MODULE 1- CONCEPT OF TAXATION

What is tax?

Fee charged by government to cover the cost of living in a society. It can be charged by any tier
of government (National, state or local) and can be charged on product, income and activity.

Tax is not defined under the IT Act- Tax is a financial change or other levy imposed on the
individual or a legal entity by a state or a functional equivalent of state

Somefield Anderson and Brock- tax is a non-penal yet compulsory tariff on resources from
private to public sector, determined on the basis of pre-determined criteria and without reference
to specific benefits recovered, so as to accomplish some of the nation’s economic and social
objectives 

Types of tax

Types of Tax: Direct and Indirect (based on the nature of tax and how it’s levied by the govt)

1. DIRECT TAX:
i. Tax levied directly on the income or wealth of a person.
ii. Incidence of tax and its impact fall on the same person- this implies that the
person paying the tax cannot recover the cost from anyone else. That is, the
burden of direct tax cannot be shifted.
iii. Eg- Income tax
2. INDIRECT TAX
i. Levied on the price of a good or service.
ii. The person paying the tax passes on the incidence to another person.
 iii. Example of the same is GST-

seller/business Government
Customer
GST is collected by collects the GST
pays price of the business/ seller from the people
good/service plus and forwarded to via sellers of
the GST govt goods and service

iv. It is regressive in nature- everyone who buys the good/service pays the exact same
amount
v. Useful social welfare promotion tool- higher taxes can be imposed on goods which
are harmful to human health like alcohol and cigarettes

Difference between direct and indirect tax

Basis Direct Tax  Indirect Tax

1. Meaning  Incidence and impact falls on the Incidence and impact falls on
same person different persons

1. Nature Progressive (earn more, more Regressive (uniform across

payable) people)

1. Taxable Taxable income of the assessee Purchase, sale, manufacture

event and provision of services.

1. Levy and Levied and collected from the Levied and collected from the
collection  assessor respondent by the
assessee/dealer

1. Shifting of Directly borne by the assessee- can’t Tax burden is shifted on to the
burden be shifted  subsequent user 

1. Collected  After income for a year is earned or At the time of sale or purchase
 valuation of assets is determined on of the services
the valuation date
Collected by the collecting
It is collected by the government agents, i.e . sellers and
suppliers.

Why do we pay taxes- need for tax?

● It is the primary source of government revenue for public welfare

● In a welfare state, government takes primary responsibility to ensure welfare for its
citizens in matters of health care, education, employment, infrastructure, social security
and other development needs.
● Taxes are compulsory or enforced contribution to the government revenue by public- this
is because not everyone will be willing to pay tax and so it is made compulsory (BIG
LOL)

Power to levy tax

● People give this power to the government through the constitution

● Article 265 of Constitution states that no tax shall be levied or collected except by the
authority of law. (This article is restrictive in nature). Thus, tax imposed must be within
legislative competence. For levy of ANY tax, there MUST be a law framed by
government for it to be valid.
● Article 246- gives state and union govt power to make laws to tax matters mentioned
within 7th schedule.
o Union List (List I) Entry 82: Taxes on income other than agricultural income i.e.
income tax
o State List (List II) Entry 46: Taxes on agricultural income

ADMINISTRATION OF TAX LAWS

− Administrative hierarchy of tax:

I. Ministry of Finance
1) Department of Revenue
 a) Central Board of Direct Tax
b) Central Board of Indirect Tax & Customs

Both the boards have been constituted under the Central Board of Revenue act, 1963

Overview of Income Tax Law

Main components to the law-

1) Income Tax Act 1961

2) Finance Act
3) income tax rules 1962
4) circulars and notifications
5) case laws

1) INCOME TAX ACT, 1961

● Contains 298 sections and 14 schedules

● Undergoes change every year with changes by the annual finance act and other legislations
like taxation laws (amendment) act.
● The act provides for determination of taxable income, determination of tax liability etc.

2) FINANCE ACT

● Every year, the finance minister introduces the finance bill in the parliament’s budget
session
● The bill contains amendments which are sought to be made in the areas of direct and
indirect taxes levied by the central govt
● When bill is approved by both the houses of Parliament and receives assent from
president, it becomes the finance act.
● SEC 294: If fin act not enacted on the first date of April of assessment year,
▪ The provisions in force in the preceding assessment year or the provisions
proposed in fin bill before the parliament, whichever is more beneficial to
the assesse will apply.
● First Schedule to the finance act contains four parts:
1) PART I: specifies the rates of tax applicable for the current assessment year.
 2) PART II: specifies the rates at which tax is deductible at source for the current
financial year
3) PART III: Rates for calculating income tax for deducting tax from income
chargeable under “salaries” and computation of advance tax.
4) PART IV: rules for computing net agri income
− The Direct Tax Vivad se Vishwas Act, 2020:

3) Income Tax Rules, 1962:

● These rules keep on changing. Latest notification of the amendment: 28th July
● Blogs to keep yourself updated: Clear Tax, Tax Guru

4) Circulars and Notifications

● Issuance power given to CBDT under section 119 of the ITA.

● The board may issue circulars and clarifications from time to time which is to be
followed by the tax authorities (binding)
● These circulars/notifications are binding upon the income tax authorities but the same
are NOT binding on the assessee, income tax appellate tribunal or on the courts.
● CIRCULARS are NOT law in terms of Art. 13 of the Constitution
● However, asessee can claim benefit under the circulars

Notifications:

● Issued by the Central government to give effect to the provisions of the ITA
● For example, S. 15(10) of ITA allows CG to issue notification to exclude certain income from total
income. S 10(15) (iv)(h) of ITA in particular allows CG to issue notification to exclude income generated
by bonds or debentures of public sector company.
● CDBT can also make and amend rules for the purposes of the act by issue of notifications

SECTION 4: Basic Principles for charging income tax:

● Income of previous year of a person is charged to tax in the immediately following

assessment year. Assessment year is the year in which your income tax is being assessed
● Rate is applicable as per the annual finance act of that year, which is different for
different categories of income.
 − Sec 115bb, 112, 11a: The income tax act has prescribes some specific rights. Eg. lottery
income to be taxed at 30%

Random information

● He discussed some news pertaining to Transparent Taxation: Honoring the honest.

This is a scheme launched on 13/8/2020 to provide fair and reasonable treatment to
taxpayers. There are 3 basic features and 6 benefits-
● FEATURES-
i. Faceless assessment scheme- no visit required to IT office ensuring speedy
completion of assessment
ii. Faceless appeal- random allocation of cases by AI
iii. Taxpayer’s Charter- roles and responsibilities of authorities, along with
expectation of taxpayers
● BENEFITS-

MODULE 2

● Origin of Taxation: Origin from manusmriti, arthshastra and the theory of maximum
social welfare
● In 1860, tax was introduced by the very first finance minister. Sir James Wilson to cover
losses sustained by British Raj as a result of Sepoy Mutiny.
● 1921: All India Committee formed to suggest new reforms
● 1922: The Indian Tax Act of 1992 was passed, pursuant to the committee’s
recommendation.
● 1956: Referred to LCI, leading to generation of its 12th Report on LCI loopholes and
issues.
● 1962: Modern ITA comes into effect on 1st April.

SECTION 2:

● Definitional clause defining 90-100 terms with 48 sub-clauses

● In addition to S 2, the General Clauses Act must also be referred. The GCA defines terms
like ‘financial year’, which are not defined within the ITA
 ● Technical terms like “dividend. Amalgamation, transfer” etc. have been specifically
defined by the ITA, so other sources for definition (like dictionaries) cannot be referred.
● Section 321 of GCA- Financial year is the year commencing from 1st April. So, FY is a
GENERAL term, which is used in different contexts to ascertain AY and PY (assessment
year and previous year).
● Sec 2 (7) : Assesse means a person by whom any tax/sum of money is payable under this
act.
● S.2(9)- Assessment Year (AY)- means the period of 12 months commencing on the first
day. Assessment year will always fall after the previous year. Purpose: Income of the
previous year is assessed. It is the period starting from April 1 and ending on March 31 of
the next year. This, the assessment year 2019-20 commences on April 1, 2019 ad ends on
March 31, 2020.
● Income of previous year of an assesse is taxed during the next following assessment year
at rates prescribed in the relevant finance act.
● Section 2(34)- previous year (PY)- previous year" means the previous year as defined
in section 3.

SECTION 3- defines PY

● General rule- "previous year" means the financial year immediately preceding the
assessment year
● 2 exceptions to this general rule- In case of
1) Newly set up business or profession
2) New source of income,

The previous year is the period beginning with the date of setting up of the business/date on
which new income starts to come in, and ending on 31st march of that financial year.

Previous year for undisclosed incomes-

1) Cash Credits (Section 68): For instance, if the CC is received in 2017 but not taxed
and satisfactorily explained as to why it was not taxed, for the AY 2019-2020 this CC
will be deemed to fall in PY 2018-19.
 2) Unexplained investments (69): If the assessee make transactions which are not
recorded in any book of account and he’s not able to explain the source of the
income, in such a case, the value of income is deemed to be taxable in the AY under
consideration.
3) Unexplained money (Section 69A)
4) Amount of investments etc. not fully disclosed in the books of account (S 69B):
You’re not fully disclosing the amount of investment in the books of account- the
cash flow and books do not match
For example, if gold biscuit worth 1 lakh is purchased but the books only account for
30k, then if assessee is unable to prove why this was done, the difference between
actual value and book value (70K) will be added to the PY income and assessed in
AY
5) Unexplained expenditure (S 69 C)
6) Amount borrowed/ repaid on hundi ( S 69D)

CERTAIN CASES WHEN INCOME OF PREVIOUS YEAR WILL BE ASSESSED IN

THE PREVIOUS YEAR ITSELF:

● GENERAL RULE: Income of a previous year is assessed in the assessment year

following the previous year
● EXCEPTIONS: Cases where income of a previous year us assessed in the previous year
itself:
1) Sec 172: Shipping business of non-resident- conditions-
i. Assessee is NRI
ii. Owns a shipping business
iii. Ship carries goods/persons shipped at a port in India
iv. NRI may/may not have an agent
v. Irrespective of whether amount generated in business (by the NRI owned
business) is paid inside/outside India

The income so generated is deemed to accrue within India and the tax must be paid on this
amount BEFORE leaving Indian port

2) Sec 174: Persons leaving India

 i. Appears to AO (Assessing Officer) that person may leave India during AY.
ii. With NO intention to return back to India

Then the total income accumulated by the assessee until probable date of leaving is to be paid in
that year itself.

3) Sec 174A: AOP/BOI/Artificial Juridical Person formed for a particular event

or purpose
● Appears to AO that the entity in the above category is going to be dissolved bc
of completion of purpose, then income accumulated till date of dissolution is
chargeable to that AY itself
4) Sec 175: Persons likely to transfer property to avoid tax
5) Sec 176: Discontinued Business

Assessee

● Section 2(7): Assessee means a person by whom any tax or any other sum of money is
payable under this act.
● The section puts forth an INCLUSIVE DEFN and the term assessee has been defined to
include-
1) Normal assessee- Person who’s-
i. Income is taxed under the ITA
ii. Fringe benefit is taxed under the ITA
iii. Assessable for income of another person under the ITA
iv. Assessable under the ITA for loss sustained by him or another person
v. Assessable under the ITA amount of refund due to him or another person
2) Persons who are DEEMED to be an assessee under the ITA
3) Persons who are DEEMED to be an assessee in default under the ITA
1) Normal assessee also includes representative assessee- A person may not be liable only
for his own income or loss but he may also be liable for the income or loss of other
persons e.g. agent of a non-resident, guardian of minor or lunatic. For instance, S 160
 defines representative assessee, and establishes the guardian or manager who is entitled
to receive income of non-resident, minor, lunatic or idiot to the repetitive assessee.
● Further, S 64(1)A establishes that in computing the total income of any individual,
there shall be included all such income as arises or accrues to his minor child.
● In such cases, the person responsible for the assessment of income of such person is
called representative assesses. Such person is deemed to be an assessee.
● Fringe benefit is u/s 223 B
2) Deemed assessee includes-
i) In case of a deceased person who dies after writing his will the executors of
the property of deceased are deemed as assessee.
ii) In case a person dies intestate (without writing his will) his eldest son or other
legal heirs are deemed as assessee.
iii) In case of a minor, lunatic or idiot having income taxable under Income-tax
Act, their guardian is deemed as assessee.
iv) In case of a non-resident having income in India, any person acting on his
behalf is deemed as assessee. 1
Such is provided under S 159(1)- Where a person dies, his legal representative shall be
liable to pay any sum which the deceased would have been liable to pay if he had not
died, in the like manner and to the same extent as the deceased.
3) A person is deemed to be an assessee-in-default if he fails to fulfill his statutory
obligations. For example, an assessee who fails to pay the demand u/s 156 within 30
days, in full, shall be deemed to be an ‘Assessee in Default’, except in circumstances
where he has obtained Order staying the demand in due course. An assessee in default
will continue to be so, unless he has cleared the demand/ obligations in full. Another
example- wrt S 201 which deals with deduction of tax at source, if this is not done or
incorrectly done, then the assessee is in default.

Additionally, assessee can be categorized based on-

1
https://www.caclub.in/assessee-meaning-s-27-income-tax/#:~:text=i)%20any%20person%20against
%20whom,payable%20by%20him%20or%20not%3B&text=iii)%20any%20person%20by%20whom,of%20tax
%20under%20this%20Act.
 1) Legal status- individual, HUF, a firm, an association of persons or a body of
individuals, a local authority, every artificial judicial person
2) Residential status- resident, ordinary resident, non-resident, resident but not ordinary
resident

Person

● Term “person” is defined under S 2(31) to include

(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-
clauses.
An AOP/BOP/local authority etc. are deemed to be a person, whether or not they were
formed or established or incorporated with the object of deriving income, profits or
gains.
(i) Section 2(31)(i) r/w Section 161 establishes that even a minor, deceased or lunatic is
also an individual and so a person in terms of ITA, however are not assessees.
(ii) Member of HUF can be assessed as an individual based on individual income, as well
as a part of a HUF (for two different incomes). HUF is taxed up until partition. The
HUF income cannot be taxed individually for the members.
(iii) Company defined under S 2(17) of ITA and is given a wider connotation that the
Companies Act. It includes-

a) An indian company
b) Body corporate incorporated by or under the laws of a country outside India
c) Any institution, association or body which is or was assessable or was assessed
as a company for any assessement year under the Indian income tax act, or
which iso r was assessable or was assessed under this act as a company for any
assessement year commencing on or before 1970
 d) Any institution, association or body, whether incorporated or not and whether
Indian or non-Indian, which is declared by general or special order of the
Board to be a company.

Provided such institution, association or body shall be deemed a company only for such
assessment year or assessment years.

Company can be 1) Domestic -S (22A) or 2) Foreign u/s 2(23A).

Domestic company is-

a) An Indian company,
b) or any other company which, in respect of its income liable to tax under this act,
has made the prescribed arrangement for payment within India, of the dividends
payable out of such income.

(iv) Firm is defined u/s 2(23) as to have the meaning assigned to it in the Indian
Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as
defined in the Limited Liability Partnership Act, 2008 (6 of 2009).
While partnership firms do not ordinarily have a separate legal entity from the
partners, they are a different TAXABLE entity, thus can be taxed as so apart from
individually taxing partners.
(v) AOP/BOI-
(vi) Local authority defined u/S 3(31) of GCA- includes municipal authorities, panchayat,
local boards etc. and they are taxed only wrt the BUSINESS income and not the
administrative income.
(vii) Every artificial juridical person, not falling within any of the preceding sub-clauses-
Catch all phrase to include entities that don’t fall under specified categories.
Not all non-natural persons have a separate legal entity and so cannot be directly sued
(like idols, company, university). However, such artificial persons can still be taxed
as a separate unit under ITA.
Income – S 2(24)

● An inclusive definition and not an exhaustive one.

