​6 MARKS

3.Historical prospective of Income -Tax

Taxation, tax evasion, tax disputes and settlement thereof in some shape or the other have been
in existence since the human beings started living in the colonies or groups; but tax evasion &
tax disputes reached a glaringly vicious height during the Second World War period and
afterwards (1936-46).

Tax evasion, at the beginning of the Second World War was only a trickle because at that time,
honesty in public, personal and social life was still regarded as something to be proud of; but by
the end of the world war and, thereafter, it became a flood. Production of goods became short
and money became surplus, which resulted into the economy of license, permit and quota.

The provisions of income tax are contained in the Income- Tax Act, 1961 which extend to whole
of India and became effective from 1-4-1962(Section 1). This Act contains provision for
determination of taxable income, determination of tax liability, procedure for assessment,
appeals, penalties and prosecutions. It also lays down the powers and duties of various
income-tax authorities.

Since the Income Tax Act 1961, is a revenue law, there are bound to be amendments from time
to time in this law. Therefore, Income Tax Act has undergone innumerable changes from the
time
it was originally enacted. These amendments are generally brought in annually along with the
Union Budget. Besides these amendments, whenever it is found necessary, the Governments
introduce amendments in the form of Amendments Act and Ordinances.

4. DEFINITIONS-

(i) INCOME-

Under section 2(24) of income tax “Income” includes:

(i) Profit and gain
(ii) Dividend
(iii) Voluntary contributions received by a trust created wholly or partially for charitable or
religious purpose or by an institution established wholly or partially for such purpose or by an
association or by a fund or by any university or by a hospital or other educational institute under
different sub clauses.
(iv) The value of any perquisite or profit in lieu of salary taxable under section 17.
(v) Any special allowance or benefit other than perquisite.
(vi) Any allowance granted by the assessee either to meet the personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by him.
(vii) 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.
(viii) The value of any benefit or perquisite, whether convertible into money or not, obtained by
any representative assessee mentioned in different clauses of section 160.

(ii) ASSESSEE-

Sec.2(7)-​Assessee is ​person​ who liable to pay Tax, Interest, or penalty under the Income Tax Act
and includes

1. every ​person​ in respect of whom any proceeding under this Act has been taken for the
assessment of his income or assessment of fringe benefits or of the income of any other
person in respect of which he is assessable, or of the loss sustained by him or by such
other person, or of the amount of refund due to him or to such other person;
2. every ​person​ who is deemed to be an assessee under any provision of this Act;
3. every ​person​ who is deemed to be an assessee in default under any provision of this Act.

(iii) FINANCIAL YEAR-

A fiscal year (or financial year or accounting reference date) is a 12-month period used for
calculating annual ("yearly") financial reports in businesses and other organizations. In many
jurisdictions, regulatory laws regarding accounting require such reports once per twelve months,
but do not require that the twelve months constitute a calendar year (i.e. January to December).

(iv) PREVIOUS YEAR-

As per S.2(34) of Income Tax Act, 1961, unless the context otherwise requires, the term
“previous year” means the previous year as defined in section 3. In view of above, we need to
visit Section 3 of Income Tax Act, 1961, which defines the term previous year as under:

‘For the purposes of this Act, the term “previous year” means the financial year immediately
preceding the assessment year. Provided that, in the case of a business or profession newly set
up, or a source of income newly coming into existence, in the said financial year, the previous
year shall be the period beginning with the date of setting up of the business or profession or, as
the case may be, the date on which the source of income newly comes into existence and ending
with the said financial year.

(v) RESIDENCE (S.6) -

An Individual is said to be a resident Indian for the purpose of Income tax if one of the following
Basic conditions are satisfied.

1. An Individual is in India for a period of 182 days in the financial year in which he is
getting his salary income or;.
2. An Individual is in India for a period of 60 days or more during financial year in
which he gets his salary and 365 days or more during 4 years immediately preceding
to that financial year.

(vi) PERSON-

As per S.2(31) of Income Tax Act, 1961, unless the context otherwise requires, the term
“person” includes:

(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.

5. DISTINCTION BETWEEN CESS, FEE, TAX-

Tax is the amount payable by each person for doing an activity and paid by the purchaser/earning
income (receiver) and paid by him/her and goes to government.
Income tax is charged for earning income above a threshold limit and paid to central
government.

