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UNIT-1

Q. 1 Explain the Constitutional Provisions Regarding Taxation in India

The roots of every law in India lie in the Constitution, therefore understanding the provisions of the Constitution is
foremost to have a clear understanding of any law. The Constitutional provisions regarding taxation in India can be
divided into the following categories:

 Only by the authority of law can taxes be levied. (Article 265)

 Levy of duty on tax and its distribution between centre and states (Article 268, Article 269, and Article 270)

 Restriction on power of the states to levy taxes (Article 286)

 Sale/purchase of goods which take place outside the respective state

 Sale/purchase of goods which take place during the import and export of the goods

 Taxes imposed by the state or purpose of the state (Article 276, and Article 277)

 Taxes imposed by the state or purpose of the union (Article 271, Article 279, and Article 284)

 Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)

Article 265

Without the ‘authority of law,’ no taxes can be collected is what this article means in simple terms. The law here
means only a statute law or an act of the legislature. The law when applied should not violate any other constitutional
provision. This article acts as an armour instrument for arbitrary tax extraction.

Article 266

This article has provisions for the Consolidated Funds and Public Accounts of India and the States

Article 268

This gives the duties levied by the Union government but are collected and claimed by the State governments such
as stamp duties, excise on medicinal and toilet preparations which although are mentioned in the Union List and
levied by the Government of India but collected by the state (these duties collected by states do not form a part of
the Consolidated Fund of India but are with the state only) within which these duties are eligible for levy except in
union territories which are collected by the Government of India.

Article 269 provides the list of various taxes that are levied and collected by the Union and the manner of distribution
and assignment of Tax to States.

Article 269(A)

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This article is newly inserted which gives the power of collection of GST on inter-state trade or commerce to the
Government of India i.e. the Centre and is named IGST by the Model Draft Law. But out of all the collecting by
Centre, there are two ways within which states get their share out of such collection

1. Direct Apportionment (let say out of total net proceeds 42% is directly apportioned to states).

2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a selected prescribed
percentage goes to the States.

Article 270

This Article gives provision for the taxes levied and distributed between the Union and the States:

 All taxes and duties named within the Union List, except the duties and taxes named in articles 268, 269
and 269A, separately.

 Taxes and surcharges on taxes, duties, and cess on particular functions which are specified in Article 271
under any law created by Parliament are extracted by the Union Government.

 It is distributed between the Union and the States as mentioned in clause (2).

 The proceeds from any tax/duty levied in any financial year, is assigned to the states where this tax/duty is
extractable in that year but it doesn’t form a part of the Consolidated Fund of India.

 Any tax collected by the centre should also be divided among the centre and states as provided in clause
(2).

 With the introduction of GST 2 sub-clauses having been added to this Article- Article 270(1A) and Article
20(1B7).

The Supreme Court of India has set a famous judicial precedent under Article 270 of the Constitution of
India in the case T.M. Kanniyan v. I.T.O. The SC, in this case, propounded that the Income-tax collected
forms a part of the Consolidated Fund of India. The Income-tax thus extracted cannot be distributed between
the centre, union territories, and states which are under Presidential rule.

Article 271

At times the Parliament for the Union Government (only when such a requirement arises), decides to
increase any of the taxes /duties mentioned in article 269 and Article 270 by levying an additional surcharge
on them and the proceeds from them form a part of the Consolidated Fund of India. Article 271 is an
exception to Article 269 and Article 270. The collection of the surcharge is also done by the Union and the
State has no role to play in it.

Cess and surcharge

There seems to be a lot of confusion between cess and surcharge. Cess is described in Article 270 of the
Constitution of India. Cess is like a fee imposed for a particular purpose that the legislation charging it
decides. Article 271 deals with a surcharge which is nothing but an additional tax on the existing tax collected
by the union for a particular purpose.

Grants-in-aid

The constitution has provisions for sanctioning grants to the states or other federating units. It is Central
Government financial assistance to the states to balance/correct/adjust the financial requirements of the
units when the revenue proceeds go to the centre but the welfare measures and functions are entrusted to

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the states. These are charged to the Consolidated Fund of India and the authority to grant is with the
Parliament.

Article 273

This grant is charged to the Consolidated Fund of India every year in place of any share of the net proceeds,
export duty on products of jute to the states of Assam, Bihar, Orissa, and West Bengal. This grant will
continue and will be charged to the Consolidated Fund of India as long as the Union government continues
to levy export duty on jute, or products of jute or the time of expiration which is 10 years from its
commencement.

Article 275

These grants are sanctioned as the parliament by law decides to give to those states which are in dire need
of funds and assistance in procuring these funds. These funds /grants are mainly used for the development
of the state and for the widening of the welfare measures/schemes undertaken by the state government. It
is also used for social welfare work for the Scheduled tribes in their areas.

Article 276

This article talks about the taxes that are levied by the state government, governed by the state government
and the taxes are collected also by the state government. But the taxes levied are not uniform across the
different states and may vary. These are sales tax and VAT, professional tax and stamp duty to name a few.

Article 277

Except for cesses, fees, duties or taxes which were levied immediately before the commencement of the
constitution by any municipality or other local body for the purposes of the State, despite being mentioned
in the Union List can continue to be levied and applied for the same purposes until a new law contradicting
it has been passed by the parliament.

Article 279

This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means the proceeds which
are left after deducting the cost of collection of the tax, ascertained and certified by the Comptroller and
Auditor-General of India.

Article 282

It is normally meant for special, temporary or ad hoc schemes and the power to grant sanctions under it is
not restricted.

Article 286

This article restricts the power of the State to tax

1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the territory of the
state.

Article 289

State Governments are exempted from Union taxation as regards their property and income but if there is
any law made by the parliament in this regard then the Union can impose the tax to such extent.

Some other tax-related provisions

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 1. Article 301 which states that trade, commerce and inter-course are exempted from any taxation
throughout India except for the provisions mentioned in Article 302, 303, and 304 of the Indian Constitution,
1949.

2. Article 302 empowers the parliament to impose restrictions on trade and commerce in view of public
interest.

3. Article 303– Whenever there is the scarcity of goods this article comes in play. Discrimination against the
different State Governments is not permitted under the law except when there is a scarcity of goods in a
particular state and this preference to that state can be made only by the Parliament and in keeping with
the law.

4. Article 304– permits a State Government to impose taxes on goods imported from other States and Union
Territories but it cannot discriminate between goods from within the State and goods from outside the State.
The State can also exercise the power to impose some restrictions on freedom of trade and commerce within
its territory.

Article 366

Apart from all these provisions, there are other provisions also that require mention such as Article
366 which gives the definition of:

 Goods;

Services;

 Taxation;

 State;

 Taxes that are levied on the sale/purchase of goods;

 Goods and service tax etc.

Q.2 Distinction between Tax and Fee

Tax

 Definition: A tax represents money – that a government charges an individual or business when they
perform a particular action or complete a specific transaction. Taxes are levied in the greater interests of
the country.

 Measured: This tax is often assessed as a percentage of the amount of money involved in the transaction.

 Levy collection: A tax is a levy collected for general government services. It is a way to generate revenue
by Govt.

 Administration and Application: Your taxes may pay the salary of a teacher, police officer or bureaucrat.
They may help pave a road or build a school. They may finance the running of the local sewage-treatment
plant.

 Example: A tax is applied on the income that a person makes during a year. In addition, a tax is often
pieced on the sale of goods. income tax, gift tax, wealth tax, VAT, etc. are examples of tax.

Fee

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  Definition: A fee is related to a tax in that it is also a charge paid to the government by individuals or by
a business. Fees are mostly imposed to regulate or control various types of activities.

 Measured: The fee rate is directly tied to the cost of maintaining the service. Money from the fee is
generally not applied to uses other than to provide the service for which the fee is applied.

 Levy collection: A fee is a levy collected to provide a service that benefits the group of people from which
the money is collected. It is charged for services rendered by an individual /Company/Professionals.

 Administration and Application: A fee is assessed for an exacting service, and the money collected is
usually earmarked for that service. The fee that you pay for inspecting your assets every other year probably
goes directly to cover the costs.

 Example: However, a fee is specifically applied for the use of a service. For example, a government may
charge a fee to visit a park. Stamp fee, driving license fee, Govt. registration fee, etc. are examples of Fee.

Q 3. Explain the provisions relating to state agencies from tax.

Could not get answer

Explain the provisions relating to Immunity of state agencies from tax.

Exemption of Central Property from State Taxation

The property of Centre is exempted from all taxes imposed by a state or any authority within a state like
municipalities, district boards, panchayats and so on. But, the Parliament is empowered to remove this ban. The
word ‘property’ includes lands, buildings, chattels, shares, debts, everything that has a money value, and every kind
of property movable or immovable and tangible or intangible. Further, the property may be used for sovereign (like
armed forces) or commercial purposes.

The corporations or the companies created by the Central government are not immune from state taxation or local
taxation. The reason is that a corporation or a company is a separate legal entity.

Exemption of State Property or Income from Central Taxation

The property and income of a state is exempted from Central taxation. Such income may be derived from sovereign
functions or commercial functions. But the Centre can tax the commercial operations of a state if Parliament so
provides. However, the Parliament can declare any particular trade or business as incidental to the ordinary functions
of the government and it would then not be taxable.

We note here that the property and income of local authorities situated within a state are not exempted from the
Central taxation. Similarly, the property or income of corporations and companies owned by a state can be taxed by
the Centre.

The Supreme Court, in an advisory opinion24 (1963), held that the immunity granted to a state in respect of Central
taxation does not extend to the duties of customs or duties of excise. In other words, the Centre can impose customs
duty on goods imported or exported by a state, or an excise duty on goods produced or manufactured by a state.

According to Tax Law, the Doctrine of Immunity of Instrumentalities means, the State and Central (Federal)
Governments have immunity from paying taxes imposed by the other. Article 289(2) of the Constitution of India
relaxes the Doctrine saying that the Union can tax a State by passing a bill in the Parliament.

The Concept of State and Article 12 of the Constitution of India

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The law dictionary defines “state” as :A body politic, or society of men united together for the purpose of promoting
their mutual safety and advantage, by the joint efforts of their combined strength. Individuals need constitutional
protection from the acts of the state itself. Fundamental rights protection is available against the state only as
ordinary laws are sufficient enough to protect infringement of rights by individuals. With great powers comes a
greater risk of abuse and in order to safeguard rights and freedom of individuals so that men in power do not trample
upon them. However, in order to delve deeper into the concept it is firstly imperative to explore the definition of
“state”.

Article 12 defines state in the following manner:

In this part unless the context otherwise requires, “the State” includes

1. The Government and Parliament of India

2. The Government and Legislature of each of States

3. Local Authorities or

4. Other Authorities Within the territory of India or under the control of Government of India.

Concept of sovereign immunity.

India has adopted a restricted concept of sovereign immunity. Pursuant to the Code of Civil Procedure of India,
foreign states and their organs and instrumentalities can be sued with the prior written consent of the Indian
government. However, such consent may not be required where the matter is governed by a special law (for, eg,
the Carriage by Air Act 1972, Consumer Protection Act 1986) or where the legal proceedings are not in the nature of
a suit, such as an industrial dispute under the Industrial Disputes Act 1947. In its 2011 judgment in Ethiopian Airlines
v Ganesh Narain Saboo (Ethiopian Airlines), the Supreme Court of India reiterated the consistent view in India that
the doctrine of sovereign immunity in India was not absolute, and that foreign states do not have immunity from
judicial proceedings in cases involving their commercial and trading activities and contractual obligations undertaken
by them in India.

Legal basis

What is the legal basis for the doctrine of sovereign immunity in your state?

The legislative recognition of the doctrine of sovereign immunity in India can be found in the following provisions and
statutes:

 section 86 of the Code of Civil Procedure 1908 (CPC), which provides that no suit may be instituted against
foreign states in India, except with the prior written consent of the government; and

 the Diplomatic Relations (Vienna Convention) Act 1972, which incorporates certain specified immunities
available to diplomatic missions and their members in India pursuant to the Vienna Convention on Diplomatic
Relations, 1961. A few articles of the Convention, including articles 29, 30, 31, 32, 37, 38 and 39, have
been given the force of law in India by extending the scope of sovereign immunity to diplomatic agents,
their family, members of staff and servants.

It is noteworthy that in Mirza Ali Akbar Kasani v United Arab Republic & Anr, a five-judge bench of the Supreme
Court held that section 86(1) CPC modifies the international doctrine of sovereign immunity to a certain extent, and
when a suit is instituted against a foreign state with the consent of the government, it is not open for a foreign state
to rely upon the doctrine of sovereign immunity under international law.

Jurisdictional immunity

Domestic law:

Describe domestic law governing the scope of jurisdictional immunity.

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The domestic law governing jurisdictional immunity of foreign states is prescribed in section 86(1) of the CPC. Section
86(1) provides that ‘no foreign state may be sued in any court otherwise competent to try the suit except with the
consent of the central government [government] certified in writing by a Secretary to that Government’; implying
thereby that there is immunity in the favour of foreign states from the jurisdiction of Indian courts, which survives
unless the government consents to a suit against a foreign state. However, the proviso to section 86(1) exempts
suits by tenants of immovable properties held by foreign states from the requirement of obtaining the government’s
prior consent.

Further, section 86(2) provides that the government shall not consent to a suit against a foreign state unless
certain conditions exist. Per section 86(2), the government may only consent to a suit against a foreign state where
the foreign state:

 has instituted a suit in a court against the person desiring to sue the foreign state;

 by itself or another, trades within the local limits of the jurisdiction of the court;

 is in possession of immovable property situated within those limits and is to be sued with reference to such
property or for money charged thereon; or

 has expressly or impliedly waived the privilege accorded to it.

Exemption of Central Property from State Taxation

The property of Centre is exempted from all taxes imposed by a state or any authority within a state like
municipalities, district boards, panchayats and so on. But, the Parliament is empowered to remove this ban.
The word ‘property’ includes lands, buildings, chattels, shares, debts, everything that has a money value,
and every kind of property movable or immovable and tangible or intangible. Further, the property may be
used for sovereign (like armed forces) or commercial purposes. The corporations or the companies created
by the Central government are not immune from state taxation or local taxation. The reason is that a
corporation or a company is a separate legal entity.

Exemption of State Property or Income from Central Taxation

The property and income of a state is exempted from Central taxation. Such income may be derived from
sovereign functions or commercial functions. But the Centre can tax the commercial operations of a state if
Parliament so provides. However, the Parliament can declare any particular trade or business as incidental
to the ordinary functions of the government and it would then not be taxable. We note here that the property
and income of local authorities situated within a state are not exempted from the Central taxation. Similarly,
the property or income of corporations and companies owned by a state can be taxed by the Centre. The
Supreme Court, in an advisory opinion24 (1963), held that the immunity granted to a state in respect of
Central taxation does not extend to the duties of customs or duties of excise. In other words, the Centre
can impose customs duty on goods imported or exported by a state, or an excise duty on goods produced
or manufactured by a state.

Q. 4 The Law of taxation is levied in conformity with the fundamental rights under -Indian
constitution” Discuss

Taxation is the legal capacity of the sovereignty or one of its governmental agents to exact or impose a
charge upon persons or their property for the support of government and for the payment for any other
public purposes which it may constitutionally carry out. The power of taxation differs from the power of
eminent domain, for under taxation the government is required to make and enforce contribution of money
or property by the citizen as his share of the burden of support of the government. Property taken under
eminent domain is much beyond the owner’s share of the burden of government. Eminent domain takes nit
a share of the public burden, but more than a share.

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A government cannot exist without raising and spending money. Parliament controls public finance which
includes granting of money to the administration for expenses on public services, imposition of taxes and
authorization of loans. This is a very important function of Parliament. Through this means Parliament
exercise control over the executive because whenever Parliament discusses financial matters, government’s
broad policies are invariably brought into focus. The Indian Constitution devises an elaborate machinery for
securing parliamentary control over finances which is based on the following four principles.

The first principle regulates the constitutional relation between the Government and Parliament in matters
of finance. The executive cannot raise money by taxation, borrowing or otherwise, or spend money, without
the authority of Parliament. The second principle regulates the relation between the two Houses of
Parliament in financial matters. The powers of raising money by tax or loan and authorizing expenditure
belongs exclusively to the popular House, viz., Lok Sabha. Rajya Sabha merely assents to it. It cannot
revise, alter or initiate a grant. In financial matters, Rajya Sabha does not have co-ordinate authority with
Lok-Sabha and Rajya Sabha plays only a subsidiary role in this respect. The third principle imposes a
restriction on the power of Parliament to authorize expenditure. Parliament cannot vote money for any
purpose whatsoever except on demand by ministers. The fourth principle imposes a similar restriction on
the power of Parliament to impose taxation. Parliament cannot impose any tax except upon the
recommendation of the Executive.

Constitutional Podium of Taxing Power

The entries in the legislative lists are divided into two groups- one relating to the power to tax and the other
relating to the power of general legislation relating to specified subjects. Taxation is considered as a distinct
matter for purposes of legislative competence. Hence, the power to tax cannot be deducted from a general
legislative Entry as an ancillary power. Thus, the power to legislate on inter-state trade and commerce under
Entry 42 of List I does not include a power to impose tax on sales in the course of such trade and commerce.

There is no Entry as to tax, in the Concurrent List; it only contains an Entry relating to levy fees in respect
of matters specified in List III other than court-fees. In order to determine whether a tax was within the
legislative competence of the legislature which imposed it, it is necessary to determine the nature of the
tax, whether it is a tax on income, property, business or the like so that the Entry under which the legislative
power has been assumed could be ascertained.

The primary guide for this is what is known as the ‘charging section. The identification of the subject-matter
of a tax is only to be found in the charging section, the section which creates the liability to pay the tax as
distinguished from the mode of assessment or machinery by which it is assessed.

Generally speaking, all taxation is imposed on persons, but the nature and amount of liability is determined
either by individual units, as in the case of a poll-tax, or in respect of the tax payers’ interest in property or
in respect of transactions of activities of the tax payers.

Constitutional Limitations Upon The Taxing Power ( FUNDAMENTAL RIGHTS)

Apart from the limitation by the division of the taxing power between the Union and State Legislature by
the relevant Entries in the legislative Lists, the taxing power of either Legislature is particularly subject to
the following limitations imposed by particular provisions of our Constitution: (1) It must not contravene
Art.13. (2) It must not deny equal protection of the laws, must not be discriminatory or arbitrary . (Art.14)
(3) It must not constitute an unreasonable restriction upon the right to business.(19(1)(g)) (4) No tax shall
be levied the proceeds of which are specially appropriated in payment of expenses for the promotion or
maintenance of any particular religion or religious denomination (Art.27). (5) A State Legislature or any
authority within the State cannot tax the property of the Union. (Art.285) (6) The Union cannot tax the
property and income of a State (Art.289). (7) The power of a State to levy tax on sale or purchase of goods
is subject to Art.286. (8) Save in so far as Parliament may, by law, otherwise provide, a State shall not tax
the consumption or sale of electricity in the cases specified in Art.287

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 Explain the term ‘Tax’ and State the different types of taxes .[Short note]

What is Tax ?

A tax is a mandatory fee or financial charge levied by any government on an individual or an organization
to collect revenue for public works providing the best facilities and infrastructure, The collected fund is then
used to fund different public expenditure programs, If one fails to pay the taxes or refuses to contribute
towards it will invite serious implications under the pre-defined law.

