of such paddy is exported out of India.

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Conversion of Pulse not Taxable [Section 15(d)] : Each of the pulses whether whole or separated, with
or without husk, shall be treated as a single commodity for the purpose of levy of tax under the local sales
tax laws of a State. Thus, where a process is involved on channa or urad and dal is obtained from them, they
will be considered as the same commodity. If tax is paid on raw pulses, it will not be payable again when

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pulses are sold after processing.
PENALTIES AND PUNISHMENT
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Central Sales Tax Act provides for penalties and punishments in respect of certain offences. Further, in

.
respect offences not provided in the CST Act, provisions of General Sales Tax Law of the State where the

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dealer is carrying on business are applicable. Here, we will study only those offences for which provision
has been made in the CST Act. CST Act envisage three type of punishment (a) Imprisonment and fine
m
which can only be imposed by Court of Law (b) Compounding of offences by Sales Tax authorities (c)

a
Penalty in certain cases which can be imposed by Sales Tax Authorities.

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A
Offences Under the Act : Section 10 of CST Act provides that punishment upto six months of simple
imprisonment or with fine or both can be imposed for following offences under CST Act–
d
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1. Knowingly giving declaration in form C, E-1, E-II, F or H which he knows, or has reason to believe, to
be false.

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2. Not registering under CST Act when required to be registered.
3. False representation by a registered dealer that the goods being purchased are covered under his
Certificate of Registration for concessional rate.
4. Falsely representing that he is a registered dealer, though he is not.
5. misusing or using for different purpose the goods obtained under C form at concessional rate.
6. Having in possession C form which are not obtained as per provisions of Act.
7. Collecting any amount representing as Central Sales Tax by an unregistered dealer or by a
registered dealer in contravention of provision of Act.
8. Provisions regarding offences in 'General Sales Tax Law' (excepting those enumerated above) are
applicable in respect of offences.
Punishment by Court of Law : Punishment of imprisonment and/or fine can be imposed only by Court of
law. If the offence is a continuing offence, fine of Rs. 50 per day till offence continues can be imposed. The

88
person has to be prosecuted in a criminal case. Such prosecution can be launched only with previous
sanction of State Government or its authorized officer. The offences are cognizable and bailable.
Compounding of Offences : The offences can be compounded by Sales Tax Authorities. Compounding
means the dealer agreeing to pay a fine and sales tax authorities agree to drop further action in respect of
the offence. Such compounding can be done in respect of any offence enumerated above, if provisions are
available in State law. Provisions as applicable in State Sales Tax Law will be applicable.
Offences Cognizable and Bailable : The offences under CST Act are cognizable and bailable [Section
11(2)]. However, Court can take cognizance of offence under CST Act only with previous sanction of State
Government or its authorized officer. The offence can be tried only in court of presidency magistrate of a
magistrate of first class or court above that [Section 11(1)].
Penalty in Lieu : Section 10A of CST Act authorizes imposition of penalty in lieu of punishment in respect of

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offences regarding (a) obtaining goods not included in registration certificate (b) purchasing goods
representing that he is registered dealer, though he is not (c ) using goods for purposes different than the
purposes for which purchased. (Other offences can be compounded by Sales Tax Authorities). The penalty
can be upto one and half time the tax which would have been payable. The penalty can be imposed by
Sales Tax Authority having jurisdiction over the dealer's place of business. Once penalty is imposed,

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prosecution for same offences shall not be instituted. The penalty is collected by Union of India in the State
in which the dealer is registered or if he is not registered in which he should have got himself registered.
Penalty for Other Offences : Besides above, State laws provide for other offences like late payment or
non-payment of tax, false declaration of turnover, non-filling or late filling or returns etc. These provisions

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are also applicable in respect of dealers in that State who make inter state sale [Section 9(2A) of CST Act].

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Mens Rea in the CST Offences : 'Mens rea' means 'guilty mind'. The principle is that “an act does not

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make one guilty unless the mind is also guilty”.

.
However, this is a concept of criminal law. It has been held that imposition of penalty cannot be construed as

M
punishment under Criminal Law and penalty could be imposed even if there is no 'mens rea' unless the Act
requires 'mens rea'. Thus, Section 10 expects 'mens rea' in case of following offences (a) furnishing a
m
declaration or certificate, which he knows or has reason to believe to be false (b) false representation that
a
goods are covered in the certificate of registration (c) falsely representing that he is a registered dealer.