● does not confine the scope of income but leaves room for more inclusions within the
ambit of the term.
● Income under the ITA need not be a regular income- can be a one-time income as well.
Thus, a source of income can be temporary, or permanent and regular.
● Form of income can be in cash or kind (in case of latter, it will be valued and taxed
accordingly)
● Significance of method of accounting
o Method of accounting is irrelevant in case of- house salary, capital gains
o Method of accounting is relevant
● Capital v Revenue receipt- former is not liable to be taxed unless specifically provided,
while latter will be taxed unless specifically exempted.
● Loss- income also includes negative income, including expenditure and loss.
● Disputed income- dispute over title of income does not stop it from being taxed, it just
postpones the IT assessment.
● Lump-sum receipt
● Reimbursement- relief/payment made during course of service done for employment
needs, difference from allowance which is pre-allocated.
● Legality- ITA does not look at legality of income- does not make any distinction between
income from a legal source and an illegal source. If the income is obtained illegally, will
be taken care of some other law. Disputed /illegal income will not affect assessment of
income.
● Double taxation- Otherwise expressly provided, the same income cannot be taxed twice.
− If any assesse is receiving extra money on devaluation of currency, them it will fall under
the category of income
● Tax free income
● Notional income (fictional income)- Income should always be real, should not be
fictional or notional. Like a person cannot make profits out of a transaction with himself.
● Devaluation of currency- Extra money earned by this is income and taxable
− Income/surplus by mutual activity- Income/surplus by mutual activity; whenever you
are getting any mutual activity. Exception:
i.
 ii. Profit/gain of any insurance business carried on by any cooperative society
iii. Of any business of banking carried by any cooperative society of its member
● Pin money
− Award- which I received by a person because of his business/profession, then this
award will be treated as income. Shall be treated as income incidental to that
particular business for which he has received the award. Govt approved awards are
tax free. Read S 10(17)(a) and S 56(2)
● Contingent income- Contingent income not considered as taxable income because it has
not been realized. For eg. you are making an entry of a hypothetical income in a book.
− If you failed to make an entry in the book of accounts, you cannot make a plea that
the said income cannot be computed and shouldn’t be taxed on.
● Application of income
− Transfer of income without the transfer of source (income remains to be of the person
who has transferred it).
● Eg Transferring income from shares and not the complete shares- the source income
remains with the transferor (the shares), only application of the income is transferred.
● Diversion of income
− Income is eliminated at source and shifted to another person- source of income itself
is transferred
− Such a transfer happens based on an overriding legal title/obligation to transfer.
− Transferred from X (who is collecting income on behalf of Y) to Y (to whom the
income is actually due)
− Eg- Co-authors X and Y are to be paid for their book. X received income of 10k for
both, 5 k is liable to be transferred to Y
− Bejay Singh Dudhuria v. CIT (do not get used to seeing case law)- The assessee
succeeded to the family’s ancestral property on the death of his father. A suit was
brought by his stepmother. It was a maintenance suit in which consent decree was
made wherein assessee was directed to pay a fixed monthly sum to his step mother.
This was regarded as a charge on the ancestral estate in the hands of the assessee. The
court held that the sum paid to the step mother cannot be considered as the income of
the assessee. Therefore, the voluntary payment is treated as income of that payer but
 when there is a charge, it doesn’t fall under the category of application. It’ll come
under DIVERSION.
● Section 2(24): INCOME includes
i. Profits and gains
ii. Dividend
− Dividend: a share of profit to which a shareholder is entitled: SECTION 2(22)

(iia): Voluntary contributions received by a trust created wholly or partly for charitable or
religious purposes etc. This must be r/w S 13B and S 10. Those institutions which have been
approved as research institutions under section 35.

Section 13B of the act talks about special provisions related to voluntary contributions
received by electoral trusts.

iii. the value of any perquisite or profit in lieu of salary 

− Perquisite means benefits given to parties in lieu of salary. S 17(2) defines the same to
include-

(i) the value of rent-free accommodation provided to the assessee by his employer;

(ii) the value of any concession in the matter of rent respecting any accommodation
provided to the assessee by his employer;

− Profit in lieu of salary is defined u/S 17(3) to include-

the amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the termination of his employment or the
modification of the terms and conditions relating thereto;

iiia. any special allowance or benefit, other than perquisite included under sub-clause ( iii),
specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the
performance of the duties of an office or employment of profit

− Refers to benefit given over and above perquisite

− Ex- Travel allowance
 − However, such an allowance must be used only for employment duties. For example,
spending allowance given to X meet needs of person invited to be guest lecturer. This is
not done as a part of X’s ordinary duties.
− So when money is spend on official work which is not a part of carrying out a person’s
normal job, this can be REIMBURSED (and considered as reimbursement) but it will not
be allowance/benefit under income.

iiib. any allowance granted to the assessee either to meet his personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the increased cost of living.

− City compensatory allowance / DA (as per rising expenses)

iv. the value of any benefit or perquisite, whether convertible into money or not, obtained
from a company either by a director or by a person who has a substantial interest in the
company, or by a relative of the director or such person, and any sum paid by any such
company in respect of any obligation which, but for such payment, would have been
payable by the director or other person aforesaid 
− Perquisite/benefit specifically for –
a) If it is given by the company to its director or relative of the director.
b) Substantial interest in the company
− Can be monetary or non-monetary perquisite- treated as income
− Ex- a company is providing domestic servant to the manager. This will be treated as
income of the manager.

(iva) the value of any benefit or perquisite, whether convertible into money or not, obtained
by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1)
of section 160 or by any person on whose behalf or for whose benefit any income is
receivable by the representative assessee (such person being hereafter in this sub-clause
referred to as the "beneficiary") and any sum paid by the representative assessee in respect of
any obligation which, but for such payment, would have been payable by the beneficiary
(Didn’t focus on this-just mentioned, this applies to all subsequent sub-sections tbh)

v. any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section
41 or section 59 ;
 − Section (v) to (ve) are all related to S 28 which deals with profits and gains from
business/profession

vi. any capital gains chargeable under section 45 ;

vii. the profits and gains of any business of insurance carried on by a mutual insurance
company or by a co-operative society, computed in accordance with  section 44 or any
surplus taken to be such profits and gains by virtue of provisions contained in the First
Schedule ;

(viia) the profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;

viii. omitted

ix. any winnings from lotteries, crossword puzzles, races including horse races, card games
and other games of any sort or from gambling or betting of any form or nature
whatsoever.

READ WITH EXP TO THIS SECTION-

(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever, under any scheme or arrangement by
whatever name called;

(ii) "card game and other game of any sort" includes any game show, an entertainment
programme on television or electronic mode, in which people compete to win prizes or
any other similar game;

x. any sum received by the assessee from his employees as contributions to any provident
fund or superannuation fund or any fund set up under the provisions of the Employees'
State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such
employees

xi. any sum received under a Keyman insurance policy including the sum allocated by way
of bonus on such policy.
 “Keyman” policy is an insurance policy given to a person key to the company- basically,
if that person dies it would significantly affect the company so he has A1 insurance (like
Steve Jobs to Apple for example)

− Xviii: assistance in the form of subsidy or grant or cash by the CG or a SG or any

authority or body or agency in cash or kind of assesse other than:
(a) The subsidy or grant or reimbursement which is taken into account for
determination of the actual cost of the asset in question with the provisions of
explanation 10 to clause (1) of section 43
(b) The subsidy or grant by the CG for the purpose of the corpus of a trust or institution
established by the CG or SG

Subsidy will fall under the category of capital receipt; chargeable under 224(28)

Eg. CG is giving certain subsidy to a company

Section 43- Definitions of certain terms relevant to income from profits and gains of
business or profession (bc its referred to in Section 24 (xviii)

1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of
the cost thereof, if any, as has been met directly or indirectly by any other person or
authority:
…
Explanation 10 to the same-
Where a portion of the cost of an asset acquired by the assessee has been met directly or
indirectly by the Central Government or a State Government or any authority established
under any law or by any other person, in the form of a subsidy or grant or reimbursement
(by whatever name called), then, so much of the cost as is relatable to such subsidy or
grant or reimbursement shall not be included in the actual cost of the asset to the assessee
Provided that where such subsidy or grant or reimbursement is of such nature that it
cannot be directly relatable to the asset acquired, so much of the amount which bears to
the total subsidy or reimbursement or grant the same proportion as such asset bears to all
 the assets in respect of or with reference to which the subsidy or grant or reimbursement
is so received, shall not be included in the actual cost of the asset to the assessee.
BASICALLY- CG and SG subsidy/grant is not income
Levy of income tax:

STEP 1: Determination of residential status

STEP 2: Classifications of income under diff heads (Sec 14). 5 Different heads, each with own
computation method (extra class).

i. Salaries

ii. Income from house property

iii. Profits and gains of business or profession

iv. Capital gains

v. Income from other sources

STEP 3: Computation of income under each head.

− Exemptions and deductions will be taken care of under this step

− Some incomes are completely exempted-like agricultural income
− Some are PARTLY excluded, up until the limit mentioned in the ITA. For example,
educational allowance, savings in PPF, child allowance etc.

STEP 4 – Clubbing of income of spouse, minor child etc- S 60, 64 (to be discussed in module
3)

Step 5–Set-off or carry forward and set-off of losses 2

Set off of losses means adjusting the losses against the profit or income of that particular year.
Losses that are not set off against income in the same year can be carried forward to the
subsequent years for set off against income of those years. A set-off could be an intra-head set-
off or an inter-head set-off.

a. An intra-head set-off

2
https://cleartax.in/s/set-off-carry-forward-losses
b. An inter-head set-off

− Assessee can have different incomes under different heads, which means there can be
loss under one head of income and profit under another head, this is called inter head.
− Set off can be done under different incomes under same head or different heads
themselves (inter-head)
− Ex- X can have 2 incomes in his firm (one for manufacturing and one for retailing) and
be making a profit on one and loss on the other. The loss is set-off against the profit to
arrive at net income.
− For inter-head set-off, there are more restrictions. Some losses that CANNOT be set-off-

− a. Speculative Business loss

− b. Specified business loss

− c. Capital Losses

− d. Losses from an activity of owning and maintaining race-horses

− CARRY FORWARD- for loss that could not be set-off that year, it can be carried
forward to the next year to be set-off. A reason that can done, is maybe bc of ineligibility
of minimum profit.

Step 6–Computation of Gross Total Income

− Total income of a taxpayer from all the heads of income (as discussed in previous FAQ)
is referred to as Gross Total Income.

Step 7–Deductions from Gross Total Income- Section 80C to 80U

− 4 types of deductions-
i. Deduction in certain payment- life loan and insurance
ii. Deduction in certain income- royalty on patent
iii. Deduction in other income- old age pension
iv. Deduction in other deduction

Step 8–Total income

 − Total Income is the income on which tax liability is determined. It is necessary to
compute total income to ascertain tax liability. Section 80C to 80U provides certain
deductions which can be claimed from Gross Total Income (GTI). After claiming these
deductions from GTI, the income remaining is called Income. In other words,
GTI less Deductions (under section 80C to 80U) = Total Income (TI). Total income can
also be understood as taxable income.
− As per section 288A, total income computed in accordance with the provisions of the
Income-tax Law, shall be rounded off to the nearest multiple of ten.
− If the taxable income of Mr. Keshav is Rs. 2,52,844.99, then first paisa shall be
ignored, i.e., 0.99 paisa shall be ignored) and the remaining amount of Rs. 2,52,844 shall
be rounded off to Rs. 2,52,840 (since last figure is less than five). If the total income is
Rs. 2,52,845 or Rs. 2,52,846.01, then it shall be rounded off to Rs. 2,52,850 (since the
last figure is five or above).

Step 9–Application of the rates of tax on the total income

Step 10–Surcharge / Rebate- S 87 to 88E

− An individual who is resident in India and whose total income does not exceed Rs.
5,00,000 is entitled to claim rebate under section 87A. Rebate under section 87A is
available in the form of deduction from the tax liability. Rebate under section 87A will be
lower of 100% of income-tax liability or Rs. 12,500. In other words, if the tax liability
exceeds Rs. 12,500, rebate will be available to the extent of Rs. 12,500 only and no
rebate will be available if the total income (i.e. taxable income) exceeds Rs. 5,00,000.

Step 11–Health and education cess on income-tax

Step 12–Advance tax and tax deducted at source

− Advanced tax is reqd to be pay in 4 installments. Presumptive tax scheme: pay tax in one
installment only
Sec 207 and 208 and some other provisions: Payment of advanced tax.
Tax deducted at source: Eg. Salary paid to the faculties in college; tax deducted by the
university itself (at the source). Advanced tax is mostly estimated. …….
Step 13–Tax Payable/Tax Refundable

Need to be rounded off to the nearest multiple of Rs. 10. Tax liability to be determined at
the end of the year.
At the end of a particular year, you’ll have to give a proof of investment.

CAPITAL AND REVENUE:

Capital Receipts are exempted from tax unless they are expressly taxable. Eg. Section 45 which
talks about capital gains

− Revenue receipts are always taxable provided there is a specific exemption

25th September 2020

− If you are going to get a receipt on account of fixed asset, capital receipt.
− Receipt on account of a circulating asset: Revenue receipt
− Eg. Fixed capital is what an owner turns into profit by keeping it in his own possession:
CAPITAL ASSETS
− An asset which is being circulated and because of the circulation Im getting the benefit:
FLOATING ASSET
− A fixed asset can be a circulating asset in the hands of another assesse.
− Whether a receipt is capital or revenue in nature? The source from which payment is
made has no relevance.
− Goodwill of any business is a capital receipt.
− Another eg. An amount which is being received in the placement of the source of income,
it will fall under the category of capital receipt.
− Compensation received by a person in the termination of his service is also a capital
receipt.
− Wrt sale and winding up of companies, whatever amount is received comes under
revenue receipts: CIT v. Post Chemical Industries Ltd.
− Eg. asset received by a member of JHF on partition: Capital receipts because this
− Casual Income:
− Capital expenditure: not deducted from the income. Eg expenditure on fixing a machine
− Revenue expenditure: deducted from the income-
TAX ASP: 3rd October 2020

− Direct: not dependent on the transaction; considered as progressive.

− Indirect: Dependent on the transaction, based on supply. Only income tax is indirect tax.
− Financial Year: April 1st of one year to 31st March of another. Taxable income: Net
profits. Eg. 1/04/2019 to 31/03/30; you earned RS 10 lakhs for FY 19-20.
− Submission to tax authorities by Sep 30/09/2020
− Scrutiny after 30/09/2020.
− AY is always one year after FY.
− For income earned on Sep 30 2019, FY will be 2019-20. It will end on 31 st March 2020.
Assessment starts on 1st April 2020 onwards. Assessment Year: 2020-21 (one year after
FY). PY will be 2019-2020.
− Another eg.:
A earned Rs 50,000 on May 31st, 2020. FY for this transaction will be 2020-2021
(because it falls within 1.04.2020 to 31.03.2021).
AY: 2021-2022.
PY: 2020-2021
General Trend: PY is same as FY. In jurisprudence available, ref point will always be
AY.
Eg. Shivani did not pay her tax. Her case is going on. It will be marked as a case
pertaining to AY 2021-22.

− Assessee: any person who has a taxable income OR any person who is taxable on other’s
income. Eg. minor’s income, spousal income etc. (Clubbing of income)
− Eg. Darshal Safaary earned 15 lakhs for Taare Zameen Pe. Is it his own or should be
clubbed? Should not be clubbed because he earned it because of his unique skills, talent.
− Person: simple definition and relevant part: Association of persons or body of
individuals:
Association of Persons: its members can be individuals or artificial persons or
Body of Individuals: its members can be only individuals.
Eg. Gujarat Textile Traders Association: AOP or BOP? AOP; subscription income,
membership income.
− Income: Anything and everything which has an economical benefit
Salary: Yes
Dividend: yes
Rent received: yes
GNLU gives car facility to the director: YES
A gifted B Rs 40000: Yes
GNLU gave Sir a facility to live on campus: yes
Agricultural Income: Yes but not taxable (Exempt income under section 10)

− Shivani asked: How can you tax benefits?

Ans. Most benefits will be given to employees. Indian income tax act has come with a
mechanism for taxing benefits and valuing perquisites
Eg. For housing facility: which city? Whether furnished?

− Diff between benefits and perquisites: Benefits are in direct cash/kind

Perquisites are more of a service.
House Rent allowance/DA allowance: Benefit
Car facility given to an employee: perquisite

− Revenue Income and Regular Business:

Revenue: income from regular basis
Capital: income from irregular business which is derived from transfer of assets
Eg. A is a lawyer. Revenue income: Client’s fees
Capital income: Sale of flat/ rent received

Eg. A is a real estate agent: for her, revenue income will be brokerage
Capital income: sale of flat

− Note: Capital Transaction examples for normal people can become for revenue for some:
Sale of flat is revenue for a builder
Car is revenue for Hyundai
 Plant sale is revenue for tech company
Share sale is revenue for trader

Capital Transaction: one which involves transfer of assets.

Regular Income v. Casual income

Casual income for a lawyer: rent received, sale of flat

Why is sale of flat revenue income for a builder?

Sale of flat is builder’s services and his business is a crucial component.

− Loss: (Sir didn’t teach this in detail)

− Relevant only in case of profits from business and profession
− Loss: Goods destroyed by fire

− HEADS OF INCOME under which income can be classified: (All these heads
require detailed discussion which will take place later)
Income from salary
Income from House property
Profits from business and profession
Income from capital gains
Income from other sources

− Receipt v. Accrual Basis:

When the income has to be accounted? When we earn the income or when we receive the
income?