Two types of taxes differ:

Direct taxes:

It is the tax which is directly paid by the taxpayer to the government. To estimate the amount to be paid
through direct taxes, you will have to check your wealth or income. The CBDT (Central Board of Direct
Taxes) overlooks India’s direct taxes. A direct tax is not transferred to any other entity or individual other
than the taxpayer on whom it is levied. Types of direct taxes are:

 Income tax:
This tax entails taxing an individual’s income generated through different sources like salary,
investments, property, business, etc. The income tax act describes a tax benefit that you can get
through insurance premium or fixed deposits. They also help in deciding savings from income through
investments and tax slab.

 Corporate tax:
Income tax a company pays from its revenue earned by it is called a corporate tax. Corporate tax has
its own slab for deciding the amount to be paid.

 Perquisite Tax:
Under this tax, any perks or privileges provided to you by your employer, like a car, house, fuel, etc.
are taxed considering how the perks are used. Personal uses of the perk will be taxed, while official
uses are not eligible.

 Securities Transaction tax:

The tax is levied with including a share’s price and tax. It means, every time you buy or sell a share,
you have to make a payment of this tax.

 Capital gains tax:

This tax is payable when you get a significant lump sum of money. They include two types of capital
gains, long-term capital gains and short-term capital gains. The tax applicable for both is different as
short-term gains tax is computed depending on the income bracket.
Indirect taxes:

An indirect tax is applied to the sale and purchase of services or goods. A government levies this tax on
sellers and retailers of various products and services. The seller then shifts the responsibility of the tax
payment on the buyer of the products and services. Hence, the user indirectly pays the tax to the
Government of India.

Types of indirect taxes are:

 Salestax:
A tax levied for the sale of a product is called sales tax. This tax is levied on a product’s seller who then
passes the price to the product’s buyer with the tax included in the product’s price.

 Servicetax:
Like sales tax, this tax is also included in the price of a product sold in the country. It is levied on the services
that a company offers. They are collected depending on the way these services are offered.

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  Exciseduty:
Excise duty is the tax imposed on produced goods or goods in India. It is collected directly from the
manufacturer of the goods. They are also collected from entities that receive the goods and work for the
individuals to ship the products.

 Value Added Tax (VAT):

VAT is levied on different steps that are involved in the distribution of a product. Basically, from the
manufacturer to the end-user, the tax is imposed on the product’s movement in the supply chain.

 Custom Duty:
Customs duty is the charge levied on any product that has been imported from abroad. It is to make sure
the goods which enter the country are taxed and are paid for.

Ever since the inception of GST, many indirect taxes have been clubbed into one indirect tax –
the Goods and Services Tax (GST).

 Goods & Services Tax:

The GST is an indirect tax that has clubbed together many indirect taxes in India like excise duty, VAT,
service tax, etc. This is the tax levied on the supply of services and goods, which are sold for domestic
consumption in India.
GST is considered a multi-stage comprehensive tax which is levied as per the destination on the value
addition. The tax is levied on the consumers buying the goods or services. However, the responsibility of
remitting the tax to the government lies on the seller/provider of the goods and services.

There are three different types of GST in India:

a. CGST - Central Goods and Services Tax

b. SGST - State Goods and Services Tax

c. IGST - Integrated Goods and Services Tax

The CGST and SGST are levied on the intra-state transactions, while the IGST is levied on the
inter-state transactions

Q. 5 Write a note in compensatory Tax [Short note or Long ]

The Government charges tax on various goods and services but it does not mean that it is a restriction on freedom
of trade. In many cases, it is necessary for the States to charge these taxes because they are providing many services
which are facilitating the trade activities.

Illustration

A, a seller of goods, lives in Tamil Nadu and is selling his goods to B who lives in Karnataka. The goods are being
delivered by A through a truck and when the truck reaches Karnataka, the driver is made to pay the toll tax. Here,
A cannot challenge the validity of levying toll tax by the Government of Karnataka on the grounds that it has restricted
the free flow of goods. The tax is charged in return for the maintenance of the roads by which the transportation of
the goods has been made much easier. Therefore, it is not a restriction but instead a facility which is provided by the
State and thus they have the right to charge the toll tax and it is not the violation of Article 301 of the Constitution.

In the above illustration, the tax was charged in exchange for providing services of maintaining roads to ensure
smooth transportation of goods and it is an example of facilitation of trade and not of a direct restriction of it. Similar
example can also be seen by the fact that the driver may stay in a hotel while being in Karnataka and therefore if he
stays in a hotel and a tax is charged for the luxury which he has enjoyed from it, it will not be a restriction on the

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freedom of trade and intercourse but instead such an activity is a charge which has been made for providing the
facility of staying in the State and it has helped in facilitating the trade. So, here in such situations the taxes being
charged are fully justified.

Such taxes which are charged are known as compensatory taxes. For the validity of a compensatory tax, it is
necessary to show the object behind the tax and the relation which such a tax has with the subject and object of it.
Once such a relation or connection is shown then the tax can be validly upheld and it is not important to show the
exact amount of benefit which is provided and the expenditure which has been done for providing such a service.

But if the tax is not in the nature of facilitation of trade and is in reality charged for restricting the trade, then such
a tax cannot be upheld and it will become bound to be struck down by the Courts.

A compensatory tax can be turned as confiscatory which means that it is in violation of the freedom of trade under
Article 301 if any of the following situations arise

1. The amount of tax which is charged is so excessive that it has become a setback in the free flow of goods.

2. The tax which is charged is not in proportion to the cost of the facilities which are provided against it.

3. There are no services which are being provided by the state in exchange for the tax being charged.

4. There is no fixed procedure which has been provided by the state levying the tax as to how are they
assessing and levying the tax.

5. The tax which is charged is discriminating between the goods produced within the State and the goods which
are produced outside it.

Freedom of trade, commerce and intercourse is not absolute

Even though Article 301 provides that trade, commerce and intercourse should be free throughout the territory India,
this freedom is not absolute in nature. It means that certain restrictions can be imposed on this freedom and such
restrictions will no be violative of the provisions under Article 301. These restrictions have been mentioned in Part
XIII of the constitution and even Article 301 provides that this freedom is subjected to the provisions of this part.

Parliament has been provided with the power to impose some restrictions on the free flow of goods under Article 302
of the Indian Constitution and such a power is subject to the provisions of Article 303.

Under Article 302, the Parliament can restrict the freedom of trade between different states, if it is necessary for the
public interest. This restriction can be applied on any State or it may also be placed in any part of the territory of
India.

In the case of Prag Ice & Oil Mills v. Union of India, it was held by the Supreme Court that even though Article 302
does not speak about reasonable restrictions, but still the restrictions which can be imposed under this Article should
have a reasonable nexus with the public interest for which the restriction is placed.

While the Parliament has the power to impose restrictions on the freedom of trade in any State or part of the territory
of India, this power is subjected to the provisions of Article 303 of the Indian Constitution which provides that the
Parliament cannot impose a restriction on any State in favour of another State. It means that no discriminatory
restriction can be made by the Parliament which gives benefit to one State while the other States are excluded from
such benefit.

But clause 2 of Article 303 provides that in case of scarcity in a State, the Parliament can be allowed to impose such
discriminatory restrictions so that the State which is facing the problem of scarcity to overcome it.

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Article 304 of the Indian Constitution provides some powers to the State Legislatures for imposing some restrictions
on the freedom of trade. Under this Article, the legislature of a State can charge tax on the goods which are imported
from other States, if such tax is charged on the similar goods which are produced in that State

Illustration

If the state of Madhya Pradesh charges tax on X goods which are produced in the state itself and the same goods
are imported from Maharashtra, then the State Legislature of Madhya Pradesh can also charge the tax on the
imported goods because they were being charged on the same goods which were being produced in the State of
Madhya Pradesh.

The State Legislature can also impose other reasonable restrictions in public interest, but a bill for the same can be
brought only when the previous sanction of the President is taken.

In the case of State of Karnataka v. Hansa Corporation, it was held that even though under clause b of Article 304,
the previous assent of the President is necessary for bringing a bill for imposing restrictions but in case it cannot be
introduced to the President due to Article 255, then in such cases the Bill may be presented in the State Legislature
and the assent of the President can be taken after the bill is presented.

The relation between Article 301 and 19(1)(g)

There is a complex relationship which exists between Article 301 and 19(1)(g). While both provide the right of trade
and commerce, there have been arguments which state that the rights under Article 301 are for the trade as a whole
whereas, the right under Article 19(1)(g) is provided only to the individual. But this view is wrong and it cannot be
maintained because Article 301 is derived from Section 92 of the Australian Constitution which includes the rights of
the individual as well.

So, the relation between the two cannot be explained, they both are interrelated because, during the proclamation
of emergency, the rights under Article 19 are suspended and in such cases the Courts can look towards the provisions
of Article 301 for finding out if any violation of freedom of trade has taken place or not. So, it can be said that both
these articles are interrelated with each other.

Conclusion

In India, the provisions for the Freedom of Trade, Commerce and Intercourse are provided under Part XIII of the
Indian Constitution. While there is a freedom of trade, such freedom is not absolute in nature and there are certain
restrictions which can be placed on these freedoms. Thus, by these provisions, it is ensured that the freedom of
trade, commerce and intercourse are given Constitutional status which is necessary to ensure that the geographical
barriers and the unreasonable restrictions which are imposed on the free flow of trade can be overcome.

Write a note on the difference between tax evasion and tax avoidance.

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Every assessee wants to escape from paying taxes, which encourages them to use various means to avoid such
payment. And when it’s about savings if taxes, the two most common practices that can be seen all around the world
are tax avoidance and tax evasion. Tax avoidance is an exercise in which the assessee legally tries to defeat the
basic intention of the law, by taking advantage of the shortcomings in the legislature.

On the contrary, tax evasion is a practice of reducing tax liability through illegal means, i.e. by suppressing income
or inflating expenses or by showing lower income. In other words, Tax Avoidance is completely lawful because only
those means are employed which are legal, while Tax Evasion is considered as a crime in the whole world, as it
resorts to various kinds of deliberate manipulations.

Definition of Tax Avoidance

An arrangement made to beat the intent of the law by taking unfair advantage of the shortcomings in the tax rules
is known as Tax Avoidance. It refers to finding out new methods or tools to avoid the payment of taxes which are
within the limits of the law.

This can be done by adjusting the accounts in a manner that it will not violate any tax rules, as well as the tax
incurrence, will also be minimised. Formerly tax avoidance is considered as lawful, but now it comes to the category
of crime in some special cases.

The only purpose of tax avoidance is to postpone or shift or eliminate the tax liability. This can be done investing in
government schemes and offers like the tax credit, tax privileges, deductions, exemptions, etc., which will result in
the reduction in the tax liability without making any offence or breach of law.

Definition of Tax Evasion

An illegal act, made to escape from paying taxes is known as Tax Evasion. Such illegal practices can be deliberate
concealment of income, manipulation in accounts, disclosure of unreal expenses for deductions, showing personal
expenditure as business expenses, overstatement of tax credit or exemptions suppression of profits and capital gains,
etc. This will result in the disclosure of income which is not the actual income earned by the entity.

Tax Evasion is a criminal activity for which the assessee is subject to punishment under the law. It
involves acts like:

 Deliberate misrepresentation of material facts.

 Hiding relevant documents.

 Not maintaining complete records of all the transactions.

 Making false statements.

Key Differences Between Tax Avoidance and Tax Evasion

The following are the major differences between Tax Avoidance and Tax Evasion:

1. A planning made to reduce the tax burden without infringement of the legislature is known as Tax Avoidance.
An unlawful act, done to avoid tax payment is known as Tax Evasion.

2. Tax avoidance refers to hedging of tax, but tax evasion implies the suppression of tax.

3. Tax avoidance is immoral that tends to bend the law without causing any damage to it. Unlike tax evasion,
which is illegal and objectionable both according to law and morality.

4. Tax avoidance aims at minimising the tax burden by applying the script of law. However, tax evasion
minimises the tax liability by exercising unfair means.

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5. Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax Evasion includes the
deliberate concealment of material facts.

6. The arrangement for tax avoidance is made prior to the occurrence of tax liability. Unlike Tax Evasion, where
the arrangements for it, are made after the occurrence of the tax liability.

7. Tax avoidance is completely legal however Tax Evasion is a criminal activity.

8. The result of tax avoidance is the postponement of the tax, whereas the consequence of tax evasion if the
assessee is found guilty of doing so, is either imprisonment or penalty or both.

Comparison Chart

BASIS FOR
TAX AVOIDANCE TAX EVASION
COMPARISON

Meaning Minimization of tax liability, by taking Reducing tax liability by

such means which do not violate the using illegal ways is known
tax rules, is Tax Avoidance. as Tax Evasion.

What is it? Hedging of tax Concealment of tax

Attributes Immoral in nature, which involves Illegal and objectionable,

bending the law without breaking it. both in script and moral.

Concept Taking unfair advantage of the Deliberate manipulations in

shortcomings in the tax laws. accounts resulting in fraud.

Legal implication Use of Justified means Use of such means that are
forbidden by law

Happened when Before the occurrence of tax liability. After tax liability arises.

Type of act Legal Criminal

Consequences Deferment of tax liability Penalty or imprisonment

Objective To reduce tax liability by applying the To reduce tax liability by

script of law. exercising unfair means.

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Conclusion

Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately but what makes the difference
is that the former is justified in the eyes of the law as it does not make any offence or breaks any law. However, it
is biased as the honest taxpayers are not fools, but they can also make arrangements for postponing unnecessary
tax. If we talk about the latter, it is completely unjustified because it is fraudulent activity, because it involves the
acts which are forbidden by the law and hence it is punishable.

Write a note on Centre –State Tax relationships

Indian constitution has divided the taxing powers as well as the spending powers (and responsibilities) between the
Union and the state governments. The subjects on which Union or State or both can levy taxes are defined in the
7th schedule of the constitution. Further, limited financial powers have been given to the local governments also as
per 73rd and 74th amendments of the constitution and enshrined in Part IX and IX-A of the constitution.

Since the taxing abilities of the states are not necessarily commensurate with their spending responsibilities, some
of the centre’s revenues need to be assigned to the state governments. On what basis this assignment should be
made and on what guidelines the government should act – the Constitution provides for the formation of a Finance
Commission (FC) by President of India, every five years, or any such earlier period which the President deems
necessary via Article 280. Based on the report of the Finance Commission, the central taxes are devolved to the state
governments .

Separation of Powers

The Union government is responsible for issues that usually concern the country as a whole, for example national
defence, foreign policy, railways, national highways, shipping, airways, post and telegraphs, foreign trade and
banking. The state governments are responsible for other items including, law and order, agriculture, fisheries, water
supply and irrigation, and public health.

Some items for which responsibility vests in both the Centre and the states include forests, economic and social
planning, education, trade unions and industrial disputes, price control and electricity. Then, there is devolution of
some powers to local governments at the city, town and village levels.

The taxing powers of the central government encompass taxes on income (except agricultural income), excise on
goods produced (other than alcohol), customs duties, and inter-state sale of goods. The state governments are
vested with the power to tax agricultural income, land and buildings, sale of goods (other than inter-state), and
excise on alcohol. Local authorities such as Panchayat and Municipality also have power to levy some minor taxes.
The authority to levy a tax is comes from the Constitution which allocates the power to levy various taxes between
the Centre and the State. An important restriction on this power is Article 265 of the Constitution which states that
“No tax shall be levied or collected except by the authority of law.” This means that no tax can be levied if it is not
backed by a legislation passed by either Parliament or the State Legislature.

Sources of Revenue for Union Government

The sources of Revenue of the Union Government are as follows:

 Income (except tax on agricultural income), Corporation Tax & Service Tax

 Currency, Coinage, legal tender, Foreign Exchange

 Custom duties (except export duties) Excise on tobacco and other goods.

 Estate Duty (except on agricultural goods) (Kindly note that its mentioned in the constitution but Estate
duty was abolished in India in 1985 by Rajiv Gandhi Government)

 Fees related to any matter in Union list except Court Fee

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 Foreign Loans

 Lotteries by Union as well as State Governments.

 Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless Broadcasting, other forms of
communication

 Property of the Union

 Public Debt of the Union

 Railways

 Stamp duty on negotiable instruments such as Bills of Exchange, Cheques, Promissory notes etc.

 Reserve Bank of India

 Capital gains taxes, Taxes on capital value of assets except farm land

 Taxes other than stamp duties on transactions in stock exchanges and future markets

 Taxes on the sale and purchase of newspapers and advertisements published therein.

 Terminal Taxes on Goods and passengers, carried by Railways and sea or air.

 Sources of revenue for State Governments

 The following are sources of revenue for State Governments.

 Taxes and duties related to agricultural lands

 Capitation Taxes Excise on liquors, opium etc.

 Fees on matters related to state list except court fee

 Land Revenue, Land and buildings related taxes

 Rates of Stamp duties in respect of documents other than those specified in the Union List

 Taxes on mineral rights subject to limitations imposed by the parliament related to mineral development

 Taxes on the consumption or sale of electricity

 Sales tax on goods (other than newspapers) for consumption and use within state.

 Taxes on advertisements except newspaper ads.

 Taxes on goods and passengers carried by road or on inland waterways

 Taxes on vehicles, animals and boats, professions, trades, callings, employments, luxuries, including the
taxes on entertainments, amusements, betting and gambling.

 Toll Taxes.

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Certain Taxes levied as Concurrent Powers

Please note that the Union and the State Governments have the concurrent powers to fix the principles on which
taxes on motor vehicles shall be levied and to impose stamp duties on non-judicial stamps. The property of the Union
is exempted from State Taxation; and the property of the states is exempted from the Union Taxation. But the
parliament of India can pass legislation for taxation by Union Government of any business activities / trade of the
state which are not the ordinary functions of the state.

Residuary Power of Taxation

Union Government has exclusive powers to impose taxes which are not specifically mentioned in the state or
concurrent lists. Some taxes imposed using these powers include Gift tax, wealth tax and expenditure tax.

State’s power regarding Sales Tax

The sales tax on consumer goods such as toothpastes, soaps, daily use items, electronic items etc. are imposed,
collected and appropriated by state governments. However, newspapers and newspaper ads are exception to this.
Further, there are four restrictions to this power of the state. These include:

 A state cannot impose sales tax if a good is produced there but is sold outside the state.

 A state cannot impose sales tax if the sale and purchase is taking place for items due for export.

 A state cannot impose tax on interstate trade and commerce of goods

 State cannot impose a tax on a good that has been declared of special importance by parliament.

Other facts about levying and appropriation of Taxes

 Sales tax is imposed, levied, collected, appropriated by states as mentioned above

 Income tax, Corporation Tax, Service tax are levied and collected by Centre but are appropriated by both
states and centres as per distribution formula recommended by Finance Commission. This formula is NOT
binding upon the parliament.

 However states have no share in surcharges, cesses on these taxes.

 Stamp duties on negotiable instruments and excise duties on medicinal and toilet preparations that have
use of alcohol and narcotics are levied by Centre. But these taxes don’t make a part of consolidated fund of
India. They are assigned to respective states only, which appropriate these taxes.

 Sales tax in case of Inter-state trade of goods (except newspapers) is levied and collected by the centre but
such proceeds are assigned to states. (This is known as Central Sales Tax)

Discuss the scope of the total income with reference to residential status of an Assessee

Introduction

Section 6 of the Income Tax Act 1961 talks about the Residential Status. Residential status of a person means that
whether the particular person is entitled to pay the income tax in India or not?

Residential status of a person plays a vital role in the purpose of the levy of income tax because the Income Tax
department takes the tax based on the residential status of the person. If a person is a citizen of India but at the
end of the day, he can be a non-resident for a financial year.