GST is charged when goods/services are sold and recovered from a person purchasing
goods/services and paid to central government for allocation amongst central and state
government.

Amount of taxes are shared between center and state in proportion to pre-decided allocation
amongst them.

Fee is charged for giving a license, certificate, permission and is charged from a person desirous
of taking License, certificate and/or permission and retained by the department giving such
permission. There is no share of center and/or state from the fee collected.

Cess is charged generally by Central government for any specific purpose and payable to central
government only. There is no share of state in Cess collected.

10 MARKS

1.AGRICULTURAL INCOME-

Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income
Tax Act, 1961. Agricultural income is defined under section 2(1A) of the Income-tax Act.

As per section 2(1A), agricultural income generally means :

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

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

(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified
in this regard in section 2(1A).

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

As per Income Tax Act income earned from any of the under given three sources meant
Agricultural Income;
(i)Any rent received from land which is used for agricultural purpose: Assessees do not
have to pay tax on rent or revenue from agricultural land. Such land should, of course, be
assessed to land revenue in the country or be subject to a local rate. Further, there must be a
direct link between the agricultural land and the receipt of income by way of rent or other
revenue (for instance, a landlord could receive revenue from a tenant).

(ii)Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale
of such produce.

(iii)​Income attributable to a farm house subject to the condition that building is situated on or
in the immediate vicinity of the land and is used as a dwelling house, store house etc. Income
from such farm houses is considered agricultural income. The definition of `farm houses’ covers
buildings owned and occupied by both cultivators of agricultural land and assessees who receive
rent or revenue from agricultural land. The sole purpose of such farmhouses should be for use as
dwellings for the cultivators or use as store houses. Normally, the annual value of a building is
taxable as `income from house property’. However, in the case of a farm house, the annual value
would be deemed agricultural income and would, thus, be exempt from tax.

(iv) Income earned from carrying nursery operations is also considered as agricultural income
and hence exempt from income tax.

In order to consider an income as agricultural income certain points have to be kept in

mind:

(i) There must me a land.

(ii) The land is being used for agricultural operations:- Agricultural operation means that efforts
have been induced for the crop to sprout out of the land. The ambit of agricultural income also
covers income from agricultural operations, which includes processing of agricultural produce to
make it fit for sale. Like the people who receive passive agricultural income in the form of rent
or revenue, the people who actually carry out agricultural operations are also eligible for tax-free
agricultural income.

(iii) Land cultivation is must:- Some measure of cultivation is necessary for land to have been
used for agricultural purposes. The ambit of agriculture covers all land produce like grain, fruits,
tea, coffee, spices, commercial crops, plantations, groves, and grasslands. However, the breeding
of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be
construed as agricultural operations.
(iv) If any rent is being received from the land then in order to assess that rental income as
agricultural income there must be agricultural activities on the land.

(v) In order to assess income of farm house as agricultural income the farm house building must
be situated on the land itself only and is used as a store house/dwelling house.

(vi) Ownership is not essential. In the case of rent or revenue, it is essential that the Assessee
have an interest in the land (as an owner or mortgagee) to be eligible for tax-free income.
However, in the case of agricultural operations it isn’t necessary that the person conducting the
operations be the owner of the land. He could be just a tenant or a sub-tenant. In other words, all
tillers of land are agriculturists and enjoy exemption from tax. In some cases, further processes
may be necessary to make a marketable commodity out of agricultural produce. The sales
proceeds in such cases are considered agricultural income even though the producer’s final
objective is to sell his products.

Certain income which is treated as Agriculture Income;

(a) Income from sale of replanted trees.

(b) Rent received for agricultural land.

(c) Income from growing flowers and creepers.

(d) Share of profit of a partner from a firm engaged in agricultural operations.

(e) Interest on capital received by a partner from a firm engaged in agricultural operations.

(f) Income derived from sale of seeds

Certain income which is not treated as Agricultural Income;

(a) Income from poultry farming.

(b) Income from bee hiving.

(c) Income from sale of spontaneously grown trees.

(d) Income from dairy farming.

(e) Purchase of standing crop.

(f) Dividend paid by a company out of its agriculture income.