A appears on behalf of X and raises an invoice of rs 10000 on 1 st October . Invoice is

payable by 15 October.
Accrual date: 1st October, date of receipt: 15th October
 Tax authorities say income will be taxed on accrual or receipt basis whichever is earlier.
Income is taxable on receipt or accrual basis, whichever is earlier

− Legal or Illegal Income: Illegal income is completely taxable just like legal income

− Disputed Title: there are tenants living in disputed property and they pay rent. Who is
gonna be liable to pay tax on this? One who receives the tax

− GIFTS; if from non-relatives: above 50,000, then it is considered as a taxable income

Installment based income is still income
Same income cannot be taxed twice: Double taxation
Eg. For distribution of dividend, companies have to pay DDT. Dividend is exempted
from income tax

− Aspect Doctrine: There can be 2 aspects of same transaction which can be taxed twice
but double tax is not allowed.

A import a TV. He will have to pay :

Customs duty – import
GST: supply
This is not double taxation, just two aspects of the same transaction.

− State income:
Even municipal corp has to pay tax but not state govt.

MODULE 3- BASIS OF CHARGE, SCOPE OF TOTAL INCOME AND RESIDENTIAL STATUS (S4-
9A)

S 4- Charge of IT
 − S 4 is the charging section- tax is charged on the basis of power u/S4 as per rate defined
by the Finance Act on every person specified u/S 2(31)
− This is the principle provision to charge tax
S 5- scope of total income

− Scope is related to the PY and varies as per residential status

− For a resident, scope of income includes all income which-

i. is received or is deemed to be received in India in such year by or on behalf of the

resident

ii. accrues or arises or is deemed to accrue or arise to him in India during such year

iii. accrues or arises to him outside India during such year

− For a person not ordinarily resident in India, scope includes income-

i. is received or is deemed to be received in India in such year by or on behalf of the

resident

ii. accrues or arises or is deemed to accrue or arise to him in India during such year

iii. accrues or arises to him outside India during such year ONLY if it is derived from a
business controlled in or a profession set up in India

− For non-resident, scope includes income which is-

i.  is received or is deemed to be received in India in such year by or on behalf of such

person

ii. accrues or arises or is deemed to accrue or arise to him in India during such year.

S 6- residential status

− test of residence is not dependent on citizenship and is different from domicile. A citzen of
India may not be a resident in India for the purpose of income-tax.
− it is calculated based on PY- Residential status is determined in respect of each previous
year. In other words, residential status of a person may vary from one previous year to
another previous year.
 − Single Status for each source of income: status for same PY cannot vary from source to
source of income. A person can have only one residential status for a previous year i.e. he
cannot be a resident for one source of income and non-resident for another source
− Country Specific- person can have same res status in over one country
− Person is said to be a resident in India in any previous year if he
i. Is in India in that year for a period amounting in all to 182 days or more (S 6(1)(a)),
OR
ii. Having within the four years preceding that year in India for a period or periods
amounting in all to 365 days or more, is in India for a period for a period of 60 days in
that year (S 6(1)(c).
− Stay need not be continuous, nor at a fixed location in India.
− Days of departure and arrival are counted as days of residence

PERSON

Individuals and
others
HUF

Resident non-resident resident non-Resident

ordinarily not ordinarily

resident in resident in
Inida Inida

− Non-resident is one who does not satisfy the conditions of residence given above

Illustration 1-
Soaham came to India first time during the P.Y. 2019-20. During the previous year, he stayed in
India for:

(i) 50 days;

(ii) 183 days;

(iii) 153 days.

Determine his residential status for the A.Y. 2020-21.

ANS- (i) Since Soaham resides in India only for 50 days during the P.Y. 2019-20, he does
not satisfy any of the conditions specified in sec. 6(1).

He is, therefore, a non-resident in India for the P.Y. 2019-20.

(ii) Since Soaham resides in India for 183 days during the previous year 2019-20, he satisfies
one of the conditions specified in sec. 6(1).

He is, therefore, a resident in India for the P.Y. 2019-20.

(iii) Soaham resides in India only for 153 days during the previous year 2019-20. Though he
resided for more than 60 days during the previous year but in 4 years immediately preceding
the previous year (as he came India first time), he did not reside in India. Hence, he does not
satisfy any of the conditions specified in sec. 6(1).

Thus, he is a non-resident for the P.Y. 2019-20.

Illustration 2-

• Sarthak, a British national, comes to India for the first time during 2015-16.
• During the financial years 2015-16, 2016-17, 2017-18, 2018-19 and 2019-20, he was in
India for 55 days, 60 days, 80 days, 160 days and 70 days respectively.
• Determine his residential status for the assessment year 2020-21.
ANS- He has stayed in India in the PY for 70 days, so S 6(1)(a) is ruled out. In the 4 years
preceding the PY, he has stayed in India for (55+60+80+160) 355 days, which does not meet the
365-day requirement.

Sarthak is non-resident of India

Explanation 1 and 2 have establishes exceptions to this rule-

1. Special case 1- it covers an Indian citizen who leaves India during the previous year for the
purpose of self-employment outside India or an Indian citizen who leaves India during the
previous year as a member of an Indian ship. Therefore, in case a person leaves for a
foreign assignment or goes outside to take employment outside India, the second
condition need not be met.
2. Special case 2- It covers an Indian citizen or a person of Indian origin who comes on a visit
to India during the previous year- Person is deemed to be of Indian origin if he or his
parents or any of his grand-parents was born in India. 
In these two cases, person is considered to be an Indian resident only if he is in India
during the relevant previous year for at least 182 days.

Illustration 3

Rishabh, an Indian citizen, for the purposes of employment, left India for first time on 1 April,
2019 and went to London. He came to India on 11 October, 2019 for only 190 days. Determine
his residential status for P.Y. 2019-20.

Day of leaving 1

Day of arrival 1

October 20

November 30

December 31
 Jan 31

Feb 28

March 31

TOTAL 174

As per exception, such category of person is required to stay in India for 182 days as per S 6(1)©
modified for this category. 174 days neither met S 6(1)(a), nor the modified S 6(1)(c). Therefore,
Rishab is not Indian resident.

Rule 126 of IT Rules-

• CBDT, Notification No. 70/2015 dated 17 August 2015, inserted Rule 126 in the Income-
tax Rules 126.
• Rule 126: Computation of period of stay in India in certain cases- (1) For the
purposes of clause (1) of section 6, in case of an individual, being a citizen of India and a
member of the crew of a ship, the period or periods of stay in India shall, in respect of an
eligible voyage, not include the period computed in accordance with sub-rule (2).
• (2) The period referred to in sub-rule (1) shall be the period beginning on the date
entered into the Continuous Discharge Certificate in respect of joining the ship by the
said individual for the eligible voyage and ending on the date entered into the
Continuous Discharge Certificate in respect of signing off by that individual from the
ship in respect of such voyage
• Explanation: For the purposes of this rule,
• (a) "Continuous Discharge Certificate" shall have the meaning assigned to it in the
Merchant Shipping (Continuous Discharge Certificate-cum-Seafarer's Identity
Document) Rules, 2001 made under the Merchant Shipping Act, 1958 (44 of 1958);
• (b) "eligible voyage" shall mean a voyage undertaken by a ship engaged in the carriage
of passengers or freight in international traffic where—
 • (i) for the voyage having originated from any port in India, has as its destination any
port outside India; and
• (ii) for the voyage having originated from any port outside India, has as its destination
any port in India

Illustration 4-

• Shubham is an Indian citizen and a member of the crew of na Australia bound Indian ship
engaged in carriage of passengers in international traffic departing from Mumbai port on 6th
June, 2019.
• From the following details for the P.Y.2019-20, determine the residential status of Shubham
for A.Y.2020-21, assuming that his stay in India in the last 4 previous years (preceding
P.Y.2019- 20) is 400 days and last seven previous years (preceding P.Y.2019-20) is 750
days:
• Date entered into the Continuous Discharge Certificate in respect of joining the ship by
Shubham: 6 June, 2019
• Date entered into the Continuous Discharge Certificate in respect of signing off the ship by
Shubham: 9 December, 2019

ANS-

● Apply Explanation 2 to section 6(1) read with Rule 126.

● The period beginning from 6th June, 2019 and ending on 9th December, 2019= 187 days

June 25

July 31

August 31

Sept 30

Oct 31

Nov 30
 Dec 9

Total 187

● Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded from the period of his
stay in India.
● Shubham’s period of stay in India during the P.Y.2019-20 would be 179 days [i.e., 366 days
– 187 days].
● Since his period of stay in India during the P.Y.2019-20 is less than 182 days, he is a non-
resident for A.Y.2020-21
● Clause (1A) has been inserted by the Finance Act, 2020 to Section 6(1) which further widens
the scope of “resident” for the purpose of IT Act. The clause shall come into effect from 1st
April, 2021.
● Section 6(1A): An individual, being a citizen of India, having total income, other than the
income from foreign sources, exceeding 15 Lac rupees during the P.Y shall be deemed to be
“resident in India” in that P.Y, if he is not liable to tax in any other country or territory by
reason of his domicile/ residence/ any other criteria of similar nature.
● Section 6(2): A HUF, firm or other association of persons (AOP) (body of individuals) is said
to be “resident in India” in any P.Y in every case except during that year when the control
and management of its affairs is situated only outside India.
● HUF etc. can be either a resident or non-resident in India.
● If an HUF’s control & management is “only”/ completely situated outside India- then it will
be considered non-resident in India.
● If an HUF’s control & management is wholly or partially in India, then it is resident in India.
● A resident HUF can further be classified as “ordinarily resident” and “not ordinarily
resident”.
“Control and management” means:
1. The controlling and directive power, (usually with the Karta)

2. Actual control and management (mere right to control and manage is not enough), (Karta can
vest this right with other members wrt particular estates/ businesses, they do not become control
& management)

3. Central control and management and not the carrying out of day to day affairs. (Karta, there
can be exceptions).

• CIT v. Nanelal Gandalal (1960): Control & management (C&M) means de facto control &
management, and not mere rights to control and manage affairs.
• Subbayya Chettiar v. CIT (1951): Following propositions were established by SC-
1. HUF is presumed to be resident in India unless it is proved by the assessee that the
C&M of its affairs is situated wholly outside India. C&M signifies the controlling and
directive power, the “head and brain” and “situated” implies the function of such
power at a particular place with some degree of permanence.
2. “Affairs” are affairs relevant for the purposes of IT Act, and have some relations with
income sought to be assessed.
3. The seat of C&M may be divided, and if so, it may have more than one residence.
4. If the seat of C&M is situated outside India, the bare activities in India would not be
enough to support a finding that the seat of C&M had shifted or that a second centre
for such C&M had started.
Residential status of firms and AOP:
• A firm or an AOP (“Association of Persons”) or BOI (body of individual) is said to be
“resident in India”, if C&M of its affairs are wholly or partly situated in India during the
relevant P.Y.
• C&M is vested in the hands of the partners (in case of firms) and principal officer (in case of
AOP/BOI).
• Concept of “ordinarily resident” and “non-ordinarily resident” is not applicable.
• Concept of “Non resident'” applies here.
• The C&M means not the day to day carrying on of business by employees or agents/
servants.
• The business may be done from outside India, and yet its C&M may be wholly within India.
• C&M of a business is situated where the head and brain of the business is situated.
• Section 6(3): A company is said to be “resident in India” if: (w.e.f. 1-4-2017)
1. It is an Indian company
2. Its place of effective management in that year is in India
• Explanation: “place of effective management” means a place where key management and
commercial decisions that are necessary for the conduct of business of an entity as a whole
are, in substance, made. Control means de facto control.
• Resident Company is any Indian company, or a non-Indian company if its place of effective
management & control is in India.
• BR Naik v CIT (1945) 13 LTR. 124 (Bom.)
• Narottan & Pereira Ltd v CIT, (1953) 23 ITR 454
• Calcutta Jute Mills Co v Nicholson, ITC 83
• Apthorpe v PS Brewing Co Ltd 4 TC 41 (CA)
• Circular No. 06 of 2017 (dated: 24/01/17) and Circular No. 08 of 2017 (dated: 23/02/2017)
have to be read with this clause.
• Section 6(4): Every other person is said to be resident in India in any previous year in every
case, except where during that year the control and management of his affairs is situated
wholly outside India.
• Residential status of a statutory corporation, local authority, idol or deity are determined by
this clause.
• Section 6(5): If a person is resident in India in a previous year relevant to an assessment year
in respect of any source of income, he shall be deemed to be resident in India in the previous
year relevant to the assessment year in respect of each of his other sources of income.

• Illustration: Shivansh, a foreign citizen resides in India the previous year for 2019-2020 for
83 days. Determine his residential status for previous year 2019-20 assuming his stay in India
during the last few previous years are as follows -

Year Days Year Days Year Days Year Days

2004- 220 2008- 36 2012- 137 2016- 175

05 09 13 17

2005- 15 2009- 115 2013- 265 2017- 15

06 10 14 18

2006- 257 2010- 123 2014- 310 2018- 67

07 11 15 19

2007- 110 2011- 65 2015- 121 2019- 83

08 12 16 20

● In P.Y. 2018-19 he was in India for 82 days. So, the first condition of 182 days as per Sec.
6(1)(a) is not fulfilled. But looking at the four PYs preceding the P.Y 2018-19, he is a
resident as per Section 6(1)(c). Therefore, he is a resident in India.  
● Looking at the seven P.Y. as per Section 6(6), if he satisfies the additional condition, only
then will he be considered “ordinarily resident” in India. I.e. if he is in India for 2 out of 10
P.Ys.  
● If he does not satisfy the additional condition, he will be considered resident but not
ordinarily resident. In the present case, Shivansh has been in India for 8 out of 10 P.Y,
therefore he is “ordinarily resident”. 

• Illustration: AB de Villiers, a South African cricketer visits India for 100 days in every
financial year for the past 10 years. This has been his practice for the past 10 financial years.

• Find out his residential status for the assessment year 2020-21.

• Will your answer be different if he has been coming to India for 110 days instead of 100 days
every year.

P.Y. 2019-20- 100 days- Section 6(1)(A) not fulfilled. 

Preceding 4 P.Y. 2015, 16, 17, 18- 400 days- Section 6(1)(B) fulfilled. Therefore he is a
resident of India for P.Y 2019-20. 

Additional condition: preceding 7 P.Y- 700 days- Section 6(6) not fulfilled. Therefore he is
resident but not ordinarily resident. 

If it would have been 110 days, then the additional condition of the 7 P.Y would be 770 days-
Section 6(6) is fulfilled since he has spent 2 out of 10 P.Y in India (i.e. 730 days). Therefore
he would have become “ordinarily resident in India”.

• Illustration: Yash comes to India for the first time on September 1, 2016. On September 15,
2016, he joined a company on a monthly salary of 56k, as a part-time production consultant.
He did not have any source of income upto September 14, 2016. 

On October 9,2016 he started a trading business with the approval of his boss. For the
previous year 2016-17 he has the following income:

Salary from part-time employment: Rs. 364k

Income from India from business: 186k

Foreign income: 40k dollars 

Residential status for A.Y 2017-18. 

For the P.Y. 2016-17: residential status on the basis of sources of income 

Salary from part time: 198 days (15th Sept to 31st March)- he satisfied Section 6(1)(a)

Trade: 174 days (9th October to 31st March) - not resident for this source of income because
he does not satisfy Section 6(1) (a)

But, he does not satisfy the additional condition as under Section 6(6), so he is resident but
not ordinarily resident for the first source of income. But, as per Section 6(5), if a person is
resident in India for one source of income, he is resident in India for all source of
incomes, so the fact that he does not fulfill Section 6(1)(a) for his trading business is not
relevant, he is still resident for that source of income. 

Section 6 (6) (b): 

● A person is said to be not ordinarily resident in India if such person is an HUF whose
manager (karta) has been a non-resident in India for 9 out of 10 previous years
preceding that year, i.e, 720 days for the previous 10 P.Y. 

● Residential status of karta is irrelevant, but his residential status for the past 10 years is
important for the purposes of Section 6 (6) (b) 

Illustration: 

Soaham is a resident but not ordinarily resident for A.Y. 2017- 18 (P.Y. 2016-17). During the
P.Y 2016-17, Soaham being the karta of “2017 Batch” HUF since 1990 managed the affairs
of the HUF partly from India and Nepal. 

Determine the residential status of the HUF for the A.Y. 2017-18. 

Since the Karta Soaham is RNOR, the HUF is also RNOR. (He hasn't spent 730 days in India
in the last 10 P.Y, so it is understood that he has not fulfilled Section 6(6) (B)’s condition of
720 days also, therefore HUF is also RNOR. 
 Section 6 (6) (c):

● A citizen of india or a person of indian origin, having total income other than foreign
sources, exceeding 15 lac rupees during the P.Y. as referred to in Section 6(1)(1A).   