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This can be also a vice versa like a foreigner can be a citizen of that particular country and if he is living in India for
a particular time period and that time period is fulfilling the criteria for the Resident of India then he can be taxable
in India.

While the residential status of the individual, company, a firm is determined in a different way. Each one has a
different time period for the determination of Resident in India.

Why Residential Status is Important?

We are living in such a society where we don’t like the concept of sharing. We only think about the individual while
we should think of society for the large.

That’s why we try all possibilities to not share own hard money to the government. However, it is a very important
duty to pay the tax for the growth of the nation. Because the money which we are paying in the form of tax that is
directly or indirectly connected to our own development.

At the time of filing of tax return, the residential status of the individual is very important. Because the Income Tax
Department calculate tax according to the residential status of the individual.

Residential Status of the individual, company, a firm is necessary because they are commencing their business in
India and for their business, they are using the resources of the particular country and while using the resources
they are earning money. So Residential status of the particular person plays an important role while at the time of
paying taxes.

Burden of Proof

One of the important questions arises that if any dispute arises in a calculation of residential status of the individual,
company or firm then the burden of proof will be on the assessee. This is the question of the fact that assessee is a
resident or non-resident and it is the duty of the assessee to produce all the necessary facts to the Income Tax
department to prove the resident or non-resident.

Classification of Residential Status

As per the depending stay of the individual in India, Income Tax Law has classified the residential status into three
categories.

Residential status of an individual will cover the financial year of an individual and as well as his/her previous years
of stay.

There are the following categories which classified the residential status of an individual.

1. Resident (ROR)

2. Resident but Not Ordinarily Resident (RNOR)

3. Non Resident (NR)

1. Resident and Ordinarily Resident (ROR)

Under Section 6(1) of the Income Tax Act an Individual is said to be resident in India if he fulfils the condition:

If he/she stay in India for a period of 182 days or more in a financial year, or He/ She is in India for a period of 60
days or more in a financial year and If he/she stays in India for a period of 365 days or more during the 4 years
immediately preceding the previous year.

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As per section 6(6) of Income Tax Act, 1961 there are following two conditions when an individual will be treated as
the “Resident and Ordinarily Resident” (ROR in India.

1. If He/ She stays in India for a period of 730 days or more during the 7 years of preceding previous year.

2. If He/ She stays in India for at least 2 out of 10 previous financial years which is preceding the previous
years.

If the individual doesn’t satisfy either of the condition, then he is no eligible to qualify as Resident and Ordinarily
Resident (ROR).

Points which are essential while calculating ROR

 It is not mandatory that assessed should stay at the same place and it is not mandatory that stay should
be a continuous period of time which means it shouldn’t be on a regular basis.

 Territorial of India includes territorial water, continental shelf, and airspace which is up to twelve nautical
miles.

 When any person visits India then their calculation of resident in India will be counted through their physical
presence in India. And these physical presences will be counted on an hourly basis. If any dispute arises
while calculating their physical presence, then the day on which he comes to India and the day on which he
leaves India shall be taken into consideration while calculating the Residential status.

Let’s understand the ROR with an example:

Suppose Mr. Nayar who is a resident of India who went to another country in October 2018 while he had stayed in
India during the financial year (2018-19) is for a period of 250 days which is exceeding the 182 days and his stay in
previous 7 financial years is more than 730 days then he is eligible for paying the tax in India. That’s why the income
of Mr. Nayar will be taxable in nature because he is fulfilling the condition of ROR.
2. Resident but Not Ordinarily Resident (RNOR)

An individual will be treated as RNOR when an assessee fulfill the following basic conditions:

In a financial year if an individual stays in India for a period of 182 days or more; Or He/ she stays in India for a
period of 60 days in a financial year and 365 days or more during the 4 previous financial years.

However, an Assesse will be treated as a Resident but Not Ordinarily Resident (RNOR) if they satisfy one of the basic
condition which is as follows:

1. If He/ She stays in India for a period of 730 days or more during the 7 preceding financial year or;

2. If He/ She was a resident of India for at least 2 out of 10 in the previous financial year.

Let’s understand Resident but Not Ordinarily Resident with an example:

Suppose Mr. Nayar who is in the Financial year 2017-18 stayed in India for a period pf 192 days so he was fulfilling
the condition No 1 but He didn’t stay in India for more than 730 days during the period of 1st April 2010 to 31st March
2011 which was immediately preceding the Financial Year 2017-18. So in this situation, Mr. Nayar will be qualified
for a Resident but Not Ordinarily Resident (RNOR).

3. Non – Resident (NR)

An individual will be qualified for Non Resident (NR) if He/ She satisfies the following conditions which are as follows:

1. In a financial year if an Individual stay in India for less than 181 days and

2. In a financial year If an Individual stay in India for not more than 60 days

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 3. If an Individual stay in India which exceed 60 days in a financial year but doesn’t exceed the 365 days or
more during the 4 previous financial years.

What are the steps required to Calculate the Residential Status of an Individual?

 First, we check whether the Individual is falling under the category of exceptions for the basic conditions or
not?

 After that, we check that whether they are satisfying the basic condition of 182 days of more or not? if they
are satisfying then he will be treated as a resident otherwise he will be non–resident.

If an Individual is not fulfilling the above condition, then we apply both the condition and if he satisfies any of the
basic condition takes then he is said to be a Resident.

Conclusion

Origin, Nationality, place of birth, domicile doesn’t play a vital role in the calculation of Income Tax. If a person who
is an Indian citizen can be non- resident and the person who is not a citizen of India and if they are residing in India,
and if they are fulfilling the criteria of Resident then as an eye of Income Tax they can be resident of India and they
will be taxable in nature.

A resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned
outside India.

While calculating the residential status of an individual we check the physical stay in India and the physical stay of
an individual is checked by their physical stay of the previous years. However, the residential status of an individual
is change year to year.

Like a person who can be resident for this year they can’t be resident for the next year if they are not fulfilling the
resident criteria. That’s why once a taxpayer can’t be a taxpayer for next year.

UNIT-2 – Income Tax[ Direct Tax Regime]

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Q. 1 Income of the previous year us chargeable to tax in the immediate following assessment year and
state the exception if any

Everyone is aware that income is earned in Year 1 and assessed to tax only after the completion of Year 1 i.e. in the
next Year (in Year 2). That’s why Income Tax Department uses the term Assessment Year almost everywhere. But
few cases are exceptions to this basic rule of Income Tax. They are earned and assessed to tax in the same year.
Such concept is introduced to protect the interest of revenue. It appeared to the Government that there were a few
instances where either the assessee was not available in the assessment year or there was no assessee left to be
assessed.

Five such cases are listed below:

1. Section 172 : Shipping business income of non-resident ship-owners

2. Section 174: In cases of persons leaving India

3. Section 174A: Assessment of any association of persons, body of individuals or Artificial Juridical person formed
or established only for a limited period

4. 175: In case of persons who are likely to transfer their assets to avoid tax

5. Section 176: In case of discontinued business

Now let’s seen in Detail:

1. Income from shipping business of non-residents (Section 172)

If following conditions are satisfied, then income of a non-resident is charged to tax in previous year itself

 The assessee is a non-resident.

 He owns a ship or a ship is chartered by him

 The ship carries passengers, livestock, mail or goods shipped at a port in India.

In the above case, 7.5% of the amount paid or payable on account of such carriage to the non-resident shall be
deemed to be income accruing in India to the non-resident and tax on such income is payable at the rates applicable
to a foreign company.

2. Income of a person leaving India [Section 174]

If following conditions are satisfied, then income of a person leaving India is charged to tax in the previous year
itself:

 It appears to the Assessing Officer that any individual may leave India during the current assessment year
or shortly after its expiry.

 Such a person has no present intention of returning to India.

In above cases, the total income of such an individual upto the probable date of his departure from India shall be
charged to tax in that assessment year.

Example

Mr. Francis is a foreign citizen. He is residing in India since January, 2000. At the time of making his assessment for
the assessment year 2012-13 (in January, 2013), the Assessing Officer came to know that Mr. Francis is going to
leave India on 8-4-2013. In this case, at the time of completing assessment for the previous year 2011-12 (i.e.,
assessment year 2012-13), the Assessing Officer will make following three assessments :

21
  The assessment of the income of the previous year 2011-12.

 The assessment of the income of the previous year 2012-13.

 The assessment of the income of the period 1-4-2013 to 8-4-2013.

3. Income of bodies formed for short duration [Section 174A]

If following conditions are satisfied, then income of bodies formed for short duration is charged to tax in the previous
year itself:

 It appears to the Assessing Officer that any association of persons or a body of individuals or an artificial
juridical person is, formed or established or incorporated for a particular event or purpose.

 Above entity is likely to be dissolved in the assessment year in which such entity was formed or established
or incorporated or immediately after such assessment year.

In above cases the total income of such an entity for the period from the expiry of the previous year f or that
assessment year up to the date of its dissolution shall be chargeable to tax in that assessment year.

4. Income of a person likely to transfer property to avoid tax [Section 175]

If following conditions are satisfied, then income of a person transferring his assets is charged to tax in the previous
year itself:

 It appears to the Assessing Officer during any current assessment year that any person is likely to charge,
sell, transfer, dispose of or otherwise part with any of his assets.

 The intention of such sale, transfer, etc, is with a view to avoid payment of any liability under the provisions
of the Act.

In above cases, the total income of such person for the period from the expiry of the previous year for that assessment
year to the date when the Assessing Officer commences proceedings under section 175 shall be chargeable to tax in
that assessment year.

5. Income of discontinued business or profession [Section 176]

In addition to above instances, income of a discontinued business or profession can be charged to tax in the previous
year itself. In other words, if a business or profession is discontinued during a year, then the income from the first
day of the assessment year till the date of discontinuation can be charged to tax by the Assessing Officer in the
assessment year in which the business is discontinued or in the immediately following assessment year.
General comment

It should be noted that in cases given in (1), (2), (4) and (5) it is mandatory to tax the income in the previous year
itself. However, in case (3), i.e., income of discontinued business/profession income can be charged to tax in the
previous year itself or in the assessment year (at the discretion of the Assessing Officer).

Q.2 Define Salary. Discuss the rules of Income chargeable under the heads of salaries.

“Salary” includes:-

22
i. wages, fees, commissions, perquisites, profits in lieu of, or, in addition to salary, advance of salary, annuity
or pension, gratuity, payments in respect of encashment of leave etc.

ii. the portion of the annual accretion to the balance at the credit of the employee participating in a recognized
provident fund as consists of {Rule 6 of Part A of the Fourth Schedule of the Act}:

a) contributions made by the employer to the account of the employee in a recognized provident fund in
excess of 12% of the salary of the employee, and

b) interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such
rate as may be fixed by Central Government. [w.e.f. 01-09-2010 rate is fixed at 9.5% – Notification No SO1046(E)
dated 13-05-2011]

iii. the contribution made by the Central Government or any other employer to the account of the employee
under the New Pension Scheme as notified vide Notification F.N. 5/7/2003- ECB&PR dated 22.12.2003 (enclosed as
Annexure VII) referred to in section 80CCD (para 5.5.3 of this Circular).

INCOME CHARGEABLE UNDER THE HEAD “SALARIES”:

(1) The following income shall be chargeable to income-tax under the head “Salaries” :

(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or
not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer
though not due or before it became due to him.

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former
employer, if not charged to income-tax for any earlier previous year.

(2) For the removal of doubts, it is clarified that where any salary paid in advance is included in the total
income of any person for any previous year it shall not be included again in the total income of the person
when the salary becomes due.

Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a
firm from the firm shall not be regarded as “Salary”

Taxability of Various Salary Components

Salary Component Taxability under Income Tax Act

Basic salary Taxable

Dearness allowance Taxable

Advance salary Taxable in the year received

Arrears of salary Taxable in the year received, if not taxed on due basis

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 Leave encashment at time of Taxable – Exempt in some scenarios
retirement

Salary in lieu of notice Taxable on receipt

Salary to partner Taxable under the head of “Profits and gains of business or
profession”

Fees and commission Taxable

Bonus Taxable

Gratuity Taxable – Exempt in some scenarios

Pension Taxable – Exempt in some scenarios

Annuity from Employer Taxable

Retrenchment compensation Exempt from tax to a certain extent

Remuneration for extra work Taxable

Salary to Foreign Citizens Taxable – Exempt in some scenarios

Q. 3 Write a note on Agricultural Income. [Long/short note]

What is Agricultural Income?

In India, agricultural income refers to income earned or revenue derived from sources that include farming land,
buildings on or identified with an agricultural land and commercial produce from a horticultural land. Agricultural
income is defined under section 2(1A) of the Income Tax Act, 1961. According to this Section, agricultural income
generally means: (a) Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural
produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house
subject to satisfaction of certain conditions specified in this regard in section 2(1A). (d) Any income derived from
saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Examples of Agricultural Income

The following are some of the examples of agricultural income:

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  Income derived from sale of replanted trees.

 Income from sale of seeds.

 Rent received for agricultural land.

 Income from growing flowers and creepers.

 Profits received from a partner from a firm engaged in agricultural produce or activities.

 Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

Examples of Non-Agricultural Income

The following are some of the examples of non-agricultural income:

 Income from poultry farming.

 Income from bee hiving.

 Any dividend that an organization pays from its agriculture income.

 Income from the sale of spontaneously grown trees.

 Income from dairy farming.

 Income from salt produced after the land has flooded with sea water.

 Purchase of standing crop.

 Royalty income from mines.

 Income from butter and cheese making.

 Receipts from TV serial shooting in farm house.

Is Agricultural Income Taxable?

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The central
government cannot levy tax on the agricultural income received. However, agricultural income is considered for rate
purposes while assessing the income tax liability if the following two conditions are met:

 Net agricultural income is greater than Rs. 5,000/- for previous year.

 Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs. 2,50,000 for
individuals below 60 years of age and Rs. 3,00,000 for individuals above 60 years of age).

If these two conditions are met, tax liability shall be computed in the following manner:

Step 1: Let us regard agricultural income as X and other income as Y Tax computed on X+Y is B1

Step 2: Let us regard basic exemption slab for income tax payment as A Tax computed on A+X is B2

Step 3: The actual income tax liability shall be B1-B2

25
Note: If the individual’s aggregate agricultural income is up to Rs. 5,000, the individual will have to disclose the
agricultural income in the income tax return (ITR). In case the agricultural income crosses Rs. 5,000, the individual
will have to disclose the agricultural income in ITR 2.

Section 54B of the Income Tax Act, 1961

Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their agricultural land and use the
sale proceeds to acquire another agricultural land. To claim tax benefit under Section 54B of the Income Tax Act, the
following conditions will have to be satisfied:

 This benefit can only be claimed by an individual or a HUF

 The agricultural land should be used by the individual or his or her parents for agricultural purpose for at
least two years immediately preceding the date on which the exchange of land occurred. In case of HUF,
the land should be used by any member of HUF.

 The taxpayer should purchase another agricultural land within two years from the date of selling the old
land. In case it is an incident of compulsory acquisition, the period of acquiring new agricultural land will be
assessed from the date of receipt of compensation. It must be noted that under Section 10(37), capital gain
shall not be chargeable to tax if agricultural land is compulsorily acquired under any law, and the
consideration of which is approved by the central government or banking regulator and received on or after
01-04-2004.

[Link]

Q.4 Explain the income assessable as income from business or profession.

What is Income from Other Sources?

The Income Tax Department classifies income into five categories for streamlining the process of income tax
reporting. They are:

 Income from Salary

 Income from House Property

 Income from Capital Gains/Loss

 Income from Business and Profession

 Income from Other Sources

‘Income from Other Sources’ can be defined as income that is not included in any of the other listed categories.
Besides, there are certain other incomes that are always taxed under this category.

Introduction

The Income Tax Act, 1961 (hereinafter, Act), places the income earned from business and profession under the head
of “Profits and Gains from Business and Profession”. The income categorised under this head includes the profits
earned from said business or profession, along with the compensations and incentives directly connected to the
business of professional activity.

However, running a business or being a professional also calls for incurring certain expenditure, such as rent for an
office, repairs and maintenance of machinery, expenditure on research and development, and so on. Such expenses
of business and profession are deducted from the profits earned in order to arrive at the taxable income. This is done

26
so that only the true income earned from a business of profession is taxed, without taxing the expenditures involved
in running said business or profession.

Types of business expenses

Business expenses are those which are incurred in running the day to day business of profession.[1] Such business
expenses can take the nature of capital expenditure or revenue expenditure.

 Capital Expenditure: Capital expenditures are those expenditures which have an effect on the long-term
assets or liabilities, or when the benefit of such an expenditure is utilised over a period of more than one
year. Examples of such expenditure include the purchase of machinery for a factory, or purchasing an office
space by a law firm.[2]

 Revenue Expenditure: Revenue Expenditures are those expenditures which a business or a professional
incurs in the day to day running of the business. These expenditures do not have a material effect on the
long-term assets or liabilities of a firm. Examples of such expenditures include the expense of purchasing
raw materials, payment of salary, and so on. These expenditures may also be referred to as operating
expenditures, however, this term has a narrower scope and includes only those expenses which are directly
connected to the main business or professional activity.[3]

Deductions under the Income Tax Act

Section 29 of the Act states that the profits and gains from business and profession must be calculated according to
sections 30 to 43D of the Act. The admissible deductions are laid down under sections 30 to 37 of the Act. The
general rule that governs whether an expense is admissible as a deduction or not is that it should be connected to
the business or professional activity in lieu of which such deduction is claimed. The deductions admissible under the
Act are as follows:

 Section 30 – Rent, rates, insurance, repairs, etc. for building: These expenses are allowed as
deductions only to the extent that they are used for business or professional purposes. For example, if a
person rents a 2-storey building, and uses one floor to carry out his business and one floor for residential
purposes, then only the rent for the one floor being used to carry on the business will be allowable as a
deduction.

 Section 31 – Insurance/Repairs of Plant, Machinery and/ or furniture: The main thing to be kept in
mind, apart from the fact that the expenditure must be directly related to the business activity, is that such
an expenditure must not be of a capital nature. This is because capital expenditures may be construed as
being utilized to enhance operations to increase income, rather than enable the day to day running of
operations. For example, if a machine is broken, but instead of just being repaired, a few parts are upgraded
that will increase production capacity, then a deduction will be allowed only to the extent necessary for
repairs. The costs of upgrade will not be allowed as a deduction.

 Section 32 – Depreciation: When an asset is purchased, it usually has a life of more than one year, during
which its benefit is derived by a business or profession. Keeping this in mind, the entire cost of such an
asset is not recognized all at once, but is spread out over the years during which such asset is put to use.
This method of recognizing the cost of an asset over a number of years is called depreciation. This is allowed
as a deductible expense under section 32 of the Act and is mandatory to be claimed. Section 32 also
prescribes certain conditions which have to be fulfilled in order to claim depreciation as a deduction, along
with the applicable methods of calculating such depreciation.

 Section 33 – Specific Deductions: Section 33 of the Act provides for certain deductions that are only
available to entities which carry on certain business specified in the Act. These businesses include those of
tea, coffee, rubber, manufacturing of iron and steel, fertilisers, cement, petroleum, and so on.

 Section 35 – Deductibility of Expenditure on Scientific Research: In order to encourage scientific

research, certain incentives are provided to businesses by allowing a deduction of 100-150% of the expenses

27
 incurred in such scientific research. The kinds of research for which such deduction may be allowed are
notified by the Government under the various sub-sections of section 35.