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Here, 'falsely' implies a purpose to deceive. It is not mere untruth. Thus, in case of these offences 'bona fide'

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mistake will not call for penalty. However, in case of other offences, mens rea is not required e.g. (a) not

d
registering with Sales Tax Authority or not providing security as required (b) using goods for purposes other

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than purpose for which purchased, without reasonable excuse (c) has in possession blank ST form i.e. form
C,E-I, E-II or H, which are not obtained in accordance with provisions of CST Act (d) collecting an amount by

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way of tax except in accordance and mere committing the offence can call for penalty.
In Cement Marketing Co. of India vs Asstt. CST (1980) 6 ELT 295 (SC) I (1980) 54 STC 197 (SC) AIR 1980
SC 346, it was held that 'falsely represents' postulates mens rea in that the representation should be
something which in fact and to his knowledge is false, and this element would be excluded if the person
acted in bona fide belief that his representation is true.
Liability of Company in Liquidation : As per Section 17(1), if a liquidator or receiver is appointed for a
Company, he should inform sales tax authorities within 30 days of the appointment. Sales tax authority will
inform him within three months the amount of tax due from company which is in liquidation. Liquidator
cannot sell assets of company before setting aside amount of dues as informed by sales tax authorities-
unless such transfer or sale is by order of Court. If liquidator fails to give notice to sales tax authorities or fails
to keep the dues payable to Sales Tax Authorities, he will be personally liable. In Imperial Chit Funds (P)
Ltd., vs ITO, AIR 1996 SC 1887, it has been held that the sales tax officer will be treated as secured creditor
and amount set aside by official liquidator under Section 17 of CST Act falls outside area of winding up
proceedings. The STO is entitled to payment of tax demanded. If the STO send similar orders to liquidator,
the priority will be on the basis of the date of receipt of the orders by official liquidator.

89
Liability of Directors of Private Limited Company in Case of Liquidation : Section 18 provides that if a
private limited company is being wound up, liability of directors of such private limited company is personal
if amount cannot be recovered in liquidation i.e. the tax due can be recovered from him/his personal
property. He can save the liability only if he proves that non-payment of tax cannot be attributed to any gross
neglect, misfeasance or breach of duty on his part in relation to affairs of the company.
Indemnity to Government Officers : Government officers executing CST Act are protected. A suit,
prosecution or legal proceedings does not lie against them for anything done in good faith under CST Act or
rules under CST Act [Section 12]
Various Sources of Procedures Under CST Act : Sources of procedures may be discussed as below –
Rules Framed by the Central Government : Section 13(1) authorities Central Government to make rules
for different purposes. Some of these rules have already been discussed in the preceding paras.

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Rules Framed by the State Governments : Vide Section 13(3), State Government are authorized to
make rules. These rules should not be inconsistent with the CST Act or rules made by the Central
Government under the CST Act. These rules can be made for the following purposes by State Government;
publication of list of dealers, amendments to list and particulars contained in the list; manner of furnishing

U
security or additional security for registration of dealers or providing prescribed forms to dealers; from and
manner of keeping books of account by registered dealers in course of inter-state sale; furnishing
information of stock of goods, purposes, sales and deliveries by any dealer and information necessary for
purpose of the CST Act; inspection of books, accounts or documents required to be kept under the CST Act;
entry into premises for search and seizure of books, accounts or documents; authority from whom and the

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conditions for obtaining declaration forms, i.e., C, E-I, E-II-F, etc., manner of keeping custody of such forms

m
by dealer and manner of use of such forms/declaration; form and manner in which appeal may be preferred,

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procedure for hearing appeal, fees payable for filing appeal; declaration of name of manager in case
business is carried out by HUF, association of persons, society, firms or company or in case of a person

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carrying on business as guardian or trustee on behalf of other, and form of declaration; time, manner and

a
authority to whom change of ownership of business of dealer shall be informed.

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In view of the aforesaid power, all State Government have framed their rules and prescribed their forms.
Rules Prescribed in State Sales Tax Laws : Section 9(2) provides that all provisions of local sales tax law
of each State (other than those provided in the CST Act and rules made there under) in respect of the
following shall be applicable to any person under the CST Act in that State: returns; assessment; advance

tu
d
payment of taxes; registration of transferee of any business, imposition of tax liability on transfer of
business; recovery of tax from third parties; appeal, review, revision, refunds, rebate, penalties, interest;
compounding of offences; treatment of documents furnished by dealer as confidential. If in any State (or

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part thereof) there is no general sales tax law in force, the Central Government may make necessary
provision for all or any of the matter specified above.

IMPORTANT QUESTIONS
Q.1. Discuss the objects of Central Sales Tax Act.
Q.2. What do you mean by the term 'goods' which is liable for Sales Tax?
Q.3. Discuss the definitions and essentials of valid sale.
Q.4. What is the status of Central Sales Tax with regard to Inter State Trade?
Q.5. Discuss the powers and functions of Sale Tax Authorities.
Q.6. What are the penalties and punishment with regard to the offence under the act?

90
BIBLIOGRAPHY
1. INCOME TAX AND PRACTICE, B.K. AGARWAL
2. INCOME TAX LAW AND ACCOUNTS, DR. H.C. MEHROTRA
3. INCOME TAX RULES, TAXMANN PUBLICATIONS
4. INCOME TAX ACT, B.B. BHARGAV
5. INCOME TAX ACT, WADHWA

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