Section 5: Scope of Total Income

● First and foremost factor is the residential status. Scope of total income is directly
proportional with the residential status of the assessee. There are certain incomes which
may be taxable in the hands of the assessee of a RNOR and ROR. 

● Second factor that needs to be looked at is the Nature of income, whether the income is
indian or foreign. 

● The scope of total income depends on the following 3 factors:

1. Residential status: ROR, RNOR, NRI 

2. Place of accrual or receipt of income (whether actual or deemed)

3. Point of time at which the income had accrued to or was received. 

ROR: Total income of such person under Section 5(1) consists of income 

(a) received or is deemed to be received in India during P.Y,

(b) accrues or arises or is deemed to accrue or arise to him in India during P.Y; or
(c) accrues or arises to him outside India during P.Y even if it is not received or brought
into India during the P.Y.  (foreign income) 

RNOR: Proviso of Section 5(1). Total income consists of income 

● received or is deemed to be received in India during P.Y,

● accrues or arises or is deemed to accrue or arise to him in India during P.Y; or

● BUT, the income which accrues or arises to him outside India shall not be so included
unless it is derived from a business controlled in or a profession set up in India. 

NRI: Section 5(2). Total income includes the income:

 (a) received or is deemed to be received in India in such year by or on behalf of such
person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Therefore, all assessees irrespective of their residential status are liable to be charged on: 

(a) income received or deemed to be received in India and 

(b) income accrued or arisen or deemed to be accrued or arise outside India but
received in India, 
(c) income accrued or deemed to be accrued in India but received outside India. 

Nature of Income Tax incidence in the case of

Resident & Resident but Non-

ordinarily not ordinarily resident
resident resident

Income accrued or deemed to be accrued and received Taxable Taxable Taxable

or deemed to be received in India

Income accrued outside India but received or deemed to Taxable Taxable Taxable
be received in India

Income accrued or deemed to be accrued in India but Taxable Taxable Taxable

received outside India

Income accrued and received outside India from a Taxable Taxable Not
business controlled in or profession set-up in India taxable

Income accrued and received outside India from a Taxable Not taxable Not
business controlled or profession set-up outside India taxable

Income accrued and received outside India in the Taxable Not taxable Not
previous year (it makes no difference if the same is later taxable
remitted to India)

Income accrued and received outside India in any year Not taxable Not taxable Not
preceding the previous year and later on remitted to taxable
India in current financial year

Indian income and foreign income 

● Meaning of “income received or deemed to be received”: all assessees are liable to tax in
respect of the income received or deemed to be received by them in India during the P.Y
irrespective of (a) their residential status and (b) the place of its accrual. 

To determine the nature of income as “indian income”: 

1. Income if received/ deemed to be received in India during the P.Y and is

accrued/deemed to be accrued in India. 
2. Income if received in India during P.Y but it is accrued outside India during P.Y. 
3. Income received outside India during P.Y but accrued in India during P.Y.

● Foreign income:

1. Not received in India and not accrued in India during P.Y.

● Foreign income is taxable in the hands of a Resident/ ROR(HUF,Individual) but not

taxable in the hands of the Non-resident. 

● Foreign income is taxable in the hands of RNOR only if it is from a business/profession

set up in India. (Proviso to S.5(1)

● Once an amount is received/deemed to be received as an income in India, the subsequent

transfer of that income is irrelevant.  

● “Accrual of income” is when the right of income becomes vested in the assessee. Eg.
salaried employee’s income is said to be “accrued” throughout the month, and it will
become due on 30th of the month, and will be received when the employee gets it in his
bank account.
● Explanation 1.—Income accruing or arising outside India shall not be deemed to be
received in India within the meaning of this section by reason only of the fact that it is
taken into account in a balance sheet prepared in India.

● Explanation 2.—For the removal of doubts, it is hereby declared that income which has
been included in the total income of a person on the basis that it has accrued or arisen or
is deemed to have accrued or arisen to him shall not again be so included on the basis that
it is received or deemed to be received by him in India.

● Illustration- Rishabh provides following details of income, calculate the income which is
liable to be taxed in India for the A.Y. 2020-21 assuming that –

a) He is an ordinarily resident
b) He is not an ordinarily resident
c) He is a non-resident

Particulars Amount

Salary received in India 1,40,000

from a former employer
of UK

Income from tea 10,000

business in Nepal being
controlled from India

Interest on company 30,000

deposit in Canada (1/3rd
received in India)

Profit from a business in 1,00,000

Mumbai controlled from
UK

Profit for the year 2002- 2,00,000

03 from a business in
Tokyo remitted to India

Income from a property 45,000

in India but received in
USA

Income from a property 1,50,000

in London but received
in Delhi

Income from a property 2,50,000

in London but received
in Canada

Income from a business 10,000

in Zambia but controlled
from Turkey
 Particulars Resident & Resident Non-resident
Ordinarily but not
resident ordinari
ly
resident

Salary received in India from a former employer of UK 1,40,000 1,40,000 1,40,000

Income from tea business in Nepal being controlled from India 10,000 10,000 Nil

Interest on company deposit in Canada – 10,000 10,000 10,000

- 1/3rd received in India

- 2/3rd received outside India 20,000 Nil Nil

Profit from a business in Mumbai controlled from UK 1,00,000 1,00,000 1,00,000

Past Profit from a business in Tokyo remitted to India Nil Nil Nil

Income from a property in India but received in USA 45,000 45,000 45,000

Income from a property in London but received in Delhi 1,50,000 1,50,000 1,50,000

Income from a property in London but received in Canada 2,50,000 Nil Nil

Income from a business in Jambia but controlled from Turkey 10,000 Nil Nil

Income liable to tax in India 7,35,000 4,55,000 4,45,000

Section 7: Income deemed to be received

Section 8: Dividend income

Section 9: Income deemed to accrue or arise in India

 • In some cases, income is deemed to accrue or arise in India under section 9 even though it
may actually accrue or arise outside India

• This is not related to concept of residency. There are 8 different sub-clauses for various
categories of income deemed to arise in India.

• Section 9 applies to all assessees irrespective of their residential status and place of business

Income Salary Salary from Govt. Income from Income from Income Income Deemed
from earned in by an Indian dividend paid interest from from receipt of
connectio India citizen for by an Indian payable by royalty technical gift by non
n in India services rendered company specified services resident
outside India person

Sec. 9(1) Sec. 9(1) Sec. 9(1)(iii) Sec. 9(1)(iv) Sec. 9(1)(v) Sec. 9(1) Sec. 9(1) Sec. 9(1)
(i) (ii) (vi) (vii) (viii)

Section 9(1)(i)- Income from connection in India

• All income accruing or arising, whether directly or indirectly-
a) through or from any business connection in India; or
b) through or from any property/asset or source of income in India; or
c) through the transfer of a capital asset situated in India.
• includes professional connections. Business connections may be in several forms, e.g. a
branch office in India or an agent/ organisation of a non-resident in India. 2 conditions to
be satisfied-
1. Condition one - The taxpayer has a “business connection” in India.
2. Condition two - By virtue of “business connection” (it includes even profession
connection) in India, income actually arises outside India.
● An asset or a capital asset (being any share or interest in a company or entity registered or
incorporated outside India) shall be deemed to be and shall always be deemed to have
been situated in India if the share or interest derives, directly or indirectly, its value
substantially from the assets located in India

● Capital asset in this context is the same meaning as given in Section 45 of the Income
Tax Act. 

Two ways of assessing what “substantially” is: 

1. DIT v. Copal Research Ltd. (2014] 49 taxmann.com 125 (Delhi):

Substantially” means not less than 50 per cent.
2. The Finance Act, 2015- the share or interest of a foreign company or entity shall
be deemed to derive its value substantially from the assets (whether tangible or
intangible) located in India, if on the specified date, the value of Indian assets,-
a. a exceeds the amount of Rs. 10 crore; and
b. represents at least 50 per cent of the value of all the assets owned by the company
or entity.
● Circular No. 4/2015 dated March 26, 2015:  Exemption to FA

● If a foreign company declares dividends outside India, it cannot be deemed to accrue or

arise in India even if the foreign company declaring dividend has substantial assets. (held
by it directly or indirectly) located in India. 
● However, this provision is not applicable in the case of any asset or capital asset being
investment held by a non-resident, directly or indirectly, in Category-I or Category II
Foreign Portfolio Investor under the SEBI (Foreign Portfolio Investors) Regulations,
2014.
● Eg:
1. maintaining a branch office in India for the purchase or sale of goods or transacting
other business
2. appointing an agent in India for the systematic and regular purchase of raw material
or other commodities or for the sale of the non-resident’s goods or for other business
purposes
3. erection a factory in India where the raw produce purchased locally is worked into a
form suitable for export abroad
4. forming a local subsidiary company to sell the products of the non-resident parent
company
5. having financial association between a resident and a non-resident company, etc.

Explanation 1. For the purposes of this clause—

(a) in the case of a business 8[, other than the business having business connection in
India on account of significant economic presence,] of which all the operations are not
carried out in India, the income of the business deemed under this clause to accrue or
arise in India shall be only such part of the income as is reasonably attributable to the
operations carried out in India ;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India
to him through or from operations which are confined to the purchase of goods in India
for the purpose of export ;

(c) in the case of a non-resident, being a person engaged in the business of running a
news agency or of publishing newspapers, magazines or journals, no income shall be
deemed to accrue or arise in India to him through or from activities which are confined
to the collection of news and views in India for transmission out of India ;

(d) in the case of a non-resident, being—

(1) an individual who is not a citizen of India ; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in
India ; or

(3) a company which does not have any shareholder who is a citizen of India or who is
resident in India,

no income shall be deemed to accrue or arise in India to such individual, firm or

company through or from operations which are confined to the shooting of any
cinematograph film in India;

(e) in the case of a foreign company engaged in the business of mining of diamonds, no
income shall be deemed to accrue or arise in India to it through or from the activities
which are confined to the display of uncut and unassorted diamond in any special zone
notified by the Central Government in the Official Gazette in this behalf.

Explanation 2.—For the removal of doubts, it is hereby declared that "business

connection" shall include any business activity carried out through a person who, acting
on behalf of the non-resident,—

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of
the non-resident or habitually concludes contracts or habitually plays the principal role
leading to conclusion of contracts by that non-resident and the contracts are—

  (i) in the name of the non-resident; or

 (ii) for the transfer of the ownership of, or for the granting of the right to use, property
owned by that non-resident or that non-resident has the right to use; or

(iii) for the provision of services by the non-resident; or

(b) has no such authority, but habitually maintains in India a stock of goods or
merchandise from which he regularly delivers goods or merchandise on behalf of the
non-resident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or for that
non-resident and other non-residents controlling, controlled by, or subject to the same
common control, as that non-resident:

Provided that such business connection shall not include any business activity carried
out through a broker, general commission agent or any other agent having an
 independent status, if such broker, general commission agent or any other agent having
an independent status is acting in the ordinary course of his business :

Provided further that where such broker, general commission agent or any other agent
works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to
as the principal non-resident) or on behalf of such non-resident and other non-residents
which are controlled by the principal non-resident or have a controlling interest in the
principal non-resident or are subject to the same common control as the principal non-
resident, he shall not be deemed to be a broker, general commission agent or an agent of
an independent status.

● Operations not taken as business connections:

1. Business activity through a broker, general commission agent or any other agent
having an independent status (proviso to exp 2 to S 9(1)(i))
2. Where all operations are not carried out in India
3. Activities that generate royalty from (exp 2 to Section 9 itself)-

(i) the transfer of all or any rights (including the granting of a licence) in respect
of a patent, invention, model, design, secret formula or process or trade mark
or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a
patent, invention, model, design, secret formula or process or trade mark or
similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or
trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial

or scientific knowledge, experience or skill ;

(iva) the use or right to use any industrial, commercial or scientific equipment but not
including the amounts referred to in section 44BB;

(v) the transfer of all or any rights (including the granting of a licence) in respect
of any copyright, literary, artistic or scientific work including films or video
tapes for use in connection with television or tapes for use in connection with
 radio broadcasting 11[, but not including consideration for the sale,
distribution or exhibition of cinematographic films] 

4. Purchase of goods for export (exp 1(b) to S 9(1)(i))

5. Collection of news and views (exp 1(c) to S 9(1)(i))
6. Shooting of cinematograph films in India (if a few conditions are satisfied) (exp
1(d)(3) to S 9(1)(i))
7. Fund management activity
8. Display of uncut and un assorted diamond in a notified special zone

● category I or category II foreign Portfolio Investor under SEBI (FPI) regulations, 2014. 

Salaries earned in India [Section 9(1)(ii)]

● Salaries payable for 

a) Services rendered in India, and

b) The rest period or leave period which is preceded and successes by the period during
which service were rendered in India and forms part of the service contract of
employment

Shall be deemed to accrue or arise in India

● Income of an individual which falls under the head salaries is deemed to accrue or arise
in India if services are rendered in India.
● Conversely, if service is rendered outside India salary income cannot be deemed to be
earned in India. However, this rule has an exception and the same is discussed in S ((1)
(iii)

Salary payable by the Government to Indian citizen for services rendered outside India
[Sec. 9(1)(iii)]

• Any salary –

a) payable by the Government of India;

b) to a citizen of India;
 c) for services rendered outside India;

⮚ shall be deemed to accrue or arise in India.

• any allowances or perquisites paid by the Government to a citizen of India for services
rendered outside India shall be exempted [Sec. 10(7)]

Income from dividend [Sec 9(1)(iv)]

● Any dividend paid by an Indian company outside India is deemed to accrue or arise in
India

Income from Interest [Sec 9(1)(v)]

Income from royalty [Sec 9(1)(vi)]

Income from technical services [Sec 9(1)(vii)]

For Sub-section (iv) to (vii), the following rules apply-

Rule 1- when received from Gov: it will be deemed to accrue or arise in India

Rule 2 - when received from a person resident in India. Rule 2 is not applicable in the
following cases: 

a. If borrowed money is utilized by the payer for carrying on a business/profession outside

India or for earning any income outside India

b. Payment of royalty/technical fees pertains to a business/profession carried on by the

payer outside India or earning any income outside India. 

Rule 3 - when received from a non-resident: read from act

• Interest, royalty or technical fees received from a non-resident, is deemed to accrue or

arise in India in the hands of recipient, in the following cases:

a) borrowed money is utilized by the payer for carrying on a business/ profession in India;
or

b) payment of royalty/technical fees pertains to a business/ profession carried on by the

payer in India or earning any income in India.
 • Interest received outside India by a foreign bank from its branch in India: in the
hands of recipient income shall be deemed to accrue or arise in India.

Illustration: Rahul is a non-resident in India. Only Indian income is taxable in the hands of
Rahul in India. During the previous year 2016-2017, received interest on different dates. 

In all these cases, interest is received outside India. 

If in these cases, interest accrues or arises in India then it will be indian income and table in
india

Coversly if in these cases, interest is not deemed to accrue or arise in India, it will become
foreign income which will not be taxable in the hands of Rahul, who is non-resident. 

Date Nature of interest received by Rahul Whether Whether

deemed to taxable in
accrue or arise India in the
in India hands of
Rahul

Apri Rs. 10,50,000 is received from the Government of India Yes Yes
l 10,
2016

May Rs. 9,00,000 is received from A Ltd. (resident in India) and A No No

1, Ltd. has utilized the capital borrowed from Rahul for
2016 carrying on business or profession outside India or earning
any income outside India

May Rs. 2,00,000 is received from B Ltd. (resident in India) and B Yes Yes
10, Ltd. has utilized the capital borrowed from Rahul for
2016 carrying on business or profession in India or earning any
income in India

June Rs. 7,00,000 is received from C Ltd. (non-resident in India) Yes Yes
1, and C Ltd. has utilized the capital borrowed from Rahul for
2016 carrying on business or profession in India

June Rs. 3,00,000 is received from D Ltd. (non-resident in India) No No

10, and D Ltd. has utilized the capital borrowed from Rahul for
2016 carrying on business or profession outside India or earning
any income outside India or earning income (not being
business or professional income) in India

Deemed Receipts of Gift [Sec. 9(1)(viii)]

• When

⮚ a non-resident or a foreign company receives any sum of money referred to in sec. 56(2)
(x)

⮚ such receipt is from a resident person

⮚ such money is received outside India

⮚ such money is received on or after 05-07-2019

• then, such receipt is treated as income deemed to accrue or arise in India

Illustration- Shivam is resident and ordinarily resident in India for the assessment year 2017-18.
He gives the following information in respect of his income for the previous year 2016-17:

1. Capital gain on sale of a house situated in Pune (sale consideration is received in Nepal):
10,00,000

2. Salary received in Sri Lanka for rendering service in Tamilnadu: 1,60,000

3. Interest received from Government of India (it is paid to him in Sri Lanka, the money is
utilized by the Government outside India): 2,56,000

4. Royalty received from A Ltd. (a foreign company which is non-resident in India) outside
India (royalty is paid for a manufacturing business situated outside India): 92,00,000

Find out the taxable income of Shivam for the assessment year 2017-18.
 ANS-3

Particulars ROR

Capital gain is deemed to accrue or arise in India u/s 9(1)(i) 10,00,000

Salary is deemed to accrue or arise at a place where services are rendered, 1,60,000
place of receipt being immaterial [ Sec. 9(1)(ii)] Hence, it is taxable in all
cases

Salaries paid by Government of India to an Indian Citizen for services 2,56,000

rendered outside India shall be deemed to accrue or arise in India, and is hence
taxable in India, irrespective of whether he is a Resident or Non-Resident in
India during the Relevant Previous Year.