 Section 35ABB – Expenditure on Obtaining Telecom Licence/Spectrum: To be amortised over the

number of years for which the licence is obtained.

 Section 35AD – Deduction for Investment in Specified Businesses: 100% deduction is allowed for
investment in certain businesses, like warehousing, hotels, hospitals, slum redevelopment, and so on.

 Expenditure on Development Programmes: Deduction is allowed for certain expenditure incurred in

rural, skill and agricultural development programmes under sections 35CCA-CCD.

 Section 35D – Amortisation of Preliminary Expenses – Preliminary expenses incurred in setting up of

a new company or extension of an existing company are allowed to be amortised over a period of 5 years.

 Section 35DDA – Expenditure on Voluntary Retirement Scheme: Payments towards VRS are allowed
over a period of 5 years.

Deductions under Section 36

Section 36 provides a list of certain business expenses, which are allowed as deductions from income earned under
the head of PGBP (Profits and Gains from Business and Profession).

This section covers the following allows deductions for the following businesses:

 Insurance premium paid on stock, cattle, employee healthcare, and payments towards keyman insurance
policies.

 Bonus and commission paid to employees.

 Interest paid on debt capital.

 Employer’s contribution to recognised provident/superannuation funds, pension funds and gratuity funds.

 Animals, when not used as stock, can be deducted as expenses when they die to reach the end of their
useful life, by subtracting the sale price of the animal from the cost of buying it.

 Bad debts, which are written off, can be claimed as expenses, only if they are incidental to the business. No
deduction is allowed on a provision created for writing off bad debts.

Apart from the above, the section also provides for other expenses, such as the payment of Securities/Cash
Transaction Tax, Expenses to promote family planning, buying sugarcane, etc. to be deducted from income.

Deductions allowed to start-ups

The Government has provided various tax incentives to start-ups in order to encourage entrepreneurship and build
a stronger economy in India. It must however, be kept in mind that these incentives can be availed only if the start-
up fulfils the criteria laid down by the Department for Promotion of Industry and Internal Trade (DPIIT).

Deductions allowed under the Income Tax Act

28
  Exemption from Angel Tax

Section 56(2)(viib) of the Act provides that the income from shares issued at a premium by a start-up to a Venture
Capital Fund/Company shall not be treated as “income from other sources’, as is done for any other enterprise.

 Beneficial Deduction of Profits

Section 80-IAC of the Act allows an exemption of 100% profits to an eligible start-up for any 3 consecutive years out
of the first 7 years from its date of incorporation.

 Exemption to Shareholders

Section 54B of the Act exempts shareholders who invest in an eligible start-up from long term capital gains arising
out of transfer of residential property.

Computation of business income on an estimated basis

Sections 44AD, 44ADA and 44AE of the Act are special provisions, enabling businesspeople and professionals to
compute business income on an estimated basis.

Section 44AD is applicable to a resident individual, HUF or partnership firm, whose annual turnover does not
exceed INR 2 crores. In this case, business income is taken as 8% of the annual turnover. The section also provides
for certain businesses and professions which cannot avail such benefits. No further deduction is allowed in case this
scheme is opted for.

Section 44ADA is applicable to professionals, as specified u/s 44AA(1), whose gross receipts do not exceed
INR 50 lakhs. The professional income, in such a case, is taken as 50% of the gross receipts. No further deduction
is allowed in case this scheme is opted for.

Section 44AE specifies the computation of business income for those engaged in the business of plying
leasing or hiring trucks. Profits and gains for a heavy goods vehicle are taken as INR 1000 per vehicle, while they
are INR 7500 for other vehicles. No further deduction is allowed in case this scheme is opted for.

Conclusion

Adam Smith laid down the 4 canons of taxation, which every country aims to follow. Of these canons, the ones that
stand out most in the context of computing PGBP are those of Equity and Economy.

The canon of Equity states that a person must pay tax only according to his abilities and not more. The canon
of Economy states that the Government must endeavour to keep as little out of the pockets of the people as
possible.[4]

The provisions for computing PGBP fulfil these canons, as taxing businesses solely on the basis of their income is
incorrect. 2 businesses may have the same turnover, but may have hugely different profiles of business expenditure.
Thus, it is important to take into account the various expenses incurred in carrying out the businesses and deducting
those for the purpose of taxation.

Q. 5 Write a note on recovery of Income Tax

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The word has its many meaning but the one we’re looking for is .i.e. recovery of income tax. In history, these
conditions did not exist as money was taxed on other factors. More property a person owns, more tax they paid. The
tax rates tend to incline during wars.

Schedule two is all about the modes through which recovery of tax can be done from defaulters. It tells about the
procedure to be followed when recovering tax from the defaulter and it is to be read with section 222 and 276,
which is further divided into four parts: –

1. Part I – General Provisions

2. Part II -Attachment and Sale of Movable Property

3. Part III -Attachment and Sale of Immovable Property

4. Part IV – Appointment of Receiver

5. Part V – Arrest and Detention of the Defaulter

6. Part VI – Miscellaneous

Under section 222 of the Income Tax Act states that in the situation of a defaulter, TRO (tax Recovery Officer) will
make a statement with his signature stating all amount of arrears in due. Such a statement is to be called ‘Certificate’
in schedule two. This certificate will be used to recover tax from the defaulter. Section 222 also talks about the
modes of recovery from the assessee that are very well elaborated in Schedule two of income Tax Act as procedure
as in when to act further in recovering the income tax.

Rule 4 says about ‘Modes of Recovery’ of Income-tax, it specifies if the amount mentioned in the notice is not paid
within the specified time or whatever time TRO may grant under his discretion. Then the Tax Recovery Officer shall
proceed to recover the amount by any of the methods mentioned below: –

 By attachment & sale of the defaulter’s movable/ immovable property;

 By arrest or detention of defaulter;

 By appointing a receiver for the management

Attachment & sale of the defaulter’s movable/immovable property

 Once the certificate is passed under section 222 of Income Tax Act anyone who tries to conceal, remove,
deliver or transfer to prevent recovery of tax will be punishable with a term which might extend to 2-year
punishment and fine provided under section 276. Any movable or immovable property transferred to his
minor child or to his son’s minor child even after attainment will be adequate for consideration as assessee’s
property. Within 15 days (under pa period defaulter has to pay the amount in the certificate and if the Tax
Recovery Officer believes that defaulter is likely to conceal, dispose or remove his property. Action can be
taken even before the expiry of 15 days.

 In D.V Sathyanaeayana & others vs. Tax Recovery officer & others ILR 1992 KAR 1224 In the case, writ
petition was filed after the petitioner already gave an application to TRO under Rule but the request was
rejected for setting aside of sale. Then he appealed to The Commissioner under Rule 86 later it was held by
the commissioner that petitioners contravened with the Rule 48 and hence were not eligible for any relief
under Rule 61 of the Second Schedule to the Act. Both time requests was denied on the basis that the
petitioner is not ‘the person whose interest is affected by the sale’. Relying on the following:

 Chronology of the issuance of notices to the defaulter before the agreement of sale between petitioner and
defaulter as a speculative remedy to set the sale aside u/Rule 61.

30
  Under Rule 2 agreement of sale between defaulter and petitioner was void and had no locus standi for filing
of any application under Rule 61.

 Rule 16 petitioner from entering in an agreement for sale of property with the defaulter.

 Rule 16 also prohibit defaulter to create any kind of claim such as lease, charge, etc. Further sub-rule (2)
of Rule 16 says that any transfer of property which is attached shall be void for all claims under the
attachment.

 Rule 48 prohibits defaulter from transferring/charging the property and to receive benefit from such
transfer/charge.

 Rule 16 r/w s. 54 TP Act states only contract by itself doesn’t create any interest in the property.

 It was held that petitioner did not have any locus standi and they can’t challenge the sale on behalf of the
agreement of sale with no interest to come under the meaning of ‘person whose interest is affected under
Rule 61, the writ petition was dismissed.

Appointing a receiver for the management

 Where property of defaulter consists of business TRO appoints a receiver to manage the business under
Rule 69. A copy of the order of attachment is to be given to defaulter and another copy to be fixed at
premises and on the notice board of TRO. In case of immovable property, TRO shall appoint a receiver to
manage the property instead of directing a sale. The management and attachment will be withdrawn at the
direction of TRO at any time or when the arrears have been paid out.

Arrest or detention of defaulter

 Rule 73 Specifies Tax Recovery officer can issue an arrest warrant for defaulter other than in case of minor,
unsound mind or women (under Rule 81), where appearance is not made in obedience to the notice. Such
warrant of arrest issued by a TRO may also be executed by any other TRO in whose jurisdiction defaulter is
found in. In furtherance of warrant, defaulter should be bought before TRO within 24 hours of his arrest. If
defaulter pays the amount described in warrant and cost of arrest, the Tax Recovery Officer should release
him at once.

Rule 77 says that If a person in civil prison can be detained up to 6 months if the amount in certificate
exceeds two hundred and fifty rupees, in other cases 6 weeks. Any person in civil prison detained for a
period of six months on his discharge shall not be liable to be rearrested but will not be discharged from his
liability. However, an appeal can be filed against the order of TRO before Principal chief commissioner or
chief commissioner, Principal commissioner or commissioner within 30 days and if the decision of any appeal
is pending then execution of the certificate may be stayed.

What is Order 21 of CPC?

When a court of Law passes a decree in favour of a person, to get the decree satisfied the Code provides a
fair procedure to be followed. So, in order to gain something out of litigation decided in favour of litigant
due execution of a decree is necessary[4]. There are different modes of Execution provided under section
51 of the CPC provided below:

1. By delivery of the property;

2. By attachment and sale or no attachment and sale of property;

3. By arrest and detention;

4. By appointing a receiver; or

31
 5. Any other way as the nature of relief given may require.

Sale of the Property

Any court who is executing a decree will be executed by attachment and sale or sale without attachment of
any property. Section 65 to 73 and Rules 64 to 94 of Order 21[5] deals with sale of property
movable/immovable.

Attachment of Property

Sections 60 to 64 and Rules 41 to 57 of Order 21 deals with attachment of property. In code u/s 60 it tells
about the properties liable and not liable to be attached and sold in execution of a decree. Under section 63
tells the procedure where the property is attached in execution of decrees in different courts. The code u/s
64 says that a private alienation of property is void after attachment.

Arrest and Detention

Under section 55 to 59 of code and rules 37 to 40 deals with the arrest and detention. The judgement debtor
can be arrested and as soon as possible should be brought up to court u/s 55. He shall be detained in the
civil prison. Rule 37 of order 21 says firstly an issue of calling upon the judgement-debtor is made to appear
if the appearance by judgement debtor is not made obediently after the notice of the court, an issue of an
arrest warrant is made.

Conclusion

Schedule two of the Income Tax Act is elaborative provision for the Modes of Recovery of tax. Whenever
there is a defaulter found he is sent notice u/s 222 known as a certificate for recovery of tax. In it specifies
if the amount mentioned in the notice is not paid within the specified time or whatever time TRO may grant
under his discretion. Then Tax Recovery Officer shall proceed to recover the amount by any of the method,
by attachment & sale of the defaulter’s movable/ immovable property; By arrest or detention of defaulter;
By appointing a receiver for the management.

Whereas Order 21 of CPC is elaborated provision for the execution of decrees also known as execution
proceeding, it gives out effective remedies to the decree-holder and judgment-debtors and to third parties
involved in the suit. It is done after getting a decree from the court of Law. Execution of decrees by the
orders passed by the court. For enabling decree-holder to gain the benefits from the decree. Execution is
complete when the decree-holder receives money or any other thing mentioned in the judgment/order/
decree.

Q.6 Explain the factors that are to be included for income assessing the taxable income from House
Property

MEANING OF INCOME FROM HOUSE PROPERTY

This is the only head where Income is taxed on Notional Basis. The taxability may not necessarily be of actual rent
or income received but the potential income, which the property is capable of yielding. Accordingly, if a person
owns a property which is lying vacant, notional income with respect to such property may be liable to tax even
though the owner may not have received any income from such property.

BASIS OF CHARGE:

For an Income to be assessed under this head following condition need to be fulfilled:

A. The property should consist of any Buildings or any land attached to such building may be in the form
of roads, garden, garage, cattle shed etc.

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B. The assessee should be owner / deemed owner of the property; wherein Deemed owner includes the
following:

1. Transfer of Property by an Individual to his/ her Spouse/ Minor child without adequate monetary
consideration.

2. Holder of an indivisible estate shall be the owner of properties in that estate.

3. Property held by a member of Co-operative society/ Company/ Association of Persons.

4. Person who has acquired a property under a Power of Attorney Transaction.

5. Person who has acquired a property under a Lease of 12 years or more, (excluding any rights by way of a
lease from month to month or for a period not exceeding one year).

C. The Property is not used for his Business/ Profession the profits whereof are chargeable to Income
Tax.

PROPERTIES CHARGEABLE TO TAX:

 Rental income from letting out of residential and commercial buildings is covered under this head of
income.

 Letting out of buildings or land attached thereto covered is taxable under this head; if only land attached
to a building is let out then chargeable under Income from Other Sources else under Business Income if it
is a regular business of letting out.

 Taxability also depends on letting out of equipments along with the House Property, dealt below under
Composite Rent.

COMPOSITE RENT

Situation Description

Where Composite rent includes Rent on building & charges for other Supplementary Services,
e.g, Gas/ Electricity/Lift service etc.

A
 The value of such services if, should be determined and the Building rent will be
taxed under House property & services will be taxed under Other Sources or
Business Income if letting out is regular business.

Where Composite rent includes Rent on building and other assets, e.g., Furniture, Equipments
& are Inseparable:
B
 Total rent received including for assets is taxed under Other Sources or as Business
income.

Where Composite rent includes Rent on building and other assets, e.g., Furniture, Equipments
& are Separable:

C
 Rent for building is taxed under House Property and for Assets under House property
& services will be taxed under Other Sources or Business Income if letting out is
regular business.

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HOW COMPUTATION IS MADE?

Particulars Amt (Rs.)

Gross Annual Value (G.A.V) xxx

Less: Municipal Taxes xxx

Net Annual Value xxx

Less: Deduction under Section 24 :

(a) Standard deduction xxx

(b) Interest on borrowed capital xxx

Income from House Property xxx

Municipal Taxes levied by Local Authorities on House Property are allowed on PAYMENT basis only if they paid by
the owner only, not by the tenant in any case.

GROSS ANNUAL VALUE

1) Gross Annual Value

Computation I: Calculation of Reasonable expected rent of the property, which equals Municipal value or fair rent
whichever is higher, subject to limit of Standard rent as per Rent Control Act.

Computation II: Calculation of Actual Rent received or receivable after deducting Unrealized Rent & Rent of the
period for which Property remained vacant.

Computation III: This step becomes applicable only on satisfaction of following conditions:

 The property is vacant for any part in the previous year.

 Actual Rent received/ receivable as calculated in Step 2 is lower than the Reasonable expected rent.

 Such lowering of rent receivable compared to reasonable expected rent is only because of property
remaining vacant during the year.

The above computations give rise to Four situations summarized below:

Situation Gross Annual Value (G.A.V)

I. If Computation III does not become Higher of the amount amongst Computation I or
applicable in case of no loss on vacancy Computation II equals G.A.V

34
 II. Rent calculated under Step II is lower
Step II Calculation, i.e., Rent received/ receivable
than Reasonable expected rent only
equals G.A.V
because of VACANCY

III. Rent calculated under Step II is lower

than Reasonable expected rent partly Reasonable Expected Rent minus loss due to
because of VACANCY & partly because of vacancy equals G.A.V
OTHER FACTORS

IV. Rent calculated under Step II is lower

Step II & Step III both become not Applicable and
than Reasonable expected rent only
hence Rent calculated under Step I equals G.A.V
because of OTHER FACTORS

ILLUSTRATION FOR GROSS ANNUAL VALUE

ILLUSTRATION:

Determine the Gross Annual Value of the following properties (Property A,B,C,D and E) owned by Mr. A
for the Assessment Year 2008-09

Click here to refer the provisions of the Income Tax Act relating to determination of Gross Annual Value (GAV) for
A.Y. 2008-09

Case I

IF THE PROPERTY IS LET OUT THROUGHOUT THE PREVIOUS YEAR WITHOUT SUFFERING ANY LOSS ON
ACCOUNT OF UNREALIZED RENT & PROPERTY REMAINING VACANT.

(Rs. in Thousands)

PROPERTY
Particulars
A B C D E

Municipal Value (1) 160 160 160 160 160

Fair Rent (2) 175 200 170 150 195

Standard Rent under the Rent Control Act (3) 165 190 180 180 185

Actual Rent Receivable 170 180 200 180 190

Actual Rent Received* (4) 170 180 200 180 190

Period during which the Property remains Vacant Nil Nil Nil Nil Nil

* Assume none of the properties suffer loss on account of unrealized rent.

Solution Computation of Gross Annual Value (GAV)

(Rs. in Thousands)

35
 PROPERTY
Particulars
A B C D E

Computation I: Reasonable Expected Rent, i.e., (1) or (2)

165 190 170 160 185
whichever is higher subject to limit of (3)

Computation II: Actual Rent received after deduction of

170 180 200 180 190
unrealized rent or vacancy loss (4)

Computation III: Not Applicable since house does not

NA NA NA NA NA
remain vacant in any part of the year.

Therefore, Gross Annual Value (GAV) equals Higher of

170 190 200 180 190
Computation I or II.

NOTE:

 In any case either Computation II or Computation III will be applicable; both cannot be applied at the
same time.

Case II

IF THE PROPERTY IS LET OUT THROUGHOUT THE PREVIOUS YEAR ALONG WITH LOSS BEING SUFFERED
ON ACCOUNT OF UNREALIZED RENT.

(Rs. in Thousands)

PROPERTY
Particulars
A B C D E

Municipal Value (1) 160 160 160 160 160

Fair Rent (2) 175 200 170 150 195

Standard Rent under the Rent Control Act (3) 165 190 180 180 185

Actual Rent Receivable (4) 170 180 200 180 190

Unrealized Rent (5) 20 30 10 15 Nil

Actual Rent Received (6)= (4) - (5) 150 150 190 165 190

Period during which the Property remains Vacant Nil Nil Nil Nil Nil

Solution Computation of Gross Annual Value (GAV)

(Rs. in Thousands)

Particulars PROPERTY

36
 A B C D E

Computation I: Reasonable Expected Rent, i.e., (1) or (2)

165 190 170 160 185
whichever is higher subject to limit of (3)

Computation II: Actual Rent received after deduction of

150 150 190 165 190
unrealized rent or vacancy loss (6)

Computation III: Not Applicable since house does not

NA NA NA NA NA
remain vacant in any part of the year.

Therefore, Gross Annual Value (GAV) equals Higher of

165 190 190 165 190
Computation I or II.

NOTE:

 In any case either Computation II or Computation III will be applicable; both cannot be applied at the
same time.

Deduction for Unrealized rent is allowable only on satisfaction of the following conditions:

1. Tenancy is bonafide;

2. Defaulting tenant has vacated/ adequate steps have been taken to vacate him;

3. Such tenant is not in occupation of any other property of the assessee;

4. Adequate legal steps have been taken to recover such unrealized rent.

Case III

IF THE PROPERTY IS LET OUT THROUGHOUT THE PREVIOUS YEAR WITHOUT ANY LOSS ON ACCOUNT
OF UNREALIZED RENT BUT PROPERTY REMAINS VACANT FOR A PART OF THE YEAR.