(g) Income of salt produced by flooding the land with sea water.
(h) Royalty income from mines.

(i) Income from butter and cheese making.

(j) Receipts from TV serial shooting in farm house is not agriculture income.

(k) Income from Plantation companies:- Many plantation companies have launched schemes that
offer tax-free agricultural income.

Tax on sale of agricultural land: ​Before 1970, profit on the sale or transfer of all agricultural
land was considered rent or revenue derived from the land. Such profit was, therefore,
tax-exempt as agricultural income. There were several favorable judgments of various High
Courts on the issue. However, via a retrospective amendment that took effect from April 1, 1970,
land qualifies to be an agricultural land if the prescribed conditions are satisfied. An agricultural
land does not form part of the definition of a capital asset and hence, there will be no capital
gains on the sale of such land.

Any other land not forming part of the above will be a capital asset and sale of the same shall
attract tax on capital gains subject to Section 54B, which is explained below.

Section 54B: Capital gain on transfer of land used for agricultural purposes not to be charged
in certain cases

Section 54B gives relief to a taxpayer who sells his agricultural land and acquires another
agricultural land from the sale proceeds.

Conditions to be satisfied to claim the benefit of this Section:

a. The assessee must be an individual or a HUF.

b. The agricultural land should have been used for agricultural purposes. It may be a long term
asset or a short term asset.

c. It must have been used either by the assessee or his parents for agricultural purposes in atleast
two years immediately preceeding the date on which the transfer of land took place.
d. The assessee should have purchased another land, which is being used for agricultural
purposes, within a period of two years from the date of sale.

Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful while
dealing with such income. They must make sure that they aggregate agricultural income with
their total income to avoid interest payments and possible penalties for concealment of income.
Assessees must also maintain credible records to provide the tax authorities with proof of
ownership of agricultural land and evidence of having earned agricultural income.

​20 MARKS

1. HEADS OF INCOME-

Income of a person is classified into 5 categories. Thus, income belonging to a particular

category is taxed under a separate head of income pertaining to that category. Section 14 of the
Act, has classified five different heads of income for the purpose of computation of total income.
All income shall be classified under the following heads for the purpose of computation of
taxable amount subject to certain Exemptions’ and deductions.

The five heads of income are:

1. Income under the head salaries (Section 15 – 17)

2. Income from house property (Section 22 – 27)

3.Profits and gains from business or profession (Section 28 – 44)

4. Capital gains (Section 45 – 55)

5. Income from other sources (Section 56 – 59)

Income from Salary

The first head of Income Tax heads is income from salary which.This clause essentially
assimilates any remuneration, which is received by an individual in terms of services provided
by him based on a contract of employment. This amount qualifies to be considered for income
tax only if there is an employer-employee relationship between the payer and the payee
respectively. Salary also should include the basic wages or salary, advance salary, pension,
commission, gratuity, perquisites as well as the annual bonus.

Allowances​: An allowance is a fixed monetary amount paid by the employer to the employee for
expenses related to office work. Allowances are generally included in the salary and taxed unless
there are exemptions available.

Specific tax exemptions are allowances allowed by employers as part of the salary. Some of
them are.

● Conveyance Allowance​: Up to Rs 800/- a month is exempt from tax.

● House Rent Allowance (HRA)​: Salaried individuals can claim House Rent Allowance
or HRA to lower taxes who live in a rented house. This can be partially or completely
exempt from taxes.

The deduction available is the minimum of the following amounts:

1.Actual HRA received

2.50% of [Basic salary + DA] for those living in metro cities (40% for non-metros)
3.Actual rent paid less 10% of salar​y
● Leave Travel Allowance (LTA)​: LTA accounts for expenses for travel when you and
your family go on leave. While this is paid to you, it is tax-free twice in a block of ​4
years​.
● Medical Allowance​: Medical expenses to the extent of ​Rs 15,000/​– per annum is
tax-free. The bills can be incurred by you or your family.
● Perquisites​: Section 17 of Income Tax Act deals with perquisites which are basically
benefits in addition to normal salary to which an employee has a right by way of his
employment. Examples of these are rent free accommodation or car loan. There are some
perquisites that are taxable in the hands of all categories of employees, some which are
taxable when the employee belongs to a specific group and some that are tax-free

Income from House Property

The second head of Income Tax heads is Income from house property, According to the Income
Tax Act 1961, Sections 22 to 27 is dedicated to the provisions for the computation of the total
standard income of a person from the house property or land that he or she owns. An interesting
aspect is that the charge is derived out of the property or land and not on the amount of rent
received. However, if the property is utilized for letting out the normal course of business, then
the income from the rent will be considered.