• Interest, royalty or technical fees received from a non-resident, is nope

deemed to accrue or arise in India in the hands of recipient, in the
following cases:

c) borrowed money is utilized by the payer for carrying on a business/

profession in India; or

d) payment of royalty/technical fees pertains to a business/ profession

carried on by the payer in India or earning any income in India.

Since royalty is paid for a manufacturing business situated outside India, it

does not accrue in India

Illustration - Rohin is non-resident in India. From the information given below, find out his
income chargeable to tax for the assessment year 2017-18:

1. Royalty received by him outside India from the Government of India: 8,17,000

2. Technical fees received from A Ltd. (an Indian company) in Germany for advise given
by him in respect of a project situated in UK: 1,17,000

3
https://icmai.in/upload/Students/Syllabus-2012/RTP/Dec15/Paper7.pdf
3. Income from a business situated in Bangladesh (goods are sold in Bangladesh, sale
consideration is received in Bangladesh but business is controlled partly in Bangladesh
and partly in India): 2,17,000

4. Income from a business connection in India (it is received outside India): 3,17,000

Royalty received by Deemed to arise in India

him outside India from
the Government of
India: 8,17,000

Technical fees
received from A Ltd.
(an Indian company)
in Germany for advise
given by him in
respect of a project
situated in UK:
1,17,000

Income from a
business situated in
Bangladesh (goods are
sold in Bangladesh,
sale consideration is
received in
Bangladesh but
business is controlled
 partly in Bangladesh
and partly in India):
2,17,000

Income from a
business connection in
India (it is received
outside India):
3,17,000

Income from a
business connection in
India (it is received
outside India):
3,17,000

MODULE 4

Chapter 3: Incomes which do not form the part of Total Income:

● Section 10: In computing the total income of a P.Y, these incomes will not be included
(list of general exemptions)- 

(1) agricultural income;

(2) subject to the provisions of sub-section (2) of section 64, any sum received by an
individual as a member of a Hindu undivided family, where such sum has been paid out
of the income of the family, or, in the case of any impartible estate, where such sum has
been paid out of the income of the estate belonging to the family ;

(2A) in the case of a person being a partner of a firm which is separately assessed as such, his
share in the total income of the firm.

(3) [***]
 (4) (i) in the case of a non-resident, any income by way of interest on such securities or
bonds as the Central Government may, by notification in the Official Gazette, specify in
this behalf, including income by way of premium on the redemption of such bonds.

(5) in the case of an individual, the value of any travel concession or assistance received by,
or due to, him,—

(a) from his employer for himself and his family, in connection with his proceeding on
leave to any place in India ;

(b) from his employer or former employer for himself and his family, in connection
with his proceeding to any place in India after retirement from service or after the
termination of his service,

(There are like 23 categories lmao, you don’t need to know them)

● There are certain incomes which are fully exempted (as under S.10), and others which are
partially exempted (For eg. Gratuity, pension). 

S.10(1) Agricultural income: (SELF STUDY) 

● This is exempted because the Parliament is not empowered to tax agricultural income,
since it is not a subject matter of the Union List. 

● defined under Section 2(1A) as follows-

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

● Agricultural purposes have to be understood in an ordinary sense since it has not been
defined. Agricultural purposes means some sowing, irrigation, cultivation on the land of
crops, some labour has been used for that sowing, irrigation, harvesting etc.

● CIT v. Raj Binoi Kumar Saha (1957 AIR 768) (imp case): The SC laid down the scope
of Agricultural purpose:

● The Basic operation principle, and subsequent operation principle. Agriculture involves 2
operations: before germination (tilling, sowing, planting) is basic operation and after
germination (digging, irrigation, removing weeds, etc.) is subsequent operation. 
● Agriculture does not merely include food and grains. It also includes grass, pasture,
fruits, articles of luxury like coffee, indigo, tobacco, and commercial crops like cotton,
hemp, and forest products such as timber, sal etc.

● “Some connection with land” is not sufficient. Dairy farming, poultry farming, animal
farming would not be considered agriculture. 

● Nursery operations will be deemed to be agricultural income.     

(b) any income derived from such land by— (cultivator or receiver of rent in kind (“C/R”)

(i) agriculture; or
(ii) the performance by a C/R of any process ordinarily employed by a C/R to
render the produce raised or received by him fit to be taken to market; or (can
be in cash or in kind)

● Eg. Process to remove wheat from the field, harvesting rice from paddy field. This
process of readying the wheat may involve both mechanical and manual efforts, and the
income generated is also agricultural income. 

● But if there is something that can be sold in the market directly as raw material, and if a
process is then performed on it then that process won't fall under agricultural income. 

● Mustard oil is an example for partly agricultural and partly business income. 

● (iii) the sale by a C/R of the produce (grass, wheat anything) raised or received by him, in
respect of which no process has been performed other than a process of the nature
described in paragraph (ii) of this sub-clause.

● This means any income derived from such land by the sale where no process has been
performed other than a process required to render it fit to be taken to market. 

● Eg. Land owner “A” of agricultural land transfers his land to “B” for consideration of live
annuity. This live annuity cannot be treated as agricultural income because the source of
the income is not the agricultural land but the covenant (Transfer deed). (CIT v.
Kamakhya Narayan Singh case) 

● Eg. Interest on the arrears received from the Agricultural land is not agricultural income. 
● Eg. Income received by leasing out your coffee estate is Agricultural income. But leasing
out coconut trees for enjoyment is not agricultural income because land was not the
source of income. 

● Things that grow naturally without intervention of human agency is not agricultural
income, eg. forest. 

● Income from harvested crops from purchased land is not agricultural income because the
crops were already there on the land when you bought it, and you did not do any basic
operations on it. 

● Income is required to be treated as agricultural income if it is derived from agricultural

land. Agricultural land is that land which is: ordinarily used or actually used or meant to
be used for agricultural purposes. Unless there is some measure of cultivation on that
land, or there is some expenditure on some basic operation on that land, it will not be said
to be “used for agricultural purpose”. 

(c) any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver of
rent-in-kind, of any land with respect to which, or the produce of which, any
process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on :
Provided that—
(i) the building is on or in the immediate vicinity of the land, and is a building
which the receiver of the rent or revenue or the cultivator, or the receiver of
rent-in-kind, by reason of his connection with the land, requires as a dwelling
house, or as a store-house, or other out-building, and
(ii) the land is either assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the Government as such or where the
land is not so assessed to land revenue or subject to a local rate, it is not
situated—

(A) in any area which is comprised within the jurisdiction of a municipality (whether known
as a municipality, municipal corporation, notified area committee, town area committee,
town committee or by any other name) or a cantonment board and which has a population of
not less than ten thousand; or

(B) in any area within the distance, measured aerially,—

(I) not being more than two kilometres, from the local limits of any municipality or
cantonment board referred to in item (A) and which has a population of more than ten
thousand but not exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or
cantonment board referred to in item (A) and which has a population of more than one lakh
but not exceeding ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or
cantonment board referred to in item (A) and which has a population of more than ten lakh.

● Any income derived from a building subject to fulfillment of the following conditions:
1. The building should be occupied by the cultivator or receiver of rent in kind
2. The building should be on or in the immediate vicinity of the land, being situated
in India and used for agricultural purposes
3. The building should be used as dwelling house or store-house or other out building
4. The land is either situated in
(1) Rural area; or
(2) Urban area and assessed to land revenue / local rates
● “agricultural purpose” is defined in CIT v. Kamakhya Narain Singh. (1948) 16 LT.R.
325 (P.C.)
● where a land owner transfers to another person his agricultural land in consideration of a
life annuity payable by that other person (i.e., the transferee) which is secured by a charge
on that land, the life annuity cannot be treated as agricultural income because in this
condition the source of the life annuity is not the land but covenant.
● the interest on the arrears of rent payable in respect of land used for agricultural purposes
is not agricultural income because in this condition the land is not the direct source of
income (i.e., the interest)
 ● Thus, if no there is no basic function performed related to agri by the assessee, it is NOT
agri land
● Additionally, profit on transfer on agri land is not income- UOI v Muthyam Reddy. The AP
High Court had considered the effect of a combined reading of Sections 2(1A) and 2(14) of
the Income Tax Act, 1961 and has held that (i) capital gains arising from sale of land used for
agricultural purposes would be revenue derived from such land and, therefore, agricultural
income within the definition under Section 2(1A) of the Act with the result that Parliament
would have no legislative competence to tax such agricultural income. The SC overturned
this by relying on  the Explanation to Section 2(1A) , inserted with effect from 1.4.1970,
which superseded the HC view. Therefore, since the declaratory amendment had
retrospective operation though coming into force during the pendency of this appeal, SC
overturned HC decision.

CIT v. Kamakhya Narain Singh. (1948) 16 LT.R. 325 (P.C.)

● where a land owner transfers to another person his agricultural land in consideration of a
life annuity payable by that other person (i.e., the transferee) which is secured by a charge
on that land, the life annuity cannot be treated as agricultural income because in this
condition the source of the life annuity is not the land but covenant.
● the interest on the arrears of rent payable in respect of land used for agricultural purposes
is not agricultural income because in this condition the land is not the direct source of
income (i.e., the interest)

CIT. v. All India Tea & Trading Co., 1977 Tax L.R. 1433 (Cal.)

● the land must be immediate and effective source of the rent or revenue and not merely
secondary or indirect source

Maharajadhiraj Sir Kameshar Singh v. State of Bihar. (1959) 37 I.T.R. 388 (S.C.)

● Income received by the assessee by leasing out his coffee estates is agricultural income
because here the land is the direct source of the income

Bacha F. Guzdar v. C.I.T., (1955) 27 I.T.R. 1. (S.C.)

 ● Dividend income received by the assessee shareholder is not agricultural income even if
the dividend has been paid out of the agricultural income of the company. Its reason is
this that dividend is derived from the investment in the shares of the company, and,
therefore, land cannot be taken to be the direct source of the dividend.

Maganlal Morarbhai v. C.I.T.. 1980 Tax. L.R. 58 (Guj)

● Income to be treated as agricultural income is required to be derived from agricultural

land.

C.W.T. v. Officer-in-charge (Court of Wards), Paigah, (1976) 105 I.T.R. 133 (S.C.)

● Agricultural land may be understood as a land which has been used for agricultural
purposes. Prima facie agricultural land may be said as a land which is either actually used
or ordinarily used or meant to be used for agricultural purposes.

Raja Mustafa Ali Khan v. CLT, (1948) LTR. 1. (S.C.)

● A land cannot be treated to have been used for agricultural purpose unless there is some
measure of cultivation of the land, some expenditure of skill and labour upon the land.

C.I.T. v. Raj Benoy Kiunar Sahas Roy, (1957) 32 LT.R. 466 (S.C)

● "Agriculture" involves two operations’ : (a) Basic operations prior to germination, like
tilling of the land, sowing of the seeds and planting, etc. requiring expenditure of human
labour and skill, and (b) Subsequent operations (i.e., operations performed after the
produce sprouts from the land, required for effective raising the produce from the land)
as, for example, weeding, digging, the soil around the grounds, removal of undesirable
under growths, cutting, preservation of the plants from insects, pests and other animals,
harvesting and rendering the produce marketable. Basic operations are necessary to
constitute agriculture.’ In other words, the basic operations may constitute even without
the agriculture subsequent operations but subsequent operations independently of th

C.W.T. v. Officer-in-charge (Court of Wards), Paigah, (1976) 105 I.T.R. 133 (S.C.)

● the land to be treated as an agricultural land must not only be capable of being used for
agricultural purposes but it must have been actually used for such purposes at some point
 of time. Mere potential or possible use of the land for agricultural purposes is not
sufficient to treat it as an agricultural land.
● The land to be called an agricultural land must have some connection with an agricultural
user or agricultural purpose and the agricultural user or purpose must involve expenditure
of human labour and skill. In short, possible or potential use of the land as an agricultural
land or not.

C.I.T. v. Venkataswamu Naidu, (1956) 29 LTR. 529 (S.C).

● Income from dairy farming is not agricultural income.

Union of India v. V.S. Muthyam Reddy, AIR 1999 S.C. 3881

● income derived from sale of agricultural land is not agricultural income.

● Profit on transfer of agricultural land- not agro income
● Nexus between agro-activity and agro-income- close nexus is a must. For ex, if X is
growing mulberry leaves to generate silk cocoons (worms), the sale of income is not agri
income.
● Instances of Agricultural (Agro) Income- income from commercial crops (jute, indigo),
food crops (rice wheat), potted plants (grown by the assessee), Remuneration paid to
partner by firms engaged in agri activity, interest paid on capital received by partners in
such firms, rent on agri land.
● Instances of Non-agricultural (Non-agro) Income- Foe example, if X has nursery but
is selling plants bought from Y (the farmer). This income from selling plants by X is not
AI.
● Annual annuity received in consideration of transfer of AI, salary received by business
engaged in agri activities, interest on arrears of rent wrt agri land (for ex, if tenant Y has
not paid 15k rent for 3 months, he will have to pay arrears as penalty. The interest
generated on these arrears is NOT AI), income for livestock related activities.
● Treatment of Partly Agricultural & Partly Non-agricultural Income (dealt with in
detail subsequently)

Rule 7, 7A, 7B and 8-

 ● Rule 7 is a general rule for agri income overall. Rules 7A, 7B and 8 apply specifically to
rubber, coffee and tea respectively. Rule 7 applies to determine how to calculate IT on
income which is partially from agri and partially from "Profits and gains of business".
● It establishes that in such a case, the market value of agri produce raised by assessee or
received by him as rent in kind, and ultimately utilized as raw materials in his business is
deducted as AI. No further deduction, other than this, is permitted under AI.
● For ex, if X grows sugar cane, then processes it to generate sugar which is sold, there is
AI here as well as business income. The AI is the value of the sugarcane used by X,
which then becomes the expenditure for the non-agricultural income.
● 3 steps for the same-
(1) Assessee is required to prepare two Profit or Loss statements, one for agro-
business & another for non agro-business.
(2) Agro expenses debited to Agro Profit or Loss and non agro expenses shall be
debited to Non agro-business Profit or Loss
(3) Market value of any agricultural produce, which is utilised as raw material in
such business, is to be treated as income for agro-business and expenditure for
non agro-business.

● Rule 7A to 8 can be summarized in this table-

Rule Case Agricultural Non-

Income Agricultural
Income

Assessee is engaged in the business of growing and manufacturing Rubber in India

7A Assessee is engaged in the business of growing 65% 35%

and manufacturing rubber in India
Assessee is engaged in the business of growing and manufacturing Coffee in India

7B(1) Coffee grown and cured by the seller in India 75% 25%

7B(1A Coffee grown, cured, roasted and grounded by 60% 40%

) the seller in India, with or without mixing
chicory or other flavouring ingredients

Assessee is engaged in the business of growing and manufacturing Tea in India

8 Assessee is engaged in the business of growing 60% 40%

and manufacturing tea in India

● Impact of Agricultural Income on Tax Computation

● Illustration- 2017 Batch Ltd. grows sugarcane to manufacture sugar. Details for the previous
year 2019-20 are as follows:

Particulars Rs. in lacs.

Cost of cultivation of sugarcane (5,000 tons) 10

Sugarcane sold in market (1,000 tons) 3

Sugarcane used for sugar manufacturing (4,000 tons) -

Cost of conversion 5
 Sugar produced & sold in market 25

Compute income of 2017 Batch

ANS-

Particulars Business Agriculture

Sale of agro product in market - 3

Sale of manufactured product in market 25 -

Notional sale of agro product used in the process of - 12 (since it was 3

manufacturing lakhs for 1 thousand
tons and 4000 tons
were used to
manufacture, it is
3/1000 * 4000 = 12)

Revenue [A] 25 15

Loss: Expenses incurred

Cost of conversion 5 -

Market value of sugarcane used 12 -

Cost of cultivation - 10
 Expenditure [B] 17 10

Income [A – B] 8 5

ILLUSTRATION- Rishabh grows sugarcane and uses the same for the purpose of
manufacturing sugar in his factory.