(Rs. in Thousands)

PROPERTY
Particulars
A B C D E

Municipal Value (1) 160 160 160 160 160

Fair Rent (2) 175 200 170 150 195

Standard Rent under the Rent Control Act (3) 165 190 180 180 185

Rent per month (4) 12 15 17 16 14

Actual Rent Receivable (5) = (4) × (12 months) 144 180 204 192 168

Unrealized Rent (6) Nil Nil Nil Nil Nil

No. of months property remains vacant (7) 1 1.5 3 4 12

37
 Annual Vacancy Loss suffered (8) = (7) × (4) 12 22.5 51 64 168

Actual Rent Received (8) = (5) - (6) - (8) 132 157.5 153 128 0

Solution Computation of Gross Annual Value (GAV)

(Rs. in Thousands)

PROPERTY
Particulars
A B C D E

Computation I: Reasonable Expected Rent, i.e.,(1) or (2)

165 190 170 160 185
whichever is higher subject to limit of (3)

Computation II: Actual Rent received after deduction of

NA1 NA2 NA3 NA4 NA
unrealized rent or vacancy loss (8)

Computation III: Applicable only where Computation II is

153 167.5 153 128 NIL5
not applicable

Therefore, Gross Annual Value (GAV) equals Higher of

153 167.5 153 128 NIL
Computation I or II.

NOTES:

 In any case either Computation II or Computation III will be applicable; both cannot be applied at the
same time.

NA1: In this case Actual Rent received is less than the Rent under Computation I because of two factors
which can be categorized as under:

 LOSS DUE TO VACANCY: Such loss amounting to Rs. 12,000 as shown above under (8) above

 OTHER FACTORS: The Annual Rent receivable towards property A (144) is itself lower than the Rent
shown under Computation I (165), if vacancy loss was not there, in which case Situation III becomes
applicable and GAV is calculated as Computation I less Vacancy Loss, i.e., (165 - 12 = 153)

NA2: In this case Actual Rent received is less than the Rent under Computation I because of two factors
which can be categorized as under:

 LOSS DUE TO VACANCY: Such loss amounting to Rs. 22,500 as shown above under (8) above

 OTHER FACTORS: The Annual Rent receivable towards property B (180) is itself lower than the Rent
shown under Computation I (190), if vacancy loss was not there, in which case Situation III becomes
applicable and GAV is calculated as Computation I less Vacancy Loss, i.e., (190 - 22.5 = 167.5)

NA3: In this case Actual Rent received is less than the Rent under Computation I because of only one
factor namely:

 LOSS ONLY DUE TO VACANCY: Since Actual Rent received is less than Computation I figure (170) only
because of Loss on account of property remaining vacant (51) and not because of any other factor,
Situation II becomes applicable and Actual Rent (153) equals GAV.

38
NA4: In this case Actual Rent received is less than the Rent under Computation I because of only one
factor namely:

 LOSS ONLY DUE TO VACANCY: Since Actual Rent received is less than Computation I (160) figures only
because of Loss on account of property remaining vacant (64) and not because of any other factor,
Situation II becomes applicable and Actual Rent (128) equals GAV.

NIL5: In this case Actual Rent received is NIL because of property remaining vacant throughout the
year and hence GAV will also become NIL.

Case IV

IF THE PROPERTY IS LET OUT THROUGHOUT THE PREVIOUS YEAR WITH LOSS BEING SUFFERED ON
ACCOUNT OF UNREALIZED RENT AND LOW ANNUAL RENT (NO VACANCY LOSS INCURRED)

(Rs. in Thousands)

PROPERTY
Particulars
A B C D E

Municipal Value (1) 160 160 160 160 160

Fair Rent (2) 175 200 170 150 195

Standard Rent under the Rent Control Act (3) 165 190 180 180 185

Rent per month (4) 11 12 15 14 13

Actual Rent Receivable (5) = (4) × (12 months) 132 144 180 168 156

Unrealized Rent (6) 22 12 22.5 16 26

Annual Vacancy Loss (7) Nil Nil Nil Nil Nil

Actual Rent Received (8) = (5) - (6) - (7) 110 132 157.5 152 130

Solution Computation of Gross Annual Value (GAV)

(Rs. in Thousands)

PROPERTY
Particulars
A B C D E

Computation I: Reasonable Expected Rent, i.e.,(1) or (2)

165 190 170 160 185
whichever is higher subject to limit of (3)

Computation II: Actual Rent received after deduction of

NA1 NA2 NA3 NA4 NA5
unrealized rent or vacancy loss (8)

39
 Computation III: Applicable only where Computation II is
NA1 NA2 NA3 NA4 NA5
not applicable

Therefore, Gross Annual Value (GAV) equals Higher of

165 190 170 160 185
Computation I or II.

NOTES:

 In this case neither Computation II nor Computation III will be applicable; instead figures arrived at under
Computation I will directly be taken as GAV as explained in Situation IV.

NA1 to NA5

 In all the cases Actual Rent received is less than the Rent under Computation I, hence Computation II
becomes less than Computation I for all house properties;

 Computation III will not apply in any case is no loss from on Account of Vacancy;

 Hence as per Situation I ruling read with Situation IV ruling higher of the Computation I or Computation II
will be taken as GAV and hence the treatment is done accordingly.

Deduction for Unrealized rent is allowable only on satisfaction of the following conditions:

1. Tenancy is bonafide;

2. Defaulting tenant has vacated/ adequate steps have been taken to vacate him;

3. Such tenant is not in occupation of any other property of the assessee;

4. Adequate legal steps have been taken to recover such unrealized rent.

MUNICIPAL TAXES

Municipal Taxes levied by Local Authorities on House Property are allowed on PAYMENT basis only if they paid by
the owner only, not by the tenant in any case.

Deductions u/s 24:

INTEREST ON BORROWED CAPITAL-

Section 24(b): INTEREST ON BORROWED CAPITAL

 Pre Construction period Interest: Interest payable by an assessee in respect of funds borrowed for
property, deductible in FIVE annual Installments starting from the year previous prior to the year in which
the Construction/ Acquisition of such property was completed or date of Repayment of loan whichever is
earlier, e.g.,

B takes a loan of Rs. 5,00,000/- @10% p.a., on March 31st 2006, construction of the house is completed on
December 22nd, 2010, then Pre Construction period is March 31 st 2006 to March 31st 2010, Interest value coming
up to Rs. 1,50,000/- deductible in 5 annual installments of Rs. 30,000/- each.

 Post Construction period Interest: This is the Interest paid by the assessee from the previous year
onwards in which Construction/ Acquisition of the property is completed.

STANDARD DEDUCTION

Section 24(a): STANDARD DEDUCTION allowable @ 30% of Net Annual Value.

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 SELF OCCUPIED PROPERTY

Income Tax Act allows an Individual to claim negative House Property income to be set off against other
heads of income. This is possible only in case of a self occupied property, basic factors affecting it being:

 Interest on Borrowed Capital: If Capital is borrowed by an assessee for funds utilization towards Self
Occupied Property then following situations come into picture:

Maximum Ceiling for

Date of Borrowing Purpose
Interest

Construction/ Acquisition Rs. 1,50,000/-

On/ After 1st April’
1999 Reconstruction/ Repairs/
Renewal

Construction/ Acquisition Rs. 30,000/-

Before 1st April’
1999 Reconstruction/ Repairs/
Renewal

 A House Property owned by the assessee which is neither actually occupied by the assessee nor any
benefit is derived from such property owing to employment or Business/ Profession carried on at any other
place, wherein the assessee during the previous year stays at any other leased accommodation elsewhere,
then in that case the assessee is allowed to claim such property as Self Occupied.

 Even if assessee is the owner of two or more House properties, he can claim only one of them as Self
Occupied, at his discretion and the rest will be treated as DEEMED TO BE LET OUT PROPERTIES and
calculation of Income from House property will be done accordingly.

 Any House Property if it is to be claimed as Self Occupied in a Previous year is Let Out for even One day
of a year it will be taken as Let Out for the whole of the year and computation will be done accordingly.

PLEASE NOTE:

 Unrealized rent deductible in Step II calculation of G.A.V has to satisfy the Conditions vis-à-vis: Tenancy is
bonafide; Defaulting tenant has vacated/ adequate steps have been taken to vacate him; such tenant is
not in occupation of any other property of the assessee; adequate legal steps have been taken to recover
such unrealized rent.

 Interest on borrowed Capital is deductible on ACCRUAL basis; however Interest on unpaid Interest is not
deductible.

 Other than the two deductions specified u/s 24 no other deduction of expenses is claimable by the
assessee.

 The Clause of Maximum Ceiling on Interest on Borrowed Capital is applicable only for SELF OCCUPIED
Properties & not to any LET OUT Property.

 If there is letting of Building as well amenities, e.g., Gas/ Electricity/ Parking etc., but without any letting
of Assets like Plant, Machinery, Furniture etc. then whole of such Income earned will be taxed under
Income from House Property.

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ARREARS OF RENT RECEIVED SUBSEQUENTLY:

ARREARS OF RENT RECEIVED SUBSEQUENTLY (Sec. 25B)

 Where any arrears of rent is received which was not taxed earlier, such rent shall be assessed under the
head "Income from house property" in the year of Receipt.

 The arrears would be taxable under this head irrespective of the fact whether the assessee is the owner of
the buildings in the year in which such arrears are received

 A deduction of 30% on account of repairs on the arrears of rent received would be allowed in the year in
which such arrears are taxable.

Or [ You can choose either one of the answers]

Basics of House Property Tax

A house property could be your home, an office, a shop, a building or some land attached to the building like a
parking lot. The Income Tax Act does not differentiate between a commercial and residential property. All types of
properties are taxed under the head ‘income from house property’ in the income tax return. An owner for the purpose
of income tax is its legal owner, someone who can exercise the rights of the owner in his own right and not on
someone else’s behalf.

When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed
under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as
business expenditure.

a. Self-Occupied House Property

A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s
family – parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose
of Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered
and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property
to choose as self-occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2
houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income
tax purposes.

b. Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out house property for income
tax purposes

c. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a self occupied one
or a let out one based on its usage as discussed above.

How to calculate Income From House Property

42
Here is how you compute your income from a house property:

a. Determine Gross Annual Value (GAV) of the property: The gross annual value of a self-occupied house is zero.
For a let out property, it is the rent collected for a house on rent.

b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of property.

c. Determine Net Annual Value(NAV) : Net Annual Value = Gross Annual Value – Property Tax

d. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a deduction from the NAV under
Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief
beyond the 30% cap under this section.

e. Reduce home loan interest: Deduction under Section 24 is also available for interest paid during the year on
housing loan availed.

f. Determine Income from house property: The resulting value is your income from house property. This is taxed at
the slab rate applicable to you.

g. Loss from house property: When you own a self occupied house, since its GAV is Nil, claiming the deduction on
home loan interest will result in a loss from house property. This loss can be adjusted against income from other
heads.

Note: When a property is let out, its gross annual value is the rental value of the property. The rental value must
be higher than or equal to the reasonable rent of the property determined by the municipality.

Tax Deduction on Home Loans

a. Tax Deduction on Home Loan Interest: Section 24

Homeowners can claim a deduction of up to Rs 2 lakh on their home loan interest, if the owner or his family resides
in the house property. The same treatment applies when the house is vacant. If you have rented out the property,
the entire home loan interest is allowed as a deduction.

However, your deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if any of the following conditions
are satisfied:

A. Condition I

 The loan is taken on or after 1 April 1999, and

 The purchase or construction is not completed within 5 years from the end of the FY in which loan was
availed.

B. Condition II

 The loan is taken before 1 April 1999.

C. Condition III

 The loan is taken on or after 1 April 1999 for the purpose of repairs or renewal of the house property.

When is the deduction limited to Rs 30,000?

As already mentioned, if the construction of the property is not completed within 5 years, the deduction on home
loan interest shall be limited to Rs. 30,000. The period of 5 years is calculated from the end of the financial year in

43
which loan was taken. So, if the loan was taken on 30th April 2015, the construction of the property should be
completed by 31st March 2021. (For years prior to FY 2016-17, the period prescribed was 3 years which got increased
to 5 years in Budget 2016). Note: Interest deduction can only be claimed, starting in the financial year in which the
construction of the property is completed.

How do I claim a tax deduction on a loan taken before the construction of the property is complete?

Deduction on home loan interest cannot be claimed when the house is under construction. It can be claimed only
after the construction is finished. The period from borrowing money until construction of the house is completed is
called pre-construction period. Interest paid during this time can be claimed as a tax deduction in five equal
instalments starting from the year in which the construction of the property is completed. Understand pre-
construction interest better with this example.

[Link]

Under the head ‘Income from House Property’ the charging section is section 22. U/S 22 the annual value of any
property consisting of any building or land appurtenant thereto of which the assessee is the owner is chargeable to
tax under the head ‘Income from house property’. Thus the following three points must be considered for computing
income under this head-

(a ) There must be a building or a land appurtenant thereto;

(b) The assessee must be the owner of such property. Here owner means the legal owner and not the beneficial
owner;

(c ) the annual value of such property is taxable.

ANNUAL VALUE-

Annual value means the sum for which the property might reasonably be let year after year. So the focus of the law
is on the earning capacity of the house and not the actual income [Link] ascertain the annual value, the following
four factors should be considered-

(a ) Rent received or receivable- It refers to the actual rent received or receivable for the year.

(b) Fair Rent-It means rent of similar type of property in the same locality.

(c ) Municipal Value- The value assessed by the Municipal Authority for the purpose of imposing municipal tax.

d) Standard Rent- Rent fixed under the Rent Control Act.

44
Cases where income from house property is taxable under other heads of income:

Under the following circumstances income earned from house property is not taxable under the head income from
house property but under other heads of income-

(1 ) Where the owner uses his own house property for the purpose of his business or profession, then income from
such house is taxable under the head ‘Profits and gains of business or Profession’ and not under the head ‘income
from house property’.

(2) Where a tenant keeps a sub-tenant in his/her rented premises then income from such sub-lease is taxable under
the head ‘income from other sources’ as the assessee is not the legal owner of the house. (3) Where the assessee
lets out his house to the employees of his business and such letting out is necessary for the smooth running of the
business, then income from such house is taxable under the head ‘Profits & Gains from Business or profession’

(4) Where the assessee lets out the house along with plant & machinery and furniture and the `rental income is
inseparable, then income from such letting out is taxable under the head ‘Profits and gains of business or Profession’
provided such letting out is the business of the assessee, otherwise the same will taxable under the head ‘Income
from other sources’ Cases where Income from House Property

Cases where Income from House Property is not taxable at al :

In the following cases the income from house property is not taxable at al-

(1 ) One self-occupied house in occupation of an Ex-Ruler;

(2) Income from farm house;

(3) Property income of Local Authority;

(4) Property income of approved Scientific Research Association;

(5) Property income of Sports Association;

(6) Property income of registered Trade Union

(7) Property income of Political Party;

45
(8) Income from house property held for charitable purpose;

Co-ownership-Sec 26-Where the house is owned by more than one person with a definite share then the income
should be computed in proportion to their share from the very beginning whether it is let out or self -occupied.
Moreover the benefit of self-occupied house can be claimed by each co-owner separately. However, where the share
of the owners is not ascertainable, then they will be treated as an association of person for the purpose of
computation.

Deemed Owner-Sec 27- In the following cases even if the assessee does not own the house but for the purpose
of computation of income under this head the assessee shall be the deemed owner of the house-

(a ) Where an individual transfers( not being a transfer under an agreement to live apart) his or her house property
to his or her spouse otherwise than for adequate consideration or to his or her minor child( not being a married
daughter),is treated as deemed owner of the house so transferred.

(b) The holder of an impartible estate is treated as deemed owner of the house property comprised in that estate.

(c ) A member of a co-operative society, company or other association of person to whom any building or any part
thereof is allotted under the House Building Scheme of the society or company or the association as the case may
be shall be deemed to be the owner of the house.

(d) Where a person is in possession of any house in part performance of a contract under the Transfer of Property
Act,1953, then he shall be deemed to be the owner of the house.

Q. Which are the Income Tax Authorities? Explain the Provisions relating to collection and recovery of
Income tax.

Background :

The government of India imposed the Income Tax Act in the year 1961. Two categories of taxation were
prescribed

1. Direct tax

2. Indirect tax

Income tax or the tax taken by the government on an individual on his earnings is income tax. The government has
set up various authorities for lawful execution of the income Tax Act and to oversee the righteous functioning of the
income tax department. The various income tax authorities for the purposeful existence of the Act are

1. CBDT or the Central Board of Direct Taxes which has been constituted under the Central Board of Revenue Act
1963 2. Director general of income tax

3. Chief commissioner of income tax

4. Directors and commissioner of income tax

5. Additional directors and additional commissioners of income tax

6. Joint directors and joint commissioners of income tax

7. Deputy directors and deputy commissioners of income tax

46
8. Assistant directors and assistant commissioners of income tax

9. Income tax officers

10. Income tax inspectors It is a joint role of all these authorities that tax payer abide by the rule mentioned in the
beginning of every financial year and pay their taxes accordingly.

The supreme body with reference to the direct tax setup in India is the Central Board of Direct Taxes.
This board comprises of a leading Chairperson and a body of 6 members.

THE CBDT OR CENTRAL BOARD OF DIRECT TAXES

Consolidate under the Department of Revenue in the Ministry of Finance the CBDT holds the highest position on the
direct tax world in the country. It lays down the policies and planning’s for all direct tax related matters in India.
With the help of the Income Tax Department it makes sure that direct taxes are properly administered on the
workforce of the country. The Chairperson along with the 6 members of the body of the CBDT are all ex officio Special
Secretaries in the government and function as a division of the ministry that deals with levy and collection of all
direct taxes in India.

APPOINTMENT OF CBDT MEMBERS AND CHAIRPERSON

A person who desires to work with the CBDT board as the chair person or the body needs to clear IRS i.e. Indian
Revenue Services. The central government has full rights to decide who the members shall be. The office
memorandum of the government states the following requirements for the post of members of the CBDT

1. Officer shall be an office holder in the central government with a minimum of oneyear regular service in level 15

2. Officer shall have minimum of 15 years of experience in administration and running direct tax administration in
the central government along with 10 years of experience in field of CBDT

3. High professional merit and excellence

4. High impeccable reputation of integrity

5. Maximum age limit of 56 although exemptions provided in case of absorption

6. The person shall have at least 1 year of residual service on the date of occurrence of vacancy

All the posts for income tax authorities and filled by the central government as per the income tax ordinance. The
government has to decide as to who is fit, has proper professional skills and experience to hold office.

POWER OF DIRECTOR GENERAL

1. POWER TO DISCOVER AND PRODUCE EVIDENCE

As per the civil procedure of 1908 the director general can ask any assessing officer, chief
commissioner, commissioner, or the joint commissioner to suit for the following

 Discovery

 Inspection

 Examination of individual on oath

47
 Issue of commissions

 Compelling the individual to produce book of accounts and related document

2. POWER TO SEARCH AND SEIZURE

In an unlikely scenario of tax evasion, the government has given rights to the income tax authority to
search and seize the evaded revenue under default in taxes.

3. TAKE POSSESION OF BOOK OF ACCOUNTS

4. TO MAKE AN INQUIRY

5. TO SURVEY

POWERS OF INCOME TAX COMMISSIONERS:

1. HEAD INCOME TAX ADMINISTRATION:

At any given time, they are designated with areas to foresee the functioning of direct taxes

2. POWER TO TRANSFER ANY CASE

He enjoys the power to transfer a certain case from one assessing officer to another

3. POWER WITH REGARDS TO ORDERS:

He enjoys the powers to grant approval to an order issued, or even revise an order passed by
assessing officers.