• 30% of sugarcane produce is sold for Rs. 10 lacs, and the cost of cultivation of such
sugarcane is Rs. 5 lacs. The cost of cultivation of the balance sugarcane (70%) is Rs. 14
lacs and the market value of the same is Rs. 22 lacs. After incurring Rs. 1.5 lacs in the
manufacturing process on the balance sugarcane, the sugar was sold for Rs. 25 lacs.

• Compute Rishabh’s business income and agricultural income.

Particulars Business Agriculture

Sale of agro product in market (30%) - 10

Sale of manufactured product in market 25 -

Notional sale of agro product used in the process of - 22

manufacturing (market value of 70%)

Revenue [A] 25 32

Loss: Expenses incurred

Manufacturing cost 1.5 -

 Market value of sugarcane used 22 -

Cost of cultivation - 14 + 5= 19

Expenditure (B) 23.5 19

TOTAL (a-b) 1.5 13

ILLUSTRATION- R and R Ltd. is engaged in the business of growing and manufacturing tea in
India. The following data is available for the previous year 2016-17:

• Sales turnover of tea: Rs 45L

• Expenses on growing tea leaves: Rs 20L

• Manufacturing expenses: Rs 15L

Income in lakhs

Sales turnover (A) 45

Expense 1 (B) 20

Expense 2 (C) 15

Net income- NI A – [ B + C] = 10

AI (60% of NI)- applying 6

rule 8

Non AI (40%) 4

ILLUSTRATION- Rohin manufactures latex from the rubber plants grown by him in India.

• These are then sold in the market for Rs 30L.

 • The cost of growing rubber plants is Rs 10L.

• Manufacturing latex is Rs 8L.

Compute his total income

Income in lakhs

Sales turnover (A) 30

Expense 1 (B) 10

Expense 2 (C) 8

Net income- NI A – [ B + C] = 12

AI (65% of NI)- applying 7.8

rule 7A

Non AI (35%) 4.2

• ILL- A rural society has as its principal business the selling on behalf of its member
societies, butter made by these societies from cream sold to them by farmers. The making
of butter was a factory process separated from the farm.

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

• ANS- irrespective of whether a portion of income was agri, Rajat is a taking income via a
personal contract. Since income of employee is not agri income, by the same logic, this is
not agri income either.
 ILL- Rohit owned 100 acres of agricultural land, a part of which was used as pasture for
cows. The lands were purely maintained for manuring and other purposes connected with
agriculture and only the surplus milk after satisfying the assessee’s needs was sold.

• Whether income from such sale of milk is agricultural income.

• ANS- No. no nexus. Milk is sold as a commercial product and not an agricultural one.

• ILL- SRK, the owner of a land situated in Kerala used for growing thereon different
types of fruits, paddy, vegetables and flowers, received from Yahoo Movies Ltd.,
Chennai, Rs 5L as rent towards the use of this land for shooting of a film.

• The amount so received was accounted by him in the books as revenue derived from land
and claimed to be exempt under section 10(1).

• He now wants to confirm whether the amount has been correctly treated by him as
agricultural income.

• ANS-

Impact of Agricultural Income on Tax Computation

• The scheme of partial integration of non-agricultural income with agricultural income is

applicable if the following conditions are satisfied —

Condition 1 The taxpayer is an individual, a Hindu undivided family, a body

of individual, an association of persons or an artificial juridical
person

Condition 2 The taxpayer has non-agricultural income exceeding the amount

of exemption limit, therefore-

● Greater than Rs. 2,50,000 for individuals below 60 years of

age and all other applicable persons

● Greater than Rs. 3,00,000 for individuals between 60 – 80

years of age
 ● Greater than Rs. 5,00,000 for individuals above 80 years of
age

Condition 3 The agricultural income of the taxpayer exceeds Rs. 5,000.

• Computation of tax in cases covered by the scheme

• Step one - Net agricultural income is to be computed as if it were income chargeable to
income-tax.
• Step two - Agricultural and non-agricultural income of the assessee will then be
aggregated and income-tax is calculated on the aggregate income as if such aggregate
income were the total income
• Step three - The net agricultural income will then be increased by the amount of
exemption limit (i.e., the first slab of income on which tax is charged at nil rate) and
income-tax is calculated on net agricultural income, so increased, as if such income was
the total income of the assessee
• Step four - The amount of income-tax determined at Step two will be reduced by the
amount of income-tax determined under Step three.
• Step five- Find out the balance. Add surcharge and Cess.
• Step six - The amount so arrived will be the total income-tax payable by the assessee

ILLUSTRATION- For the previous year ending March 31, 2020, non-agricultural income
of Rahul (age:22 years) is Rs. 2,50,000 whereas agricultural income is Rs. 6,80,000.

• Compute his tax liability for the A.Y. 2020-21.

• ANS- since non-agri income does not exceed Rs 2,50,000, he is not liable to pay tax
irrespective of whether there is agri income or not.

ILLUSTRATION- From the following information, find out whether RGV (age: 63 years)
is liable to pay income-tax for the A.Y. 2020-21:

• Non-agricultural income for the year ending March 31, 2019: Rs. 4,76,000

• Agricultural income for the previous year ending March 31, 2020: Rs. 9,00,000

• Non-agricultural income for the year ending March 31, 2020: Rs. 3,00,000
• ANS- Since non-agricultural income for the year ending March 31, 2020 is Rs. 3,00,000,
which is lesser than the exemption limit for a 63 yar old, there is no IT applicable.

ILLUSTRATION-Shubham aged 30 years has non-agro income of Rs. 3,25,000 and agro
income of Rs. 2,55,000.

• Compute his tax liability for the A.Y. 2020-21.

Step 1: Compute income tax on total income of assessee including Agro-income.

• That means tax on AI+NAI

• So after applying step 1 following will be the calculation part:

• AI+NAI= Rs 2,55,000 + Rs 3,25,000 = Rs 5,80,000

• Now tax is required to be computed on Rs 5,80,000 as per provided tax rates (for tax
rates please visit https://www.incometaxindia.gov.in/_layouts/15/dit/mobile/viewer.aspx?
path=https://www.incometaxindia.gov.in/charts++tables/tax+rates.htm&k&IsDlg=0)

• For illustration in hand following rates are applicable:

• Up to Rs. 2,50,000: Nil (that means out Rs 5,80,000; upto Rs 2,50,000, the tax is nil) =
Rs 0 (nil)

• Rs. 2,50,000 to Rs. 5,00,000: 5% (that means out of Rs 5,80,000 till Rs 5,00,000; 5% will
be computed) = 5% of 2,50,000= Rs 12,500

• Now Rs. 5,00,000 to Rs. 10,00,000: 20% will be applicable.

• That means on remaining Rs 80,000 out of Rs 5,80,000 the tax will be calculated @ 20%
= 20% of Rs 80,000 = Rs 16,000

• Finally the total tax after applying step 1 is Rs 0 + Rs 12,500 + Rs 16,000 = Rs 28,500

Step 2: Add net agricultural income and the maximum exemption limit available to the
assessee and compute tax on the aggregate amount

• AI+ maximum exemption limit = Rs 2,55,000 + Rs 2,50,000 = Rs 5,05,000

• Now tax is required to be computed on Rs 5,05,000 as per provided tax rates. Here again
we need to follow the same method of computing income tax.

• Up to Rs. 2,50,000: Nil (that means out Rs 5,05,000; upto Rs 2,50,000 the tax is nil) = Rs
0 (nil)

• Rs. 2,50,000 to Rs. 5,00,000: 5% (that means till 5,00,000; 5% will be computed)

• That means on remaining Rs 2,50,000 out of Rs 5,05,000 the tax will be calculated @
5%= 5% of Rs 2,50,000 = Rs 12,500

• Now Rs. 5,00,000 to Rs. 10,00,000: 20% will be applicable.

• That means on remaining Rs 5,000 out of Rs 5,80,000 the tax will be calculated @ 20%=
20% of Rs 5,000/- = Rs 1,000

• Finally the total tax after applying step 2 is Rs 0 + Rs 12,500 + Rs 1,000 = Rs 13,500

Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated
in step 1 i.e., Step 1 – Step 2.

• Step 1 – Step 2 = Rs 28,500 – Rs 13, 500 = Rs 15,000

• Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be

reduced by the rebate, if any, available u/s 87A.

• As provided in the current finance act, Surcharge will not be applicable in the given
illustration.

• As far as rebate u/s 87A is concerned, we will have a details discussion on this provision
so right now for all the illustrations, we will be presuming the rebate as Rs X [please note
that the rebate u/s 87A for the given illustration shall be Rs 12,500 (for your
information only)]

• That means after applying step 4 the amount of tax will be (Rs 15,000 – X)

• Note: As already mentioned that the rebate u/s 87A for the given illustration shall be Rs
12,500. That means after applying step 4 the exact amount of tax will be Rs 15,000 – Rs
12,500 = Rs 2,500
Step 5: Thereafter, it would be increase by health and education cess @4%.

• That means add 4% on the amount came after applying step 4 = 4% of (Rs 15,000 – X) +
(Rs 15,000 – X)

• Note: The exact tax payable after applying step 5 will be Rs 2,600.

We reached to Rs. 2,600 by following calculation:

• Step 5: Add 4% cess on total tax = Rs 2,500 + 4% of Rs 2,500 = Rs 2,500 + Rs 100 = Rs

2,600

• ANSWER: TAX LIABILITY OF SHUBHAM FOR THE A.Y. 2020-21 IS RS 2,600

• Important Note: I would also like to remind you with respect to 13 steps which are
required to be followed while computing the tax liability and completing the whole tax
requirements. Once again I am mentioning those steps here for your ready reference.

• Step 1 – Determination of residential status

• Step 2 – Classification of income under different heads

• Step 3 – Computation of income under each head (As we have discussed in detail, do not
forget to take care of exemptions and deductions at this stage also)

• Step 4 – Clubbing of income of spouse, minor child etc

• Step 5–Set-off or carry forward and set-off of losses

• Step 6–Computation of Gross Total Income

• Step 7–Deductions from Gross Total Income (Do not forget four types of deduction as we
have discussed in the class)

• Step 8–Total income

• Step 9–Application of the rates of tax on the total income

• Step 10–Surcharge / Rebate

• Step 11–Health and education cess on income-tax

 • Step 12–Advance tax and tax deducted at source

• Step 13–Tax Payable/Tax Refundable

• Lastly, filling of return of income as per the prescribed format.

• So at the end please do not forget the above steps because it is always required to be
followed. Till now whatever illustration we have discussed, we did not have all the
aspects involved while computing the tax liability. For example, in the illustration
discussed above, we did not have aspects like clubbing of income of spouse, minor child
etc; Set-off or carry forward and set-off of losses;; Advance tax and tax deducted at
source etc. even we also not had aspects like deductions from Gross Total Income or
Surcharge etc.

4. ILLUSTRATION- Karan, has provided the following particulars of his income for the
P.Y. 2019-20.

Income from salary (computed): Rs 2,80,000

Income from house property (computed): Rs 2,50,000

Agricultural income from a land in Jaipur: Rs 4,80,000

Expenses incurred for earning agricultural income: Rs 1,70,000

• Compute his tax liability assuming his age is:

(1) 45 years

(2) 70 years

For 45 years

Step one - Net agricultural NAI + AI= 2.8 + 2.5 + (4.8 – 1.7) = 5.3 + 3.1 = 8.4 lakh
income is to be computed
as if it were income
chargeable to income-tax.

Step two - Agricultural 0-2.5l- nil

and non-agricultural
income of the assessee 2.5-5 l @ 5%- 5% of 2.5l- 12,500
will then be aggregated
5- 10l @20%- 20% on 3.4 L- 68,000
and income-tax is
calculated on the IT= 80,500
aggregate income as if
such aggregate income
were the total income

Step three - The net 3.1 L + 2.5L =5.6L

agricultural income will
then be increased by the
amount of exemption limit 0-2.5l- nil
(i.e., the first slab of 2.5-5 l @ 5%- 5% of 2.5l- 12,500
income on which tax is
5- 10l @20%- 20% on 60,000= 12,000
charged at nil rate) and
income-tax is calculated IT= 24,500
on net agricultural income,
so increased, as if such
income was the total
income of the assessee

Step four - The amount of 80,500 – 24,500

income-tax determined at
56,000
Step two will be reduced
by the amount of income-
tax determined under Step
three.

Step five- Find out the Assuming max rebate @ 12,500

balance. Add surcharge
56,000 – 12,500 = 43,500
and Cess.
 4% cess

4% of 43,500 = 1740

43,500 + 1740= 45,240

Step six - The amount so INR 45,240

arrived will be the total
income-tax payable by
the assessee

For 70 years

Step one - Net agricultural NAI + AI= 2.8 + 2.5 + (4.8 – 1.7) = 5.3 + 3.1 = 8.4 lakh
income is to be computed
as if it were income
chargeable to income-tax.

Step two - Agricultural 0-2.5l- nil

and non-agricultural
2.5-5 l @ 5%- 5% of 2.5l- 12,500
income of the assessee
will then be aggregated 5- 10l @20%- 20% on 3.4 L- 68,000
and income-tax is IT= 80,500
calculated on the
aggregate income as if
such aggregate income
were the total income

Step three - The net 3.1 L + 3 L =6.1 L (where the difference lies)
agricultural income will
then be increased by the
amount of exemption limit 0-2.5l- nil
(i.e., the first slab of
income on which tax is 2.5-5 l @ 5%- 5% of 2.5l- 12,500
charged at nil rate) and
5- 10l @20%- 20% on 1.1 l = 22,000
income-tax is calculated
on net agricultural income, IT= 34,500
so increased, as if such
income was the total
income of the assessee

Step four - The amount of 80,500 – 34,500

income-tax determined at
46,000
Step two will be reduced
by the amount of income-
tax determined under Step
three.

Step five- Find out the Assuming max rebate @ 12,500

balance. Add surcharge
46,000 – 12,500 = 33,500
and Cess.

4% cess

4% of 33,500 = 1340

33,500 + 1340= 44,840

Step six - The amount so INR 44,840

arrived will be the total
income-tax payable by
the assessee
ILLUSTRATION-

For the assessment year 2020-21, net agricultural income of Mrs. Deepika (age: 37 years) is Rs.
8,10,000 and non-agricultural income is Rs. 4,78,300. Mrs. Deepika pays Rs. 20,000 as life
insurance premium (sum assured : Rs. 3,00,000) on the life of her major son.

• Determine her tax liability.

Step one - Net agricultural NAI = 4,78,300 – deduction of premium ()= 4,58,300
income is to be computed
NAI + AI= 4,58,300 + 8,10,000 = 5.3 + 3.1 = 12,68,300
as if it were income
chargeable to income-tax.

Step two - Agricultural 0-2.5l- nil

and non-agricultural
2.5-5 l @ 5%- 5% of 2.5l- 12,500
income of the assessee
will then be aggregated 5- 10l @20%- 20% on 5 L- 1,00,000
and income-tax is 10l above @30%- 30% on 2,68,300= 80,490
calculated on the
aggregate income as if
such aggregate income IT= 1,92,990
were the total income

Step three - The net 8.1 L + 2.5l =10.6 L

agricultural income will
then be increased by the
amount of exemption limit 0-2.5l- nil
(i.e., the first slab of 2.5-5 l @ 5%- 5% of 2.5l- 12,500
income on which tax is
5- 10l @20%- 20% on 5 l = 1,00,000
charged at nil rate) and
income-tax is calculated 10l above @30%- 30% on 60,000= 18,000
on net agricultural income,
so increased, as if such
income was the total IT= 1,30,500
income of the assessee

Step four - The amount of 1,92,990 – 1,30,500

income-tax determined at
62,440
Step two will be reduced
by the amount of income-
tax determined under Step
three.

Step five- Find out the Assuming max rebate @ 12,500

balance. Add surcharge
62,440– 12,500 = 49,940
and Cess.

4% cess

104% of 49,940 = 51,937.6

Step six - The amount so INR 51,937.6 = 51,938

arrived will be the total
income-tax payable by
the assessee

ILLUSTRATION-

For the A.Y. 2020-21, Sunny Deol, an individual (age 62 years), submits the following
information:

✔ House property income: Rs 6,25,000

✔ Income from the business of growing and manufacturing coffee in India (gross): Rs
5,00,000

✔ Expenditure on earning coffee income: Rs 2000

 • Determine the tax liability of Sunny Deol for the A.Y. 2020-21 on the assumption that he
contributes Rs. 60,000 towards public provident fund.

• Sec. 10 enlists the various income which are exempt from tax i.e. does not form part of
total income of the assessee.

• These are:

Agricultural Income [Sec. 10(1)]

Member’s Share in Income of HUF [Sec. 10(2)]

• Any sum received by an individual as a member of a Hindu undivided family:

✔ Where such sum has been received out of the income of the family; or

✔ Where such sum has been received out of the income of an impartible estate
belonging to the family.