4. JUDICIAL AND ADMINISTRATIVE POWERS:

POWER TO JOINT COMMISIONNERS :

Main duty is to detect tax invasion and supervise the subordinate officers. They also get power to
adopt fair market value as full consideration and are given power to inspect company registers

POWER TO INCOME TAX OFFICERS :

They are provided the

1. POWER OF SEARCH, SEIZURE.

2. POWER TO ASSESS AND CALL FOR INFORMATION from any individual

3. POWER OF SURVEY

POWER OF INCOME TAX INSPECTOR :

They are given functional powers by the person under whom they are appointed. They work specific
to the task given to them by their seniors.

Therefore, the powers given to the income tax authorities can be read Section 131, Section 132,
Section 132 A, 133,133A,133B, and Sec-134

48
 Conclusion:

It can be concluded that tax authorities in India pass well-reasoned independent orders and act
as independent judiciary bodies. They work in accordance to the orders given from superior officials
in their hierarchy.

Q. Explain the provisions relating to collection and recovery of Income tax .

1. TDS

TDS or Tax Deducted at Source is the tax deduction that occurs at the source itself. For instance,
if you are a salaried employee, your employer will deduct TDS and give the same to the
government. Your TDS is calculated as per your income tax slab.

Apart from your salary, TDS is also deducted from interest payments, rent, professional fees,
commission, etc. Depending on who is deducting the TDS, you will either receive Form 16 or Form
16A with detailed information about the deducted tax. You will need this form while filing
your income tax returns.

2. TCS

Sellers collect TCS or Tax Collected at Source from buyers. All the goods for which TCS is applicable
are mentioned under Section 206C of the IT Act. The TCS rates vary based on the product sold.
For instance, TCS on Tendu leaves is 5%, and the same for liquor of alcoholic nature is 1%.
It is important to note that the seller here is not paying any kind of tax. He/she is only collecting it
from the buyers and passing the same to the government. Sellers are required to deposit TCS
collected from buyers within a week from the last day of the month when the tax was collected.

3. ONLINE/OFFLINE TAX PAYMENTS

While the TDS is automatically deducted at source, there are still other types of taxes such as
Self-Assessment Tax, Regular Assessment Tax, and Advance Tax that taxpayers might be
required to pay to the government. Challan 280 can be used for paying such income taxes online
or offline.

You can visit the TIN NSDL website for paying these taxes online. Another option is to pay the
same offline at one of the designated bank branches empanelled by the IT department.

The income tax collection mechanism is well-structured in India to ensure that the taxpayers
experience complete convenience. Moreover, the government also makes regular improvements
to the same to further strengthen the nation and aid its development.

Modes of Recovery of Tax [Section 122]

Section-122 provides that in case assessee fails to pay any sum imposed by way of interest, fine,
penalty, or any other sum payable under the provisions of this Act, the same shall be recoverable
in the manner specified in the Act for the recovery of arrears of tax.

“Tax Recovery Officer” means :

1. A Collector or an Additional collector

2. Any such officer empowered to effect recovery of arrears of land revenue or other public demand under any
law relating to land revenue or other public demand for the time being in force in the State as ma be

49
 authorized by the State Government , by general or special notification in the Official Gazettee, to exercise
the powers of a Tax Recovery Officer.

3. Any Gazetted Officer of the Central or s State Govt. who may be authorized by the Central Govt. by general
or special notification in the Officer Gazette, to exercise the powers of a Tax Recovery Office.

When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax
Recovery Officer may draw up under his signature a statement in the prescribed form specifying the
amount of arrears due from the assessee and shall proceed to recover from such assessee the amount
specified in the certificate by one or more of the modes mentioned below, in accordance with the rules laid
down in the Second Schedule :

a. attachment and sale of the assessee’s movable property ;

b. attachment and sale of the assessee’s immovable property ;

c. arrest of the assessee and his detention in prison ;

d. appointing a receiver for the management of the assessee’s movable and immovable properties.

A- Tax Recovery Officer by whom recovery is to be effected [ Sec. 223 ]

1. The Tax Recovery Officer competent to take action shall be—

a. the Tax Recovery Officer within whose jurisdiction the assessee carries on his business or profession
or within whose jurisdiction the principal place of his business or profession is situate, or

b. the Tax Recovery Officer within whose jurisdiction the assessee resides or any movable or
immovable property of the assessee is situate,
Jurisdiction assigned to the Tax Recovery Officer under the orders or directions issued by the
Board, or by the Chief Commissioner or Commissioner who is authorised in this behalf by the
Board.

2. Where an assessee has property within the jurisdiction of more than one Tax Recovery Officer
and the Tax Recovery Officer by whom the certificate is drawn up—

a. is not able to recover the entire amount by sale of the property, movable or immovable, within his
jurisdiction, or

b. is of the opinion that, for the purpose of expediting or securing the recovery of the whole or any
part of the amount under this Chapter, it is necessary so to do, he may send the certificate or,
where only a part of the amount is to be recovered, a copy of the certificate certified in the
prescribed manner and specifying the amount to be recovered to a Tax Recovery Officer within
whose jurisdiction the assessee resides or has property and, thereupon, that Tax Recovery Officer
shall also proceed to recover the amount under this Chapter as if the certificate or copy thereof
had been drawn up by him.

B- Other Mode of Recovery of Tax [ Section 226 ]

Where no certificate has been drawn up, the Assessing Officer may recover the tax by any one or more of
the modes provided in this section.

Where a certificate has been drawn up, the Tax Recovery Officer may recover the tax by any one or more
of the modes provided in this section.

B-1 (i) Deduction from Salary

If any assessee is in receipt of any “Salaries” income, the Assessing Officer or Tax Recovery Officer may
approach such person paying salary to deduct arrears of tax from the salary of the assessee, and such
50
 person shall comply with any such requisition and shall pay the sum so deducted to the credit of the
Central Government or as the Board directs.

But any part of the salary exempt from attachment in execution of degree of a civil court, shall be exempt
from any requisition made under this sub-section.

(ii) Collection from persons who owe money to assesee :

1. The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, by notice in writing
require any person from whom money is due or may become due to the assessee or any person who holds
or may subsequently hold money for or on account of the assessee to pay to the Assessing Officer or Tax
Recovery Officer (when the money becomes due or is held) the amount which may be sufficient to pay the
amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than
that amount.

2. A notice may be issued to any person who holds or may subsequently hold any money for or on account of
the assessee jointly with any other person and the shares of the joint holders in such account shall be
presumed, until the contrary is proved, to be equal.

3. A copy of the notice shall be forwarded to the assessee at his last address known to the Assessing Officer
or Tax Recovery Officer, and in the case of a joint account to all the joint holders at their last addresses
known to the Assessing Officer or Tax Recovery Officer.

4. Save as otherwise provided in this sub-section, every person to whom a notice is issued under this sub-
section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a
post office, banking company or an insurer, it shall not be necessary for any pass book, deposit receipt,
policy or any other document to be produced for the purpose of any entry, endorsement or the like being
made before payment is made, notwithstanding any rule, practice or requirement to the contrary.

5. Any claim respecting any property in relation to which a notice under this sub-section has been issued
arising after the date of the notice shall be void as against any demand contained in the notice.

6. Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that
the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for
or on account of the assessee, then nothing contained in this sub-section shall be deemed to require such
person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement
was false in any material particular, such person shall be personally liable to the Assessing Officer or Tax
Recovery Officer to the extent of his own liability to the assessee on the date of the notice, or to the extent
of the assessee’s liability for any sum due under this Act, whichever is less.

7. The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, amend or revoke any
notice issued under this sub-section or extend the time for making any payment insection226 pursuance of
such notice.

8. The Assessing Officer or Tax Recovery Officershall grant a receipt for any amount paid in compliance with a
notice issued under this sub-section, and the person so paying shall be fully discharged from his liability to
the assessee to the extent of the amount so paid.

9. Any person discharging any liability to the assessee after receipt of a notice under this sub-section shall be
personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the
assessee so discharged or to the extent of the assessee’s liability for any sum due under this Act, whichever
is less.

10. If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof
to the Assessing Officer or Tax Recovery Officer he shall be deemed to be an assessee in default in respect
of the amount specified in the notice and further proceedings may be taken against him for the realisation
of the amount as if it were an arrear of tax due from him, in the manner provided in sections 222 to 225

51
 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise
of his powers under section 222.

(iii) Application to Court for payment of money in court’s custody [ Sec. 226(4)]

The Assessing Officer or Tax Recovery Officer may apply to the court in whose custody there is money
belonging to the assessee for payment to him of the entire amount of such money, or, if it is more than the
tax due, an amount sufficient to discharge the tax.

(iv) Distraint and Sale of Movable Property [ Section 226(5)]

The Assessing Officer or Tax Recovery Officer may, if so authorised by the Chief Commissioner or
Commissioner by general or special order, recover any arrears of tax due from an assessee by distraint and
sale of his movable property in the manner laid down in the Third Schedule.

(v) Recovery through State Government [ Section 227]

If the recovery of tax in any area has been entrusted to a State Government, the State Government may
direct, with respect to that area or any part thereof; that tax shall be recovered therein with, and as an
addition to, any municipal tax or local rate, by the same person and in the same manner as the municipal
tax or local rate is recovered.

Q. What are the items of incomes that would be assessed to tax under the head income from other
source? State the admissible deductions.

Income from other sources, which is the last among the five heads of income sketched out in the Income Tax Act, is
essentially a head of income that includes all receipts that cannot otherwise be classified under any of the other
heads of income.

According to section 56 of the Income Tax Act, the following three conditions need to be satisfied for a receipt to be
categorized as income from other sources.

 There is an income.

 Such income is not exempted under any other provisions of the Income Tax Act.

 Such income cannot be charged as salary, income from house property, profits and gains from business or
profession, or capital gains.

What does this head of income include?

Here’s a list of the receipts that fall under the category of income from other sources.

 Dividends: Dividends are taxable as income from other sources depending on the residential status of the
company that paid them out.

 Dividend from an Indian company: If the company has paid Dividend Distribution Tax on this receipt, the
dividend is exempted from tax. However, under section 115BBDA of the income tax act, if a resident
individual/HUF/firm received dividends in excess of ₹ 10 lakhs from Indian companies, then the amount
exceeding ₹ 10 lakhs is taxable at 10%.

 Dividend from a foreign company: Dividend received from foreign companies is subject to tax as income
from other sources.

 One-time income: One-time incomes like winnings from lotteries, crossword puzzles, horse races, card
games and other games of any sort, or gambling or betting of any form or nature are covered under income
from other sources.

52
  Interest on compensation: Interest received by an assessee (tax payer) on the amount of compensation or
reimbursement given in situations like compulsory acquisition is taxable under this head of income.

 Gifts: Gifts such as any sum of money and movable or immovable property that’s received without
consideration are also taxable.

The following receipts are classified as income from other sources only if they’re not chargeable as
“profits and gains of business or profession.”

 Employees’ contribution to welfare schemes

 Interest on securities like government bonds or debentures

 Rental income from letting out plant, machinery, or furniture owned by the assessee

 Rental income from letting out plant, machinery, or furniture, along with a building, where these two cases
of letting out are inseparable

 Receipts under Keyman Insurance Policy

Examples of other receipts chargeable as income from other sources

Here are some examples of other receipts that automatically fall under this category.

 Income from subletting of a house property by a tenant

 Casual income

 Insurance commissions received by the assessee

 Family pension payments received by the legal heirs of dead employees

 Interest on bank deposits and deposits with companies

 Interest on loans given

 Remuneration received by Members of Parliament

 Rent earned from a vacant plot of land

 Agricultural income from agricultural land situated outside India

 Interest paid by the Government on excess payment of advance tax

Q. What is previous year? Explain the exception to the previous year[Half]

"Previous year" means—

53
(a) the financial year immediately preceding the assessment year; or

(b) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of
the assessee, the twelve months ending on such date; or

(c) in the case of any person or business or class of persons or business not falling within clause ( a) or clause (b),
such period as may be determined by the Board or by any authority authorised by the Board in this behalf; or

(d) in the case of a business or profession newly set up in the said financial year, the period beginning with the date
of the setting up of the business or profession and—

(i) ending with the said financial year, or

(ii) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of
the assessee, ending on that date, or

(iii) ending with the period, if any, determined under clause (c), as the case may be ; or

(e) in the case of a business or profession newly set up in the twelve months immediately preceding the said financial
year—

(i) if the accounts of the assessee have been made up to a date within the said financial year and the period from
the date of the setting up of the business or profession to such date does not exceed twelve months, then, at the
option of the assessee, such period, or

(ii) If any period has been determined under clause (c), then the period beginning with the date of the setting up of
the business or profession and ending with that period, as the case may be ; or

(f) where the assessee is a partner in a firm and the firm has been assessed as such, then, in respect of the assessee's
share in the income of the firm, the period determined as the previous year for the assessment of the income of the
firm ; or

(g) in respect of profits and gains from Life Insurance business, the year immediately preceding the assessment year
for which annual accounts are required to be prepared under the Insurance Act, 1938, or under that Act read with
section 43 of the Life Insurance Corporation Act, 1956.

(2) Where an assessee has newly set up a business or profession in the said financial year and his accounts are made
up to a date in the assessment year in respect of a period not exceeding twelve months from the date of such setting
up, then, notwithstanding anything contained in sub-clause (iii) of clause (d) of sub-section (1), the assessee shall
in respect of that business or profession, at his option, be deemed to have no previous year for the said assessment
year under that clause and such option, shall, in relation to the immediately succeeding assessment year, have effect
as an option exercised under sub-clause (i) of clause (e) of sub-section (1).

(3) Subject to the other provisions, of this section, an assessee may have different previous years in respect of
separate sources of his income.

(4) Where in respect of a particular source of income or in respect of a business or profession newly set up, an
assessee has once exercised the option under clause (b) or sub-clause (ii) of clause (d) or sub-clause (i) of clause
(e) of sub-section (1) or has once been assessed, then, he shall not, in respect of that source, or, as the case may
be, business or profession, be entitled to vary the meaning of the expression "previous year" as then applicable to
him, except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer may
think fit to impose.

Below mentioned example will help you gain more clarity on these terms:

54
Previous year means the financial year immediately preceding the assessment year, i.e. the year in which income is
actually earned.

 Mr. Z, a sole proprietor earned a profit of Rs. 20,000/- for the previous year 2009-10, His income for
previous year 2009-10 will however be chargeable to tax at rates applicable for Assessment year 2010-11.

However there are certain exceptions to the above Rule, those being:

1. Income of a Non-resident from Shipping.

2. Income of persons leaving India either permanently or for a long period of time.

3. Income of Bodies formed for a short duration says for a particular event or purpose.

4. Income of a person trying to either Charge, Sell, Transfer or dispose of or otherwise part with any assets
with a view to avoid any tax liability.

5. Income earned from a discontinued business.

PLEASE NOTE:

 Previous year and Assessment year will always be starting from 1st April and ending on 31st March, In no
case it can be followed as a Calendar year i.e., 1st January to 31st December.

[Link] [ ALL And Good]

[Link] any 16 items of exempted income under Section 10 of Income Tax.

Exempt Income

What is Exempt Income?

Any income earned which is not subject to income tax is called exempt income. As per Section 10 of the Income Tax
Act, 1961, there are certain types of income which will be subjected to income tax within a financial year, provided
they meet certain guidelines and conditions.

Types of Exempt Income

Following are the types of income that are exempted from tax-

1. House Rent Allowance.

2. Allowance on transportation, children’s education, subsidy on hostel fee.

3. Exemption on Housing Loan.

4. Income defined as per Section 10, Section 54 of the Income Tax Act, 1961.

5. Leave and Travel Allowance.

Income Exempt from Tax as per Section 10

Mentioned below is the list of income exempt from tax specific to Section 10:

1. Agriculture Income [Section 10(1)]

2. Amount received out of family income, Hindu Undivided Family (H.U.F.) [Section 10(2)]

3. Share of profit, [Section 10(2A)]

55
4. Interest paid to Non-Resident [Section 10(4)(i)]

5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)]

6. Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)]

7. Leave Travel Concession or Assistance [Section 10(5)]

8. Remuneration or Salary received by an individual who is not a citizen of India [Section 10(6)] a.
Remuneration [U/s 10(6)(ii)] b. Remuneration received as an employee of foreign enterprise [U/s 10(6)(vi)]
c. Employment on a foreign ship [U/s 10(6)(viii)] d. Remuneration received by an employee of foreign
government [U/s 10(6)(xi)]

9. Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B), (6BB)
and (6C)]

10. Perquisites/Allowances paid by Government to its Employees serving outside India [Section 10(7)]

11. Employees of Foreign Countries working in India under Cooperative Technical Assistance Programme
[Section 10(8)]

12. Income of a Consultant [Section 10(8A)]

13. Income of Employees of Consultant [Section 10(8B)]

14. Income of any member of the family of individuals working in India under cooperative technical assistance
programmes [Section 10(9)]

15. Gratuity [Section 10(10)] a. Gratuity received by Government servants [Section 10(10)(i)] b. Gratuity
Received by a Non-Government Employee covered by Payment of Gratuity Act, 1972 [Section 10(10)(ii)]

16. Commuted value of Pension Received [Section 10(10A)]

17. Amount received as Leave Encashment on Retirement [Section 10(10AA)]

18. Retrenchment Compensation received by Workmen [Section 10(10B)]

19. Payment received under Bhopal Gas Leak Disaster (Processing of Claims) Act 1985 [Section 10 (10BB)]

20. Compensation received in case of any disaster [Section 10(10BC) ]

21. Retirement Compensation from a Public Sector Company or any other Company [Section 10(10C)]

22. Tax on Non-monetary Perquisites paid by Employer [Section 10(10CC)]

23. Amount received under a Life Insurance Policy [Section 10(10D)]

24. Statutory Provident Fund [Section 10(11)]

25. Recognized Provident Fund [Section 10(12)]

26. Superannuation Fund [Section 10(13)]

27. House Rent Allowance-HRA [Section 10(13A)]

28. Business Expenditure Allowance [Section 10(14)]

29. Interest Incomes [Section 10(15)]

56
30. Scholarship [Section 10(16)]

31. Allowance of M.P./M.L.A.I or M.L.C. [Section 10(17)]

32. Awards Instituted by Government [Section 10(17A)]

33. Pension received by certain winners of gallantry awards [Section 10(18)]

34. Family pension received by family members of armed forces including para military forces [Section 10(19)]

35. Income of a Local Authority [Section 10(20)]

36. Income of Scientific Research Association [Section 10(21)]

37. Income of a News Agency [Section 10(22B)]

38. Income of some Professional Institutions [Section 10(23A)]

39. Exemption of Income Received by Regimental Fund [Section 23AA] a. Income of a Fund set-up for the
welfare of employees or their dependents [Section 10(23AAA)] b. Income of a pension fund set up by LIC
or other insurer [Section 10(23AAB)]

40. Income of State Level Khadi and Village Industries Board [Section 10(23BB)] a. Income of certain Authorities
set up to manage Religious and Charitable Institutions [Section 10(23BBA)] b. Income of European Economic
Community [Section 10(23BBB)] c. Income of a SAARC Fund for regional projects [Section 10(23BBC)] d.
Any income of Insurance Regulatory and Development Authority [Section 10(23BBE)] e. Income of Prasar
Bharti [Section 10(23BBH)] [Inserted by the Finance Act 2012, w.e.f. 2013-14]

41. Any income received by a person on behalf of following Funds [Section 10(23C)]

42. Income of Mutual Fund [Section 10(23D)]

43. Exemption of income of a securitization trust [Section 10(23DA)j [w.e.f. A.Y. 2014-15]

44. Income of Investor Protection Fund [Section 10(23EA)]

45. Exemption of income of investor protection fund of depository [Section 10(23ED)] [w.e.f. A.Y. 2014-15]

46. Exemption for Certain Incomes of a Venture Capital Company or Venture Capital Fund from Certain Specified
Business or Industries [Section 10 (23FB)]

47. Income of Registered Trade Unions [Section 10(24)]

48. Income of Provident and Superannuation Funds [Section 10(25)]

49. Income of Employee’s State Insurance Fund [Section 10 (25A)]

50. Income of Schedule Tribe Members [Section 10(26) and 10(26A)]

51. Income of Sikkimese individual [Section 10(26AAN] (With retrospective effect from 1-4-1990)

52. Regulating the marketing of agricultural produce [Section 10[26AAB]

53. Income of a corporation set-up for promoting the interests of Scheduled Castes, Scheduled Tribes or
Backward Classes [Section 10(26B)]

54. Income of a corporation set-up to protect the interests of Minorities [Section 10(26BB)]

55. Any income of a Corporation established for Ex-Servicemen [Section 10(26BBB)]

57
 56. Income of cooperative society looking after the interests of Scheduled Castes or Scheduled Tribes or Both
[Section 10(27)]

57. Any income accruing or arising to Commodity Boards etc. [Section 10(29A)]

58. Amount received as subsidy from or through the Tea Board [Section 10(30)]

59. Amount received as subsidy from or through the concerned Board [Section 10(31)]

60. Income of Child Clubbed U/s 64 (IA) [Section 10(32)]

61. Income by way of dividend from Indian company [Section 10(34)]

62. Exemption of income to a shareholder on buyback of shares of unlisted company [Section 10 (34A) [w.e.f.
A.Y. 2014-15]

63. Exemption of income from Units [Section 10(35)]

64. Exemption of income from Securitization Trust [Section 10(35A)] [w.e.f A.Y. 2014-15]

Q. What is annual value ? State the deductions that allowed from the annual value in computing income
from house property.

The term annual value has been defined under Section 23(1) of the Income-tax Act, as "the sum for which the
property might reasonably be expected to let from year to year". The annual value is the value which any house can
fetch from the market under the prevailing circumstances such as local conditions, the demand for house, municipal
valuation, type and standard of construction, rent for similar type of house in the similar type of locality, etc.

From the explanation it should be clearly understood that the annual value does not mean the rent derived or rental
value of the house but the notional rent at which the house can reasonably be let out. A property can be let out at a
rent which is lower than its reasonable rent but its annual value will be its reasonable rent.

However, the Finance Act 2001 has changed the definition of the, Annual value as under: In case of a let out house
property, section 23(1) has defined this term as follows:

1. Where the house property or any part of it is let out, any sum of money received or receivable in the previous
year or from year to year shall be treated as annual value.

2. Where any house property is let out and the rent received or receivable is in excess of the sum referred above {in
point (1)}, the sum of money so received or receivable shall be treated as annual value.

3. Where a let out house property remains vacant during the previous year or during any part of the previous year
and due to vacancy the actual rent received or receivable is less than the sum of money referred above in point (1),
the sum of money so received or receivable shall be treated as annualvalue.

Income from House Property: Statutory Deduction @ 30% of NAV

From the Net Annual Value, the taxpayer is allowed a statutory deduction of 30% of the Net Annual Value. This
deduction of 30% is a flat deduction and is allowed to everyone.

It is to be noted that this deduction is allowed from the Net Annual Value and not from the Gross Annual Value. (Net
Annual Value = Gross Annual Value – Taxes paid)

58
Income from House Property: Deduction for Interest on Loan

In case the taxpayer has borrowed capital for the purpose of acquiring, constructing, repairing, renewing or
reconstructing any property, the amount of interest payable on such loan is allowed as a deduction.

The amount of interest payable every year should be calculated and claimed as a deduction. It is irrelevant whether
this interest has actually been paid or not during the year.

In case the loan is being taken for a Residential property, deduction under Section 80C is also allowed for repayment
of Principal.

 Recommended Read: Tax benefits of Home Loans under Section 24 & Section 80C

In case loan is being taken for an under-construction property (whether Residential or any other property), the
interest on loan payable for the period while the property was under construction will not be allowed to be claimed
during the period of construction.

Such Interest will be aggregated and allowed as a deduction in 5 successive instalments starting from the year in
which the construction has been completed. The interest will be aggregated starting from the year in which the loan
was taken till the year prior to the year in which the construction has been completed and not till the actual date of
completion.

Relevant points regarding Income from House Property and Deductions allowed

1. Any amount paid for brokerage or commission for arrangement of the loan will not be allowed as deduction
[Circular No. 28 dated 20-08-1969]

2. Where a fresh loan has been taken to repay the original loan, if the second borrowing has really been used
merely to repay the original loan and this fact is proved to the satisfaction of the Income Tax Officer, the
interest paid on the second loan would also be allowed as a deduction. [Circular No. 28 dated 20-08-1969]

3. Interest on Interest is not deductible. The taxpayer is entitled to deduct only the interest payable by him on
the capital borrowed.

4. Generally, the municipal taxes are to be paid by the occupier. In the case of let out property, the occupier
is the tenant and therefore he should pay the municipal taxes etc. In such case, no deduction of municipal
tax etc will be allowed from gross annual value as these taxes have not been paid and borne by the owner.

5. Taxes levied by a local authority in respect of any property shall be deemed to include service tax levied by
the local authority in respect of the property.

6. The taxpayer should not be allowed in any other deduction on account of any expenses incurred in relation
to such property.

Q. What are the circumastance under which income of one person can be clibbed with income of another
? Explain

The law makers at the time of framing skeleton of the Income Tax Act had correctly taken into consideration all such
instances where an assessee who is legally liable to pay tax on a genuine income might clearly escape hands of law
by claiming that such income was never earned by him but was earned by a third party say his relatives etc. In
simple words there are various ways in which an assessee can try to escape his legal income through various tactics

59
which has been duly taken care of by lawmakers by introducing this sub head of income known as ‘Clubbing of
Income’.

ransfer of Income without of transfer of an asset [Sec. 60]

In case of satisfaction of the following conditions of Income from the Asset would be taxable in the hands of
TRANSFEROR.

SPECIFIC CASES OF INCOME CLUBBING

Condition Description

I The Transferor of asset is the Taxpayer.

II The Asset is owned by the Transferor.

III The ownership of the asset is not transferred by transferor to the transferee.

The resultant income from such asset is transferred to any person under a settlement,
IV
agreement, covenant or arrangement.

V Such transfer may be Revocable or Irrevocable.

The above transfer may be effected at anytime, even before the Income tax Act coming
VI
into force.

Wherein a Revocable Transfer means to include the following:

 Any provision for the re-transfer directly/ indirectly of whole or part of the income/ asset to the transferor
during the lifetime of transferee; or

 Any Provision which gives the right to the Transferor to directly re-assume power directly/ indirectly over
the whole or any part of the income/ assets during the lifetime of the transferee.

ILLUSTRATIONS.. For Your better understanding

 Mr. B owns 120 XYZ Ltd. 10% Preference Shares of Rs. 100 each. On 1st April’ 2009 he transfers the shares
to his brother without transferring the ownership of such shares, hence the Interest income of Rs. 1,200/-
(10% of Rs. 12000) is taxable in the hands of Mr. B & not his brother.

2. Revocable Transfer of Asset [Sec. 61]

The meaning of revocable transfer of asset is same as defined above, various situations being listed out as:

Situation Description

60
 I If an asset is transferred under a trust & it is revocable during the lifetime of transferee.

II If an asset is transferred to a person & is revocable during the lifetime of the transferee.

If the transfer contains any provision for the re-transfer directly/ indirectly of whole or
III
part of the income/ asset to the transferor during the lifetime of the transferee.

If the transfer contains any provision which gives the right to the transferor to directly re-
IV assume power directly/ indirectly over the whole or any part of the income/ assets during
the lifetime of the transferee.

In any of the above situations even on transfer of the asset by the transferor the income from such asset still remains
chargeable in the hands of the Transferor. However it should be noted that such transfer should take place only
through a settlement, trust, covenant, agreement or arrangement and not otherwise.

ILLUSTRATIONS.. For Your better understanding

 Situation I: Mr. A has transferred a Taxi to his two brothers X & Y for their benefit. As per terms of agreement
he has the right to revoke the trust during the lifetime of X & Y, hence the income from Taxi will be taxable
in the hands of Mr. A & not X or Y.

 Situation II: Mr. B owns 120 XYZ Ltd. 10% Preference Shares of Rs. 100 each. On 1 st April’ 2009 he
transfers the shares to his brother with still retaining the right to revoke such transfer during lifetime of his
brother, hence Interest income of Rs. 1200/- is taxable in the hands of Mr. B & not his brother.

 Situation III: Mr. B has transferred a house to his Uncle. As per the terms of transfer he has the right to
utilize income of the rented part of the house for his benefit, in which case income will be taxable in the
hands of Mr. B irrespective of the fact that he exercises this right or not.

 Situation IV: In the same situation as discussed above, if Mr. B has the right to use the house or income for
his personal benefits whenever he wishes the Income from such house property will be taxable in the hands
of Mr. B irrespective of the fact that he exercises this right or not.

INCOME OF OTHER PERSONS INCLUDED IN THE INDIVIDUAL’S TOTAL INCOME

CASE I: When an Individual is assessable in respect of Remuneration of his ‘Spouse’ [Sec. 64(1)(ii)]

Condition Description

I The Taxpayer is an Individual.

II The Taxpayer has a Substantial Interest in a concern.

III Husband/ Wife of the Taxpayer is employed in the above mentioned concern.

Husband/ Wife of the taxpayer is employed without having requisite Qualification/

IV
Experience/ Knowledge for the concerned position.

 If the above conditions are satisfied then Salary income of the spouse will be taxable in the hands of the
taxpayer.

PLEASE NOTE:

 Salary referred here is the total income derived by an individual from Salaries, subject to adjustments being
made as per the provisions of the Income tax Act.

61
  Substantial Interest’ is defined as a situation wherein a person is the beneficial owner of at least 20% or
more Equity Voting Power (in case of Company) or is entitled to 20% or more of the profits. (in any other
case).

 Where Husband & Wife both have substantial interest in a concern & they are also in receipt of Salary from
such concern then such salary will be clubbed in the income of either Husband or Wife who has higher
income excluding remuneration.

ILLUSTRATIONS.. For Your better understanding

 Mr. A is the Managing Director of a company XYZ Pvt. Ltd. Mrs. A is working as Marketing Development
head in XYZ Pvt. Ltd & is in receipt of remuneration of Rs. 10, 59,000/- p.a (calculated as per the provisions
of the Income tax Act). Mrs. A however is only HSC passed and also does not have any prior working
experience. In such case whole remuneration received by Mrs. A will be solely taxed in the hands of Mr. A.

Case II: When an Individual is assessed in respect of Income from assets transferred to Spouse [Sec.
64(1)(iv)]

Condition Description

I The taxpayer is an Individual.

II The Taxpayer has transferred an asset to his/ her Spouse. (Other than a House Property)

The asset is transferred without Adequate Consideration (other than a case of an

III
agreement to live apart.)

The asset may be held by the Transferee (Spouse) in the same/ altered form after the
IV
transfer.

 If the above conditions are satisfied then Income from such asset will be taxable in the hands of the
TRANSFEROR

PLEASE NOTE:

 Spouse means to include Husband or Wife of the Taxpayer.

 Income from the asset is to be calculated after considering all relevant provisions of the Income Tax Act’
1961.

 The asset definition specifically excludes House Property from it’s purview considering the fact that on
satisfaction of the above mentioned conditions on a house property transfer the transferor would considered
to be the ‘deemed owner’ of the property and income from same would be taxed in hands of transferor.

 In case of transfer of House property by the transferee, Capital Gains will first be calculated in the hands
of transferee, and then clubbed into the taxable income of the Transferor of such House property.

 The word Adequate Consideration here means any Monetary Consideration. Natural love & affection may be
an adequate consideration from the transferor’s view point but such instance would still be considered as a
transfer without Adequate Consideration.

ILLUSTRATIONS.. For Your better understanding

62
  Mr. X transferred an asset worth Rs. 10, 00,000/- to his spouse for Rs.7, 50,000/-in which case Rs. 2,
50,000 would be the inadequate consideration. Hence income from such asset of Rs 25,000/- would be
taxable in the hands of Mr. X to the extent of inadequacy of consideration received, i.e., Rs. 6,250/- [25,000
× (10,00,000 - 7,50,000) ÷ 10,00,000/-]

Case III: When Individual is assessable in respect of income from assets transferred to Son’s Wife [Sec.
64(1)(vi)]

Condition Description

I The taxpayer is an Individual.

II He/ She has transferred an asset after May 31st’ 1973 to his/ her Sons’ Wife

III The asset is transferred without Adequate Consideration.

The asset may be held by the Transferee (Spouse) in the same/ altered form after the
IV
transfer.

V The Transfer may be Direct or Indirect.

 If above conditions are satisfied then income from the asset is included in the income of the TRANSFEROR.

ILLUSTRATIONS.. For Your better understanding

 Mr. X transferred an asset worth Rs. 15, 00,000/- to his Elder sons’ wife without any consideration, income
earned from such asset will be taxable in the hands of Mr. X.

Case IV: When Individual is assessable in respect of income from assets transferred to a Person for the
benefit of Spouse [Sec. 64(1)(vii)]

Condition Description

I The taxpayer is an Individual.

II He/ She has transferred an asset after May 31st’ 1973 to his/ her Sons’ Wife

III The asset is transferred to a Person or an Association of Persons.

IV It is transferred for the Present or Future benefit of the Spouse.

V The asset is transferred without Adequate Consideration.

VI The Transfer may be Direct or Indirect.

 If above conditions are satisfied then income from the asset is included in the income of the TRANSFEROR.

ILLUSTRATIONS.. For Your better understanding

 Mr. Z transferred Govt. Bonds worth Rs. 27, 00,000/- to an Association of Persons without any consideration
with a view to utilize Interest income for benefit of Mrs. Z in future, hence Interest income earned from such
bonds will be taxable in the hands of Mr. Z.

63
Case V: When Individual is assessable in respect of income from assets transferred to a Person for the
benefit of Sons’ Wife [Sec. 64(1)(viii)]

Condition Description

I The taxpayer is an Individual.

II The asset is transferred to a Person or an Association of Persons.

III It is transferred for the Present or Future benefit of the Spouse.

IV The asset is transferred without Adequate Consideration.

V The Transfer may be Direct or Indirect.

 If above conditions are satisfied then income from the asset is included in the income of the TRANSFEROR.

ILLUSTRATIONS.. For Your better understanding

 Mr. Ugly transferred Debentures worth Rs. 21, 00,000/- to an Association of Persons without any
consideration with a view to utilize Interest income for benefit of Mrs. C (wife of his Younger Son) in future,
hence Interest income earned from such Debentures will be taxable in the hands of Mr. Ugly.

Case VI: When Individual is assessable in respect of income of his Minor Child [Sec. 64(1A)]

 Taxability: In case an Income is earned by a child before his attainment of 18 years of age, then such
income of child will be included in the income of the parent whose taxable income, excluding income
includible u/s 64(1A), is GREATER .

 Exemption u/s 10(32): In case of inclusion of income earned by a minor in the parent’s income, exemption
of Rs. 1,500/- per Child per Annum or Income earned by child whichever is lower.

 Non Taxability of Income in certain cases:

i. Income of a Minor Child suffering from any disability specified u/s 80U .

ii. Income of a Minor Child on account of any Manual work.

iii. Income of a Minor Child on account of any activity involving his Skill, Talent or Specialized knowledge &
Experience.

PLEASE NOTE:

 Child herein includes both Step child as well as Adopted child.

 If both the Parents of the minor child are not alive and such minor is maintained by a guardian, then
guardian of the minor child should file a return of income on behalf of the minor. In no case will the income
be clubbed in the hands of the Guardian.

 Where child attains majority during the previous year part of the income earned by the child during his
minor stage shall be clubbed in the hands of the Parent.

ILLUSTRATIONS.. For Your better understanding

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  X a minor earned Rs. 1, 50,000/- from business income in PY 09-10. His Father’s tax able income is Rs. 10,
00,000/- while that of his mother is Rs. 3, 50,000/-. In this case income of Rs. 1, 50,000 of X will be taxable
in the hands of his father.

UNIT-3 [ GST]

Q. Analyse the provisions relating to levy and collection of GST under the Central GST Act 2017.

Levy and collection Intra-state supply

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1. Intra –stae supply ( Supply within state)

* Basis of charge as per CGST Act 2017

* Basis of charge as oer respective SGST Act 2017

2. Intra –State supply[ Supply from one state to another state]

* Basis of charge as per IGST Act ,2017 PLUS

Levy and collection as per CGST Act, 2017

(a) U/s 9(1) of CGST Act, 2017 there shall be levied a tax –

* Called the Central Goods and Services Tax(CGST);

* On all the intra-state supplies of goods or services or both, except on supply of alcoholic liquor for human
consumption;

* On the value determined u/s 15; and

* At such a rate (maximum 20%,) as notified by the Central Government on recommendation of GST Council; and

* Collected in such a manner as may be prescribed; and

* Shall be paid by the taxable person.

(b) U/s 9(2) of CGST Act 2017, the CGST of following supply shall be levied with the effect from such
date as notified by the Central Government on recommendation of GST Council:

* Petroleum crude

* High speed diesel

* Motor spirit (commonly known as petrol)

* Natural gas

* Aviation turbine fuel

(c) U/s 9(3), CGST is to be paid on reverse charge basis by the recipient on notified goods/ services or
both (liability to pay tax by the recipient of supply of goods / services rather than supplier of goods/
services under forward charge)

(d) U/s 9(4), CGST on taxable supply of goods/ services to registered supplier from unregistered
supplier is to be paid on reverse charge basis by the recipient.

(e) U/s 9(5), E-Commerce operator is liable to pay CGST on notified intra-state supplies.

Q. Write an impact of GST on GDP of India.

GST Positive Impact of GDP

Now, There is only one tax rate for all which will create a unified market in terms of tax implementation and the
transaction of goods and services will be seamless across the states.

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The same will reduce the cost of the transaction. In a survey, it was found that 10-11 types of taxes levied on the
road transport businesses. So the GST will be helpful to reduce transportation cost by eliminating other taxes.

After GST implementation the export of goods and services will become competitive because of nill effect of cascading
effect of taxes on goods and products. In a research done by NCAER, it was suggested that GST would be the key
revolution in Indian Economy and it could increase the GDP by 1.0 to 3.0 percent.

GST is more transparent in comparison to the previous law provision so it will generate more revenue to the
Government and will be more effective in reducing corruption at the same time. Overall GST will improve the tax
Compliances.

In a report issued by the Finance Ministry, it was mentioned that Make In India programme will be more benefited
by the GST structure due to the availability of input tax credit on capital goods.

As the GST will subsume all other taxes, the exemption available for manufacturers in regards of excise duty will be
taken off which will be an addition to Government revenue and it could result in an increase in GDP.