Share of Profit from a Firm [Sec. 10(2A)]

Interest Income of Non-resident [Sec. 10(4)/(4B)]

✔ Interest on specified securities or bonds, including premium on redemption of such bonds

is exempted in the hands of a non-resident [Sec. 10(4)(i)]

✔ Interest on Non-Resident (External) Account in any bank in India to a person who

is a resident outside India as per as defined in sec. 2(w) of the Foreign Exchange
Management Act, 1999 or is a person who has been permitted by the Reserve Bank of
India to maintain the aforesaid Account

✔ Interest on notified savings certificates issued before 1-6-2002 by the Central

Government to a non-resident, being a citizen of India or a person of Indian origin
[Sec. 10(4B)]

Interest on Rupee Denominated Bond [Sec. 10(4C)]

 ✔ Interest payable to a non-resident, not being a company, or to a foreign company, is
exempt if following conditions are satisfied:

a) Interest is payable by any Indian company or business trust.

b) Such interest is payable in respect of monies borrowed from a source outside India by way
of issue of rupee denominated bond, as referred to in sec. 194LC(2)(ia).

c) Such bond has been issued during 17-09-2018 and 31-03-2019.

Income received by specified fund [Sec. 10(4D)]

• Any income accrued or arisen to, or received by a specified fund as a result of transfer of
capital asset referred to in sec. 47(viiab), on a recognised stock exchange located in any
International Financial Services Centre and where the consideration for such transaction
is paid or payable in convertible foreign exchange, to the extent such income accrued or
arisen to, or is received in respect of units held by a non-resident.

• Specified fund means a fund established or incorporated in India in the form of a trust or
a company or a limited liability partnership or a body corporate:

• (i) which has been granted a certificate of registration as a Category III Alternative
Investment Fund and is regulated under the Securities and Exchange Board of India
(Alternative Investment Fund) Regulations, 2012, made under the Securities and
Exchange Board of India Act, 1992;

• (ii) which is located in any International Financial Services Centre;

• (iii) of which all the units are held by non-residents other than units held by a sponsor or
manager

Leave Travel Concession [Sec. 10(5)]

Remuneration to Person who is not a Citizen of India in certain cases [Sec. 10(6)]

• Remuneration received by him as an official of an embassy, high commission, legation,

commission, consulate, or the trade representation of a foreign state or as a staff of
 any of these officials provided corresponding Indian officials in that foreign country
enjoy similar exemptions in their country - Sec. 10(6)(ii).

• Remuneration received as an employee of a foreign enterprise for services rendered by

him during his stay in India provided -

• a. the foreign enterprise is not engaged in any business or profession in India;

• b. his stay in India does not exceed 90 days in aggregate; and

• c. such remuneration is not liable to be deducted from the income of the employer under
this Act - Sec.10(6)(vi)

• Remuneration for services rendered in connection with his employment on a foreign ship
provided his total stay in India does not exceed 90 days in the previous year - Sec. 10(6)
(viii)

• Remuneration received as an employee of the Government of a foreign State during his

stay in India in connection with his training in any undertaking owned by Government,
Government company, subsidiary of a Government company, corporation established by
any Central, State or Provincial Act and any society wholly financed by the Central or
State Government – Sec. 10(6)(xi)

Tax paid by Government on Royalty or Fees for Technical Service [Sec. 10(6A)]

Tax paid by Government on Income of a Non-resident or a Foreign Company [Sec. 10(6B)]

Tax paid on Income from Leasing of Aircraft [Sec. 10(6BB)]

Fees for Technical Services in Project connected with Security of India [Sec. 10(6C)]

Income from service provided to National Technical Research Organisation [Sec. 10(6D)]

Allowance or Perquisite paid Outside India [Sec. 10(7)]

Remuneration received for Co-operative Technical Assistance Programmes with an

Agreement entered into by the Central Government in certain cases [Sec. 10(8)]

Remuneration received by Non-resident Consultant or Employee or Family Member of

such Consultant [Sec. 10(8A), (8B) & (9)]
Death-cum-retirement-gratuity [Sec. 10(10)]

Commutation of Pension [Sec. 10(10A)]

Leave Encashment [Sec. 10(10AA)]

Workmen’s Retrenchment Compensation [Sec. 10(10B)]

Compensation under Bhopal Gas Leak Disaster Act, 1985 [Sec. 10(10BB)]

Compensation for any Disaster [Sec. 10(10BC)]

Payment under Voluntary Retirement Scheme [Sec. 10(10C)]

Tax paid by Employer on behalf of Employee on Non-monetary Perquisites u/s 17(2) [Sec.
10(10CC)]

Sum received under a Life Insurance Policy [Sec. 10(10D)]

Payment from Statutory or Public Provident Fund [Sec. 10(11)]

Payment from Sukanya Samriddhi Account [Sec. 10(11A)]

Payment from Recognised Provident Fund [Sec. 10(12)]

Payment from National Pension Trust [Sec. 10(12A) & 10(12B)]

Any payment from the National Pension System Trust to an assessee on closure of his
account or on his opting out of the pension scheme referred to in sec. 80CCD, to the extent
it does not exceed 60% of the total amount payable to him at the time of such closure or his
opting out of the scheme [Sec. 10(12A)]

Any payment from the National Pension System Trust to an employee under the pension
scheme referred to in sec. 80CCD, on partial withdrawal made out of his account in
accordance with the terms and conditions, specified under the Pension Fund Regulatory
and Development Authority Act, 2013, to the extent it does not exceed 25% of the amount
of contributions made by him [Sec. 10(12B)]

Payment from Approved Superannuation Fund [Sec. 10(13)]

House Rent Allowance [Sec. 10(13A)]

Notified Special Allowances [Sec. 10(14)]

Interest on Securities [Sec. 10(15)]

Income from Leasing of Aircraft [Sec. 10(15A)]

Scholarship [Sec. 10(16)]

Daily Allowance, etc. to MP and MLA [Sec. 10(17)]

Awards and Rewards [Sec. 10(17A)]

Pension to receiver of Gallantry Awards [Sec. 10(18)]

Family Pension to Widow or Children of Armed Force [Sec. 10(19)]

Palace of Ex-ruler [Sec. 10(19A)]

Income of Local Authority [Sec. 10(20)]

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

Income of News Agency [Sec. 10(22B)]

Income of Professional Institutions [Sec. 10(23A)]

Income of Regimental Fund [Sec. 10(23AA)]

Income of specified Employee Welfare Fund [Sec. 10(23AAA)]

Income of specified Pension Fund [Sec. 10(23AAB)]

Income of trust for Development of Khadi and Village Industries [Sec. 10(23B)]

Income of Khadi and Village Industries Boards [Sec. 10(23BB)]

Income of body formed for Administration of Public Religious or Charitable Trusts [Sec.
10(23BBA)]

Income of European Economic Community [Sec. 10(23BBB)]

Income of SAARC Fund [Sec. 10(23BBC)]

Income of ASOSAI-SECRETARIAT [Sec. 10(23BBD)]

Income of Insurance Regulatory Authority [Sec. 10(23BBE)]

Income of the Central Electricity Regulatory Commission [Sec. 10(23BBG)]

Income of the Prasar Bharati (Broadcasting Corporation of India) [Sec. 10(23BBH)]

any income received by any person on behalf under provided categories [Sec. 10(23C)]

• Income of Mutual Fund [Sec. 10(23D)]

• Income of Securitisation Trust [Sec. 10(23DA)]

• Income of Investor Protection Fund [Sec. 10(23EA)]

• Income of Credit Guarantee Fund Trust for Small Industries [Sec. 10(23EB)]

• Income of Investor Protection Fund set up by Commodity Exchange [Sec.

10(23EC)]

• Income of Investor Protection Fund of Depositories [Sec. 10(23ED)]

• Income of Core Settlement Guarantee Fund [Sec. 10(23EE)]

Income of Ventures Capital Fund or Venture Capital Company [Sec 10(23FB

• Non-business income of Investment Fund [Sec. 10(23FBA)]

• Income of Unit holder [Sec. 10(23FBB)]

• Income of Business Trust [Sec 10(23FC)]

• Income of Real Estate Investment Trust [Sec. 10(23FCA)]

• Distributed Income to unit holder of a Business Trust [Sec 10(23FD)]

• Income of Trade Union [Sec. 10(24)]

• Income of specified Provident Funds, etc. (e.g. RPF, Superannuation fund,

Approved gratuity fund) [Sec. 10(25)]

• Income of Employees’ State Insurance Fund [Sec. 10(25A)]

 • Income of Scheduled Tribe [Sec. 10(26)]

• Income of Sikkimese [Sec. 10(26AAA)]

• Income of an Agricultural produce Market Committee [Sec. 10(26AAB)]

• Income of Corporation for promoting the Interests of the Members of the Scheduled
Castes or the Scheduled Tribe or Backward Classes [Sec. 10(26B)]

• Income of Corporation for promoting Interest of Members of a Minority

Community [Sec. 10(26BB)]

• Income of Corporation for the Welfare and Economic Upliftment of Ex-servicemen

[Sec. 10(26BBB)]

• Income of a Co-operative Society for promoting the Interests of the Members of

Scheduled Castes or Scheduled Tribes [Sec. 10(27)]

Income of specified Boards [Sec. 10(29A)]

• Subsidy received from Tea Board [Sec. 10(30)]

• Subsidy received from other Board [Sec. 10(31)]

• Income of Minor [Sec. 10(32)]

• Income on Transfer of Units of US 64 [Sec. 10(33)]

• Dividend Income [Sec. 10(34)]

• Income of Shareholder on Buy-back of Shares [Sec. 10(34A)]

• Income from Units [Sec. 10(35)]

• Capital Gain on compulsory Acquisition of Urban Land [Sec. 10(37)]

• Capital Gain on transfer under Land Pooling Scheme for Andhra Pradesh [Sec.
10(37A)]

• Specified Income, Arising from any International Sporting Event [Sec. 10(39)]

• Reconstruction or Revival of Power Generation Subsidiary Company [Sec. 10(40)]

• Income of a Non-profit Body or Authority specified by the Central Government
[Sec. 10(42)]

• Reverse Mortgage [Sec. 10(43)]

• New Pension Trust [Sec. 10(44)]

• Allowance or Perquisite to member of Union Public Service Commission [Sec.

10(45)]

• Specified Income of notified body or authority or Board or Trust or Commission

[Sec. 10(46)]

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

• Import of Crude Oil [Sec. 10(48)]

• Storage of Crude Oil [Sec. 10(48A)]

• Sale of leftover stock of crude oil [Sec. 10(48B)]

• Equalization Levy [Sec. 10(50)]

• Special provision in respect of newly established undertakings in free trade zone,

etc. [Sec. 10A]

• Special Provision in respect of Newly established Units in SEZ [Sec. 10AA]

• Special provisions in respect of newly established hundred per cent export-oriented

undertakings. [Sec. 10B]

• Special provisions in respect of export of certain articles or things. [Sec. 10BA]

• Special provision in respect of certain industrial undertaking

• Income from property held for charitable or religious purposes. [Sec. 11]

• Income of trusts or institutions from contributions [Sec. 12]

• Section 11 not to apply in certain cases [Sec. 13]

• Special provision relating to incomes of political parties. [Sec. 13A]

 • Special provisions relating to voluntary contributions received by electoral trust
[Sec. 13B]

CLUBBING OF INCOME-SECTIONS 60 TO 65

General Rules

(1) Computation of income to be clubbed

(2) Clubbing Head- clubbing should be done head-wise.

(3) Deduction under chapter VIA(S 80C-80V)- For example, if my virtue of interest
generated on minor child’s bank account, this income is clubbed with his father X u/s 64(1A).
This income can be used to avail of deduction u/s 80TTA.

(4) Clubbing of negative income- S 64(2) est that loss can also be clubbed

Section 60: Transfer of income where there is no transfer of assets

• All income arising to any person by virtue of a transfer whether revocable or not and
whether effected before or after the commencement of this Act shall, where there is no
transfer of the assets from which the income arises, be chargeable to income-tax as the
income of the transferor and shall be included in his total income.

• Doesn’t explicitly say “clubbing” of income

• Conditions-

(i) Taxpayer owns asset

(ii) Ownership of asset is not transferred
(iii) Income received from asset is transferred to any person through settlement, trust,
covenant, agreement or arrangement
(iv) Transfer may be revocable or not
(v) Transfer can be affected at any time- before or after commencement of ITA

Section 61: Revocable transfer of assets

 • All income arising to any person by virtue of a revocable transfer of assets shall be
chargeable to income-tax as the income of the transferor and shall be included in his total
income.

• What is a revocable transfer- asset transferred under a trust and is revocable during
lifetime of beneficiary; if transferor has any right to reassume power over asset directly or
indirectly, wholly or partly.

• Conditions-

(i) Asset transferred under a revocable transfer

(ii) Income from asset is taxable at hands of transferor
(iii) Income is taxable as and when the power to revoke arises
(iv) Taxable even if the power to revoke is not yet exercised

Section – 62: Transfer irrevocable for a specified period

(1) The provisions of section 61 shall not apply to any income arising to any person by virtue of
a transfer—

(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in
the case of any other transfer, which is not revocable during the lifetime of the
transferee ; or
(ii) made before the 1st day of April, 1961, which is not revocable for a period
exceeding six years :
Provided that the transferor derives no direct or indirect benefit from such income in
either case.
(3) Notwithstanding anything contained in sub-section (1), all income arising to
any person by virtue of any such transfer shall be chargeable to income-tax
as the income of the transferor as and when the power to revoke the transfer
arises, and shall then be included in his total income

Section 63: "Transfer" and "revocable transfer" defined

For the purposes of sections 60, 61 and 62 and of this section,—

• (a)  a transfer shall be deemed to be revocable if—

 • (i)  it contains any provision for the re-transfer directly or indirectly of the whole or any
part of the income or assets to the transferor, or

• (ii)  it, in any way, gives the transferor a right to re-assume power directly or indirectly
over the whole or any part of the income or assets ;

• (b)  "transfer" includes any settlement, trust, covenant, agreement or arrangement.

Case 1: Harry has transferred certain securities owned by him to a trust for his married sister,
Potter, as on 1/7/2019.

• He has the power to revoke the trust at his desire. On 31/3/2021, he revoked such trust.

Income accrued for the previous year 2019-20 and 2020-21 are Rs 1,20,000 and Rs 1,50,000
respectively and such income is received and enjoyed by Potter

Case 2: Rajkumar transferred his property on 1/4/2019 to Rajkumari with a clause that, he will
take property back from Rajkumari whenever he requires.

• Rajkumar was in need of money on 1/4/2020 and he took back property from Rajkumari.

• The property yields annual income of Rs 2,00,000.

Case 3: Sohan transferred on 1/4/2019 his property to Mohan for the life time of Mohan with a
clause that after death of Mohan property shall be back to Sohan.

• Mohan died on 1/4/2020.

• Sohan has not taken back the property till 31/3/2021.

Property yields annual income of Rs 1,00,000.

ANS- Immaterial whether Soham takes property back or not as the transfer was only up until
lifetime of Mohan. Therefore, it is Sohan’s income.

Section 64: Income of individual to include income of spouse, minor child, etc

1) In computing the total income of any individual, there shall be included all such income as
arises directly or indirectly—
(ii) to the spouse of such individual by way of salary, commission, fees or any other form of
remuneration whether in cash or in kind from a concern in which such individual has a
substantial interest :

iv) subject to the provisions of clause (i) of section 27, to the spouse of such individual from
assets transferred directly or indirectly to the spouse by such individual otherwise than for
adequate consideration or in connection with an agreement to live apart;

(vi) to the son's wife, of such individual, from assets transferred directly or indirectly on or
after the 1st day of June, 1973, to the son's wife by such individual otherwise than for
adequate consideration;

 the son’s wife, 79[* * *] of such individual, from assets transferred 77 directly or indirectly on

or after the 1st day of June, 1973, to the son’s wife 80[* * *] by such individual otherwise
than for adequate consideration; 81[* * *]

       ( vii)   to any person 82 or association of persons from assets transferred 82 directly or

indirectly otherwise than for adequate consideration 82 to the person or association of persons
by such individual, to the extent to which the income from such assets is for the immediate or
deferred benefit 83 of his or her spouse 84[* * *]; and]

        85[( viii)   to any person 83 or association of persons from assets transferred 83 directly or

indirectly on or after the 1st day of June, 1973, otherwise than for adequate consideration 83,
to the person or association of persons by such individual, to the extent to which the income
from such assets is for the immediate or deferred benefit 83

Provided that nothing in this clause shall apply in relation to any income arising to the
spouse where the spouse possesses technical or professional qualifications and the income is
solely attributable to the application of his or her technical or professional knowledge and
experience;

Explanation 1.—For the purposes of clause (ii), the individual in computing whose total
income the income referred to in that clause is to be included, shall be the husband or wife
 whose total income (excluding the income referred to in that clause) is greater; and where
any such income is once included in the total income of either spouse, any such income
arising in any succeeding year shall not be included in the total income of the other spouse
unless the Assessing Officer is satisfied, after giving that spouse an opportunity of being
heard, that it is necessary so to do.