The GST regime has although a very powerful impact on many things including the GDP also. The Gross Domestic
Product has the tendency to loom on the shoulders of revenue generated by the economy in a year. Still, a worthwhile
point includes that the GST has the capability to extend the GDP by a total of 2 percent in order to complete the
ultimate goal of increasing the per-capita income of every individual. Also, the GST scheme will certainly improve
the indirect revenues to the government as the tax compliance will be further enhanced and rigid, extending the tax
paying base which will add to the revenue. The increased income of the government will redirect towards the
developmental projects and urban financing creating an overall implied scenario.

GST Negative Impact on GDP

In a report, DBS bank noted that initially, GST will lead to the rise in inflation rate which will remain for a year but
after that GST will affect positively on the economy.

As we know Real Estate also plays an important role in Indian economy but some expert thinks that GST will impact
the Real Estate business negatively as it will add up the additional 8 to 10 percent to the cost and reduce the demand
about 12 percent.

GST is applied in the form of IGST, CGST AND SGST on the Center and State Government, but some economists say
that there is nothing new in the form of GST although these are the new names of Central Excise, VAT, CST and
Service Tax etc.

As every coin has two faces in the same way we tried here to familiarize the things related to GST with both
perspective i.e. positively and negatively in this article. Despite having some factor which is being expected to affect
the Economy adversely there are so many other things which are expected with a positive impact on GDP.

Q. Explain the benefits of GST to trade ,Industry ,e-commerce and services sector.

Introduction of the goods and services tax (GST) may be a big positive for the e-commerce industry. With no tax
laws in place for the industry currently, tax is imposed based on the understanding of various state governments.

GST will help resolve many supply chain issues which impact the e-commerce sector.

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"GST when implemented will resolve many supply chain issues surroundings e-commerce. The shipment and returns
across the country will be done more efficiently and with lesser paperwork. The efficiency in the supply chain will
also mean quicker deliveries. Companies will also be able to execute more efficient supply chain strategies, with
warehousing based on strategy rather than tax requirements (like Octroi). More importantly, with an uniform tax
structure across India, goods can be priced and margins calculated properly without worrying about where the
product is finally shipping," said Ashish Jhalani, Founder, eTailing India & ISeB.

GST will help resolve many supply chain issues which impact the e-commerce sector.

"GST when implemented will resolve many supply chain issues surroundings e-commerce. The shipment and returns
across the country will be done more efficiently and with lesser paperwork. The efficiency in the supply chain will
also mean quicker deliveries. Companies will also be able to execute more efficient supply chain strategies, with
warehousing based on strategy rather than tax requirements (like Octroi). More importantly, with an uniform tax
structure across India, goods can be priced and margins calculated properly without worrying about where the
product is finally shipping,"

GST is a single comprehensive tax regime that will be applicable across all states in India on the sale, manufacture
and consumption of goods and services. Since the same tax regulation will apply across different states, e -
commerce companies (as well as those from other industries) will not have to struggle with the complex regulatory
structure that currently prevails in the country. They will also be able to devise strategies in keeping with the GST
norms.

GST, which will be levied on both goods and services, will replace most indirect taxes with a single tax. It would have
a dual structure — a Central component levied and collected by the Centre and a state component levied by states.

While at the Central level, GST will subsume Central excise duty, service tax and additional customs duties, at the
state level it will include value-added tax, entertainment tax, luxury tax, lottery taxes and electricity duty. VAT,
however, will be charged on each stage of value addition.

GST would also help address challenges like the one faced by the Karnataka tax authorities where concerns about
tax evasion by Amazon India were brought to the fore. Questions were raised about why Amazon and its sellers were
paying no VAT for operating from the company’s warehousing facilities on the outskirts of Bangalore. The situation
may have been different if clear laws had been formulated for the e-commerce industry. The standoff is more a result
of difference in interpretation of the vague laws by Amazon and the state tax authorities.

"Since Amazon operates on the 'marketplace' model and only provides a platform for buyers and sellers to transact
(not engaging in any selling directly), its reasoning was that it should not come under the purview of sales tax or
VAT (the website gets a commission from sellers for facilitating sales) and that only service tax was applicable to
them. On the other hand, its sellers, who were stocking their goods in Amazon’s warehousing facility, were
designating it as 'an additional place of business' in contravention of the state’s VAT rules. The state tax authorities
then ordered Amazon to discontinue selling some products from its Bangalore warehouse by cancelling the licenses
of about 100 of its sellers. Consequently, the company had no choice but to cancel many orders for those particular
products and bear losses," explains Jhalani.

The roll-out of GST is likely to simplify the logistics issue for e-commerce companies. Also, the practice of companies
to minimise their tax liabilites by finding loopholes in existing sourcing, distribution and warehousing strategies will
have to undergo a change.

Q. Write a note in compensation law to state government of GST

 The Goods and Services Tax (Compensation to States) Bill, 2017 was introduced in Lok Sabha on March
27, 2017. The Bill provides for compensation to states for any loss in revenue due to the implementation
of GST.

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  Period of compensation: Compensation will be provided to a state for a period of five years from the
date on which the state brings its State GST Act into force.

 Projected growth rate and base year: For the purpose of calculating the compensation amount in any
financial year, year 2015-16 will be assumed to be the base year, from revenue will be projected. The
growth rate of revenue for a state during the five-year period is assumed be 14% per annum.

 Base year revenue: The base year tax revenue consists of the states’ tax revenues from: (i) state Value
Added Tax (VAT), (ii) central sales tax, (iii) entry tax, octroi, local body tax, (iv) taxes on luxuries, (v)
taxes on advertisements, etc. However, any revenue among these taxes arising related to supply of (i)
alcohol for human consumption, and (ii) certain petroleum products, will not be accounted as part of the
base year revenue.

 Calculation and release of compensation: The compensation payable to a state has to be provisionally
calculated and released at the end of every two months. Further, an annual calculation of the total
revenue will be undertaken, which will be audited by the Comptroller and Auditor General of India.

 Levy and compensation of GST compensation cess: A GST Compensation Cess may be levied on the
supply of certain goods and services, as recommended by the GST Council. The receipts from the cess
will be deposited to a GST Compensation Fund. The receipts will be used for compensating states for any
loss due to the implementation of GST.

 The cess will be capped at: (i) 135% for pan masala, (ii) Rs 400 per tonne for coal, (iii) Rs 4,170 + 290%
per 1,000 sticks of tobacco, and (iv) 15% for all other goods and services including motor cars and
aerated water.

 Any unutilised money in the Compensation Fund at the end of the compensation period will be distributed
in the following manner: (i) 50% of the fund to be shared between the states in proportion to revenues of
the states, and (ii) the remaining 50% will be part of the centre’s divisible pool of taxes.

---****--

Q. Discuss the provisions relating to determination of nature of supply and place of supply under IGST
Act

Section 7 of IGST Act - Interstate supply

Section 7 of Integrated Goods and Services Tax Act 2017 - Interstate supply

(1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of
supplyare in-

(a) two different States;

b) two different Union territories; or

(c) a State and a Union territory,

shall be treated as a supply of goods in the course of inter-State trade or commerce.

(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be
treated to be a supply of goods in the course of inter-State trade or commerce.

(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of

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supply are in-

(a) two different States;

(b) two different Union territories; or

(c) a State and a Union territory

shall be treated as a supply of services in the course of inter-State trade or commerce.

(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of
inter-State trade or commerce.

(5) Supply of goods or services or both,-

when the supplier is located in India and the place of supply is outside India;
to or by a Special Economic Zone developer or a Special Economic Zone unit; or

In the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
(shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

Section 8 of IGST Act - Intrastate supply

Section 8 of Integrated Goods and Services Tax Act 2017 - Intrastate supply

(1) Subject to the provisions of section 10, supply of goods where the location of the supplier and the place of
supply of goods are in the same State or same Union territory shall be treated as intra-State supply:
Provided that the following supply of goods shall not be treated as intra-State supply, namely:-

(i) supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit;

(ii) goods imported into the territory of India till they cross the customs frontiers of India; or

(iii) supplies made to a tourist referred to in section 15.

(2) Subject to the provisions of section 12, supply of services where the location of the supplier and the place of
supply of services are in the same State or same Union territory shall be treated as intra-State supply:

Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic
Zone developer or a Special Economic Zone unit.

Explanation.-For the purposes of this Act, where a person has,-

(i) an establishment in India and any other establishment outside India;

(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory;
or

(iii) an establishment in a State or Union territory and any other establishment being a business vertical registered
within that State or Union territory, then such establishments shall be treated as establishments of distinct
persons.

Explanation 2.- A person carrying on a business through a branch or an agency or a representational office in any
territory shall be treated as having an establishment in that territory.

Section 9 of IGST Act - Supplies in Territorial Waters

Section 9 of Integrated Goods and Services Tax Act 2017 - Supplies in territorial waters

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Notwithstanding anything contained in this Act,-

where the location of the supplier is in the territorial waters, the location of such supplier; or
where the place of supply is in the territorial waters, the place of supply,

shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point
of the appropriate baseline is located.

Section 10 of IGST Act - Place of supply of goods other than supply of goods imported into, or exported
from India

Section 10 of Integrated Goods and Services Tax Act 2017 - Place of supply of goods other than supply
of goods imported into, or exported from India

(1) The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as
under,-
where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the
place of supply of such goods shall be the location of the goods at the time at which the movement of goods
terminates for delivery to the recipient;

where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person,
whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of
documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods
and the place of supply of such goods shall be the principal place of business of such person;

where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of
supply shall be the location of such goods at the time of the delivery to the recipient;

where the goods are assembled or installed at site, the place of supply shall be the place of such installation or
assembly;

where the goods are supplied on board a conveyance, including a vessel, an aircraft, a train or a motor vehicle, the
place of supply shall be the location at which such goods are taken on board.

(2) Where the place of supply of goods cannot be determined, the place of supply shall be determined in such
manner as may be prescribed.

Section 11 of IGST Act - Place of supply of goods imported into, or exported from India

Section 11 of Integrated Goods and Services Tax Act 2017 - Place of supply of goods imported into, or
exported from India

The place of supply of goods,-

imported into India shall be the location of the importer;

exported from India shall be the location outside India.

Section 12 of IGST Act - Place of supply of services where location of supplier and recipient is in India

Section 12 of Integrated Goods and Services Tax Act 2017 - Place of supply of services where location
of supplier and recipient is in India

(1) The provisions of this section shall apply to determine the place of supply of services where the location of
supplier of services and the location of the recipient of services is in India.

(2) The place of supply of services, except the services specified in sub-sections (3) to (14),-

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made to a registered person shall be the location of such person;
made to any person other than a registered person shall be,-

(i) the location of the recipient where the address on record exists; and

(ii) the location of the supplier of services in other cases.

(3) The place of supply of services,-

directly in relation to an immovable property, including services provided by architects, interior decorators,
surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to
use immovable property or for carrying out or co-ordination of construction work; or

by way of lodging accommodation by a hotel, inn, guest house, home stay, club or campsite, by whatever name
called, and including a house boat or any other vessel; or by way of accommodation in any immovable property for
organising any marriage or reception or matters related thereto, official, social, cultural, religious or business
function including services provided in relation to such function at such property; or

any services ancillary to the services referred to in clauses (a), (b) and (c), shall be the location at which the
immovable property or boat or vessel, as the case may be, is located or intended to be located:
Provided that if the location of the immovable property or boat or vessel is located or intended to be located
outside India, the place of supply shall be the location of the recipient.

Explanation.- Where the immovable property or boat or vessel is located in more than one State or Union territory,
the supply of services shall be treated as made in each of the respective States or Union territories, in proportion
to the value for services separately collected or determined in terms of the contract or agreement entered into in
this regard or, in the absence of such contract or agreement, on such other basis as may be prescribed.

4) The place of supply of restaurant and catering services, personal grooming, fitness, beauty treatment, health
service including cosmetic and plastic surgery shall be the location where the services are actually performed.

(5) The place of supply of services in relation to training and performance appraisal to,-
a registered person, shall be the location of such person;
a person other than a registered person, shall be the location where the services are actually performed.

(6) The place of supply of services provided by way of admission to a cultural, artistic, sporting, scientific,
educational, entertainment event or amusement park or any other place and services ancillary thereto, shall be the
place where the event is actually held or where the park or such other place is located.

(7) The place of supply of services provided by way of,-

organisation of a cultural, artistic, sporting, scientific, educational or entertainment event including supply of
services in relation to a conference, fair, exhibition, celebration or similar events; or
services ancillary to organisation of any of the events or services referred to in clause (a), or assigning of
sponsorship to such events,-

(i) to a registered person, shall be the location of such person;

(ii) to a person other than a registered person, shall be the place where the event is actually held and if the event
is held outside India, the place of supply shall be the location of the recipient.
Explanation.- Where the event is held in more than one State or Union territory and a consolidated amount is
charged for supply of services relating to such event, the place of supply of such services shall be taken as being in
each of the respective States or Union territories in proportion to the value for services separately collected or
determined in terms of the contract or agreement entered into in this regard or, in the absence of such contract or
agreement, on such other basis as may be prescribed.

(8) The place of supply of services by way of transportation of goods, including by mail or courier to,-

72
a registered person, shall be the location of such person;
a person other than a registered person, shall be the location at which such goods are handed over for their
transportation.

(9) The place of supply of passenger transportation service to,-

a registered person, shall be the location of such person;

a person other than a registered person, shall be the place where the passenger embarks on the conveyance for a
continuous journey:

Provided that where the right to passage is given for future use and the point of embarkation is not known at the
time of issue of right to passage, the place of supply of such service shall be determined in accordance with the
provisions of sub-section (2).

Explanation.- For the purposes of this sub-section, the return journey shall be treated as a separate journey, even
if the right to passage for onward and return journey is issued at the same time.

(10) The place of supply of services on board a conveyance, including a vessel, an aircraft, a train or a motor
vehicle, shall be the location of the first scheduled point of departure of that conveyance for the journey.

(11) The place of supply of telecommunication services including data transfer, broadcasting, cable and direct to
home television services to any person shall,-

in case of services by way of fixed telecommunication line, leased circuits, internet leased circuit, cable or dish
antenna, be the location where the telecommunication line, leased circuit or cable connection or dish antenna is
installed for receipt of services;

in case of mobile connection for telecommunication and internet services provided on post-paid basis, be the
location of billing address of the recipient of services on the record of the supplier of services;
in cases where mobile connection for telecommunication, internet service and direct to home television services are
provided on pre-payment basis through a voucher or any other means,-

(i) through a selling agent or a re-seller or a distributor of subscriber identity module card or re-charge voucher, be
the address of the selling agent or re-seller or distributor as per the record of the supplier at the time of supply; or

(ii) by any person to the final subscriber, be the location where such prepayment is received or such vouchers are
sold;

in other cases, be the address of the recipient as per the records of the supplier of services and where such
address is not available, the place of supply shall be location of the supplier of services:

Provided that where the address of the recipient as per the records of the supplier of services is not available, the
place of supply shall be location of the supplier of services:

Provided further that if such pre-paid service is availed or the recharge is made through internet banking or other
electronic mode of payment, the location of the recipient of services on the record of the supplier of services shall
be the place of supply of such services.

Explanation.- Where the leased circuit is installed in more than one State or Union territory and a consolidated
amount is charged for supply of services relating to such circuit, the place of supply of such services shall be taken
as being in each of the respective States or Union territories in proportion to the value for services separately
collected or determined in terms of the contract or agreement entered into in this regard or, in the absence of such
contract or agreement, on such other basis as may be prescribed.

(12) The place of supply of banking and other financial services, including stock broking services to any person
shall be the location of the recipient of services on the records of the supplier of services:

73
Provided that if the location of recipient of services is not on the records of the supplier, the place of supply shall be
the location of the supplier of services.

(13) The place of supply of insurance services shall,-

to a registered person, be the location of such person;
to a person other than a registered person, be the location of the recipient of services on the records of the
supplier of services.

(14) The place of supply of advertisement services to the Central Government, a State Government, a statutory
body or a local authority meant for the States or Union territories identified in the contract or agreement shall be
taken as being in each of such States or Union territories and the value of such supplies specific to each State or
Union territory shall be in proportion to the amount attributable to services provided by way of dissemination in the
respective States or Union territories as may be determined in terms of the contract or agreement entered into in
this regard or, in the absence of such contract or agreement, on such other basis as may be prescribed.

Section 13 of Integrated Goods and Services Tax Act 2017 - Place of supply of services where location
of supplier or location of recipient is outside India

(1) The provisions of this section shall apply to determine the place of supply of services where the location of the
supplier of services or the location of the recipient of services is outside India.

(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of
the recipient of services:
Provided that where the location of the recipient of services is not available in the ordinary course of business, the
place of supply shall be the location of the supplier of services.

Section 13 of Integrated Goods and Services Tax Act 2017 - Place of supply of services where location
of supplier or location of recipient is outside India

(1) The provisions of this section shall apply to determine the place of supply of services where the location of the
supplier of services or the location of the recipient of services is outside India.

(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of
the recipient of services:
Provided that where the location of the recipient of services is not available in the ordinary course of business, the
place of supply shall be the location of the supplier of services.

Section 13 of Integrated Goods and Services Tax Act 2017 - Place of supply of services where location
of supplier or location of recipient is outside India

(1) The provisions of this section shall apply to determine the place of supply of services where the location of the
supplier of services or the location of the recipient of services is outside India.

(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of
the recipient of services:
Provided that where the location of the recipient of services is not available in the ordinary course of business, the
place of supply shall be the location of the supplier of services.

the bank of the recipient of services in which the account used for payment is maintained is in the taxable
territory;

the country code of the subscriber identity module card used by the recipient of services is of taxable
territory;

the location of the fixed land line through which the service is received by the recipient is in the taxable territory.

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(13) In order to prevent double taxation or non-taxation of the supply of a service, or for the uniform application of
rules, the Government shall have the power to notify any description of services or circumstances in which the
place of supply shall be the place of effective use and enjoyment of a service.

Section 14 of Integrated Goods and Services Tax Act 2017 - Special provision for payment of tax by a
supplier of online information and database access or retrieval services

(1) On supply of online information and database access or retrieval services by any person located in a non-
taxable territory and received by a non-taxable online recipient, the supplier of services located in a non-taxable
territory shall be the person liable for paying integrated tax on such supply of services:

Provided that in the case of supply of online information and database access or retrieval services by any person
located in a non-taxable territory and received by a nontaxable online recipient, an intermediary located in the
non-taxable territory, who arranges or facilitates the supply of such services, shall be deemed to be the recipient of
such services from the supplier of services in non-taxable territory and supplying such services to the non-taxable
online recipient except when such intermediary satisfies the following conditions, namely:-

the invoice or customer's bill or receipt issued or made available by such intermediary taking part in the supply
clearly identifies the service in question and its supplier in non-taxable territory;

the intermediary involved in the supply does not authorise the charge to the customer or take part in
its charge which is that the intermediary neither collects or processes payment in any manner nor is
responsible for the payment between the non-taxable online recipient and the supplier of such
services;

the intermediary involved in the supply does not authorise delivery; and
the general terms and conditions of the supply are not set by the intermediary involved in the supply
but by the supplier of services.

(2) The supplier of online information and database access or retrieval services referred to in sub-
section (1) shall, for payment of integrated tax, take a single registration under the Simplified
Registration Scheme to be notified by the Government:

Provided that any person located in the taxable territory representing such supplier for any purpose in the taxable
territory shall get registered and pay integrated tax on behalf of the supplier:

Provided further that if such supplier does not have a physical presence or does not have a representative for any
purpose in the taxable territory, he may appoint a person in the taxable territory for the purpose of paying
integrated tax and such person shall be liable for payment of such tax.

[Link]

[Link]

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