BASICALLY- to calculate as to who’s income the spouse’s income is calculated into,

Explanation 2.—For the purposes of clause (ii), an individual shall be deemed to have a
substantial interest in a concern—

(i)  in a case where the concern is a company, if its shares (not being shares entitled to a fixed
rate of dividend whether with or without a further right to participate in profits) carrying not
less than twenty per cent of the voting power are, at any time during the previous year,
owned beneficially by such person or partly by such person and partly by one or more of his
relatives ;

(ii)  in any other case, if such person is entitled, or such person and one or more of his
relatives are entitled in the aggregate, at any time during the previous year, to not less than
twenty per cent of the profits of such concern.

Explanation 3- For the purposes of clauses (iv) and (vi), where the assets transferred directly or
indirectly by an individual to his spouse or son's wife (hereafter in this Explanation referred to as
"the transferee") are invested by the transferee,—

(i) in any business, such investment being not in the nature of contribution of capital as
a partner in a firm or, as the case may be, for being admitted to the benefits of
partnership in a firm, that part of the income arising out of the business to the
transferee in any previous year, which bears the same proportion to the income of
the transferee from the business as the value of the assets aforesaid as on the first
day of the previous year bears to the total investment in the business by the
transferee as on the said day;
(ii) in the nature of contribution of capital as a partner in a firm, that part of the interest
receivable by the transferee from the firm in any previous year, which bears the
same proportion to the interest receivable by the transferee from the firm as the
 value of investment aforesaid as on the first day of the previous year bears to the
total investment by way of capital contribution as a partner in the firm as on the
said day,
(iii) shall be included in the total income of the individual in that previous year.

Conditions for S 64(1)(ii)

(1) Taxpayer is individual

(2) He/she has substantial interest in a concern
(3) Spouse of taxpayer is employed in the same concern
(4) Spouse is employed without any technical/ profession knowledge/experience.

Salary how computed

Using S 15-17

What is “concern”

Covers business/professional concerns, proprietary/non-prop concern.

Meaning of substantial interest (exp 2)

a) For a company- if individual (either singly or with relatives) holds 20% or more equity
shares at any time during PY
b) Non-company concern- - if individual (either singly or with relatives) is entitled to 20%
or more share in profit in concern at any point during PY

Who are relatives?

Husband, brother, sister, wife or any lineal descendant/ascendant of taxpayer

When both spouses have substantial interest in firm

In this case, exp 1 becomes important. Consider the bottom example- Mrs S has 1L non-GNLU
income and so, it is her income which will be the taxable one. Meaning, Mr S’s income is
clubbed into Mrs S and this will be maintained for subsequent years, even if Mrs S’s non-GNLU
income is lesser that Mr S’s.
Case 4: Sarthak and Mrs. Sarthak hold 20% and 30% equity shares in GNLU Ltd. respectively.

• They are employed in GNLU Ltd. (taxable salary being Rs 2,40,000 p.a. and Rs 3,60,000
p.a. respectively) without any technical or professional qualification.

• Other incomes of Sarthak and Mrs. Sarthak are Rs 70,000 and Rs 1,00,000 respectively.

• Find out the net income of Sarthak and Mrs. Sarthak for the assessment year 2020-21.

Mrs X Mr X

GNLU income 3.6l 2.4l

Non-gnlu income 1l 70k

Clubbing 4.6 (3.6 + 1) + 2.4 L (since 70k

Mrs S’s non-GNLU
income is more, it is
clubbed into her income by
virtue of Exp 1)

total 7L 70k

Case 5: Mr. & Mrs. Rishabh both are working in 2017 Batch Ltd. without possessing any
technical or professional qualification.

• From the following details compute their income for the A.Y. 2020-21:

Particulars Mr. Rishabh Mrs. Rishabh

Taxable Salary from 2017 Batch Ltd. Rs 2,20,000 Rs 70,000

Other income Rs 50,000 Rs 80,000

Share of holdings: Case 1 15% 6%

 Case 2 3% 17%

Case 3 18% 1%

In Case 1 and 2, there is substantial interest upon looking at combined holding of Mr and MRs
Rishabh.

Particulars Mr. Rishabh Mrs. Rishabh

Taxable Salary from 2017 Batch Ltd. Rs 2,20,000 Rs 70,000

Other income Rs 50,000 Rs 80,000

Case 1 (clubbing income) 50,000 2.2l + 70,000 +

80,000 = 3.7 L

Case 2 (clubbing) 50,000 2.2l + 70,000 +

80,000 = 3.7 L

Case 3(clubbing income- NO CLUBBING) 2.2L + 50k= 2.7L 1.5L

Case 6: Mr. & Mrs. Rahul working in Mohani Caterers Ltd. without possessing any
qualification. From the following details compute their income for the A.Y. 2020-21:

Particulars Mr. Rahul Mrs. Rahul

Taxable Salary from Mohani Caterers Ltd. Rs 1,20,000 Rs 60,000

Share of holdings 15% 6%

Other income: Case 1 Rs 50,000 Rs 80,000

Case 2 Rs 90,000 Rs 65,000

Case 3 Nil Nil

Particulars Mr. Rahul Mrs. Rahul

Taxable Salary from Mohani Caterers Ltd. Rs 1,20,000 Rs 60,000

Share of holdings 15% 6% (jointly, they

hold 20%, so it
can be clubbed
under either)

Other income: Case 1 Rs 50,000 Rs 80,000 (since

this is more)

Clubbing in case 1 50k 80,000 +

1,20,000 + 60,
000= 3.6L
 Case 2 Rs 90,000 Rs 65,000

Clubbing in case 2 1,20,000 + 60, 65,000

000 + 90,000 =
2,70,000

Case 3 Nil Nil

Clubbing in case 3

CIT v Om Prakash AIR 1999 SC 2534

• The expression “individual” occurring in Section 64 (1) covers both male and female.

• Word “individual” in Section 64 (1) does not take in the Karta of the Hindu Undivided
Family within its import.

• Income in the hands of Karta of the HUF as partner of a partnership firm cannot be
treated as income of individual and therefore the income arising to the spouse or minor
child of the Karta cannot be included in his income as such as under.

Conditions for S 64(1)(iv)

1) Taxpayer is individual
2) He/she transferred an asset other than house property
3) Asset is transferred to spouse- marriage should subsist at time of transfer
4) Transfer is direct/indirect
5) Transfer is NOT for adequate consideration or condition to live apart- while
natural love and affection is normally sufficient consideration, it is not adequate
in terms of S 64(1). Value of consideration should be measurable in terms of
money or money’s worth. Therefore, religious or spiritual benefit also do not
count.
 Inadequate consideration: If property has been transferred to spouse or son’s
wife directly or indirectly for a consideration which is inadequate, then only the
part of income which is referable to transfer for inadequate consideration, shall be
clubbed.
6) Asset may be for held by transferee spouse in same or different form- for ex,
if husband transfers cash and it is deposited in wife’s bank account, the interest
income is ALSO included in assessee’s income; 4-

Steps-

1) Find total inv of transferee spouse in business on first day of PY

2) Find out inv by transferee spouse out of the funds transferred to X without adequate
consideration by her husband on first day of PY in said business
3) Find out taxable income of transferee spouse from business.
4) Amount which is to be included in hands of transfer= step 3 * step 2 / step 1

Illustration- X gifts Mrs X 2.5 L on dec 28, 2018. Mrs X starts a business using 8,50,000 on 20
Jan, 2019, consisting of-

Gift from husband 2,50,000

Gift from her grandpa 1,50,000

Gift from Mrs A 2,00,000

Gift from father of Mrs X 1,00,000

Gift from brother of Mrs X 1,10,000

Own funds 40,000

Her books-

Dr Cr
Capital on 20 Jan, 2019 8,50,000

Profit for FY ending March, 2,00,000

2019

Drawing up to March 31, 70,000

2019

Balance on April 1, 2019 9,80,000

Fresh capital from X on 10 1,00,000

April, 2019

Profit of FY ending March, 6,00,000

2020

Drawing up to March 31, 2,15,000

2019

Balance on 1 April, 2020 14,65,000

Profit of FY ending March, 9,00,000

2020

Drawing up to March 31, 3,70,000

2020

Balance on April 1, 2020 19,95,000

Assessment year

19-20 20-21 21-22

First day of PY (date of setting up) Jan 20, 2019 April 1, 2019 April 1, 2020

Total inv my Mrs X on date of 8,50,000 9,80,000 14,65,000

setting up- A

Money in (b) gifted by X- B 2,50,000 2,50,000 3,50,000

 Income of Mrs X in business- C 2,00,000 6,00,000 9,00,000

Income to be included in hands of X 58,824 1,60,204 2,15,017

[C*B /A]

BLUE- he didn’t explain this method in class but its in the book (pg 198 of scan)

Conditions for S 64(1)(vi) – transfer to son’s wife

1) Taxpayer is individual
2) He/she transferred asset post May 31, 1973
3) Asset is transferred to son’s wife
4) Direct/indirect transfer
5) Asset is transferred NOT for adequate consideration
6) Asset may be for held by transferee spouse in same or different form
7) Relationship of “in-law” must subsist at time of transfer

Conditions for S 64(1)(vii) – transfer to person for benefit of spouse

1) Taxpayer is individual
2) He/she transferred asset
3) Direct/indirect transfer
4) Asset is transferred to person/AOP
5) Asset is transferred WITHOUT for adequate consideration
6) Asset is transferred for immediate or deferred benefit of spouse

Conditions for S 64(1)(viii) – transfer to person for benefit of son’s wife

1) Taxpayer is individual
2) He/she transferred asset post May 31, 1973
3) Asset is transferred to person/AOP
4) Direct/indirect transfer
 5) Asset is transferred NOT for adequate consideration
6) Asset is transferred for immediate or deferred benefit of son’s wife
7) Relationship of “in-law” must subsist at time of transfer

Section 64 (1A)- MINOR CHILD

In computing the total income of any individual, there shall be included all such income as
arises or accrues to his minor child, not being a minor child suffering from any disability of
the nature specified in section 80U :

• Provided that nothing contained in this sub-section shall apply in respect of such income
as arises or accrues to the minor child on account of any—

(a)  manual work done by him; or

(b)  activity involving application of his skill, talent or specialised knowledge and
experience.

• Explanation.—For the purposes of this sub-section, the income of the minor child shall
be included,—

(a) where the marriage of his parents subsists, in the income of that parent whose total
income (excluding the income includible under this sub-section) is greater; or

(b) where the marriage of his parents does not subsist, in the income of that parent who
maintains the minor child in the previous year,

and where any such income is once included in the total income of either parent, any such
income arising in any succeeding year shall not be included in the total income of the other
parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of
being heard, that it is necessary so to do.

Conditions-

1) Income derived by minor from manual work/activity involving skill, talent or

specialized knowledge or experience will not be clubbed
2) Income of minor will be included in income of that parent whose income is greater
 3) Income of child with disability as specified in S 80U shall not be included in hands of
parent but shall be assessed in hands of child
4) When marriage of parents does not subsist minor’s income will be clubbed with that
parent who maintains the child in that PY.
5) Clubbing happens for minor, married daughter as well
6) Exemption for minor child- up till INR 1,500. Thus, if minor’s income is less that 1.5
k it will be fully exempt.

Cross Transfers

• In the case of cross transfers, the income from the assets transferred would be assessed in
the hands of the deemed transferor if the transfers are so intimately connected as to form
part of a single transaction, and each transfer constitutes consideration for the other by
being mutual or otherwise.

CIT v. Keshavji Morarji [1967] 66 ITR 142

• if two transactions are inter-connected and are parts of the same transaction in such a
way that it can be said that the circuitous method was adopted as a device to evade tax,
the implication of clubbing provisions would be attracted.

Illustration- Mr. Vishal gifted a sum of Rs 7 lakhs to his brother's wife on 14-6-2019. On
12-7-2019, his brother gifted a sum of Rs 6 lakhs to Mr. Vishal 's wife.

• The gifted amounts were invested as fixed deposits in banks by Mrs. Vishal and wife of
Mr. Vishal's brother on 01-8-2019 at 9% interest.

• Discuss the consequences of the above under the provisions of the Income-tax Act, 1961
in the hands of Mr. Vishal and his brother.

ANS- this is in the nature of CROSS-TRANSFER- to be assessed wrt deemed transferor.

Thud, interest arising on Mrs Vishal’s fixed deposit as well as the brother’s wife’s fixed
deposit will be clubbed with the income of Mr Vishal and the brother respectively. This is bc
they are indirect transferor’s of income to the other’s spouses with the intention of reducing
tax burden,

Section 64(2)
• Where, in the case of an individual being a member of a Hindu undivided family, any
property having been the separate property of the individual has, at any time after the 31st
day of December, 1969, been converted by the individual into property belonging to the
family through the act of impressing such separate property with the character of property
belonging to the family or throwing it into the common stock of the family or been
transferred by the individual, directly or indirectly, to the family otherwise than for
adequate consideration (the property so converted or transferred being hereinafter
referred to as the converted property), then, notwithstanding anything contained in any
other provision of this Act or in any other law for the time being in force, for the purpose
of computation of the total income of the individual under this Act for any assessment
year commencing on or after the 1st day of April, 1971,—

• a) the individual shall be deemed to have transferred the converted property, through the
family, to the members of the family for being held by them jointly ;

• (b) the income derived from the converted property or any part thereof shall be deemed to
arise to the individual and not to the family ;

• (c) where the converted property has been the subject-matter of a partition (whether
partial or total) amongst the members of the family, the income derived from such
converted property as is received by the spouse on partition shall be deemed to arise to
the spouse from assets transferred indirectly by the individual to the spouse and the
provisions of sub-section (1) shall, so far as may be, apply accordingly :

• Provided that the income referred to in clause (b) or clause (c) shall, on being included in
the total income of the individual, be excluded from the total income of the family or, as
the case may be, the spouse of the individual.

• Explanation 1.—For the purposes of sub-section (2),— "property" includes any interest

in property, movable or immovable, the proceeds of sale thereof and any money or
investment for the time being representing the proceeds of sale thereof and where the
property is converted into any other property by any method, such other property.

• Explanation 2.—For the purposes of this section, "income" includes loss.

Conditions-

1) Individual member of HUF converts after 31/12/1969 his individual property into
HUF prop, or throws the property into common stock or otherwise transfers
directly/indirectly to the HUF property.
2) WITHOUT adequate consideration

Income of individual continues to be included in TI of individual

3) AFTER PARTITION (total/partial)- income derived by spouse on partition will be

deemed to arise to the souse from assets transferred indirectly to the spouse, and so
the income from the CONVERTED property will be clubbed with the individual who
did the conversion.
4) If income from the converted property id included in TI of individual u/S 64(2), it
will be excluded from TI of family/spouse.
5) EXP 2- income includes loss

Illustration- Nihal transfers his self-acquired property yielding an annual income of Rs.
60,000 to his Hindu undivided family, consisting of Nihal, Mrs. Nihal, his major son Rihal
and minor son Zihal.

• Clubbing before partition

• Clubbing after partition

Ans- before partition, the income is completely charged to Nihal

After partition-

Nihal Mrs N Major son- Minor son-Zihal

Rihal

Nihal share 15,000 15,000 15,000 15,000

Clubbing Mrs N 30,000 nil 15,000 15,000

share via S
64(2)
 Clubbing minor 45,000 nil 15,000 nil
child income

Standard 45,000 – 1,500= nil 15,000 nil

deduction for
43,500
minor child u/S
10(2)

Total income 43,500 nil 15,000 nil

• Accretion of asset: No clubbing

• Income on income: No clubbing

Section – 65: Liability of person in respect of income included in the income of another
person

• Where, by reason of the provisions contained in this Chapter or in clause (i) of section 27,
the income from any asset or from membership in a firm of a person other than the
assessee is included in the total income of the assessee, the person in whose name such
asset stands or who is a member of the firm shall, notwithstanding anything to the
contrary contained in any other law for the time being in force, be liable, on the service of
a notice of demand by the Assessing Officer in this behalf, to pay that portion of the tax
levied on the assessee which is attributable to the income so included, and the provisions
of Chapter XVII-D shall, so far as may be, apply accordingly :

• Chapter XVII-D (Section 190 to 234F) [A to G]

• Chapter XVII: Collection and Recovery of Tax

• D: Collection and recovery (Section 220 to 232)