Income from Profits of Business

The third head of Income Tax heads isIncome from Profits of Business in which the computation
of the total income will be attributed from the income earned from the profits of business or
profession. The difference between the expenses and revenue earned will be chargeable. Here is
a list of the income chargeable under the head:

● Profits earned by the assessee during the​ assessment year

● Profits on income by an organization
● Profits on sale of a certain license
● Cash received by an individual on export under a government scheme
● Profit, salary or bonus received as a result of a partnership in a firm
● Benefits received in a business

Income from Capital Gains

Capital Gains are the profits or gains earned by an assessee by selling or transferring a capital
asset, which was held as an investment. Any property, which is held by an assessee for business
or profession, is termed as capital gains.

Income from other sources

Any other form of income, which is not categorized in the above-mentioned clauses, can be
sorted in this category. Interest income from bank deposits, lottery awards, card games, gambling
or other sports awards are included in this category. These incomes are attributed in Section
56(2) of the Income Tax Act and are chargeable for income tax.

2. EXEMPTED INCOME-
There  are  some  incomes  which  do  not  form  part  of  total  income  and  thus,  are  also 
called as income exempt from tax. Such exempted incomes are given under section 10 
of the Income-tax Act, 1961. 

  

Some of those incomes are explained below: 

1.​ ​Agricultural income [Sec. 10(1)]:

Agricultural  income in India is totally exempt from tax. However, such income is to be 

aggregated  in  case  of  certain  assessees  for  the  purpose  of  determining  rate  of tax on 
non-agricultural income. 

  

2.​ ​Receipts by a member from a HUF [Sec. 10(2)]:

Any  sum  received  by  an  individual  as  a  member  of  a  Hindu  Undivided  Family  either 
out  of  income  of  the  family  or  out  of  income  of  estate  belonging  to  the  family  is 
exempt from tax. 

  

3.​ ​Share of profit received by a partner from a firm [Sec. 10(2A)]:

In  case  of  a person being a partner of a firm which is separately assessed as such, his/ 

her share in the total income of the firm is exempt from tax. 

  

4.​ ​Interest on Non-resident (External) Account [Sec. 10(4)]:

In  the  case of an individual who is not resident in India, any income by way of interest 
on  money  standing  to  his  credit  in  a  Non-resident  (External)  account  in  any  bank  in 
India shall be exempt from tax if certain conditions are satisfied. 

  

5. ​Remuneration to persons who are not citizens of India [Sec.

10(6)]:

In  case  of  an  individual  who  is  not  a  citizen  of  India,  the  following  income  shall  be 
exempt from tax: 

a. Remuneration received by diplomats, etc. 

b.  Remuneration  received  by  a  foreign  national  as  an  employee  of  a  foreign 
enterprise. 

c. Non-resident employed on a foreign ship. 

d. Remuneration of employee of foreign Government during his training in India. 

  

6.​ ​Allowance or perquisites outside India [Sec. 10(7)]:

Any  allowances  or  perquisites  paid  or  allowed,  as  such,  outside  India  by  the 
Government to a citizen of India, for rendering services outside India, are exempt. 

  

7. ​Payments under Bhopal Gas Leak Disaster (Processing of

Claims) Act, 1985 [Sec. 10(10BB)]:

Any  payments  made,  under  the  above  Act  or  any  scheme  made  thereunder,  shall  be 
exempt from tax in the hands of the recipient. 
  

8. ​Exemption  ​for compensation received or receivable on account

of any disaster [Sec. 10(10BC)]:

Any  amount  received  or  receivable  from  the  Central  Government  or  a  State 
Government  or  a  local  authority  by  an  individual  or  his  legal  heir  by  way  of 
compensation on account of any disaster shall be exempt from tax. 

However,  the  exemption  is  not  allowable  in  respect of amount received or receivable 

to  the  extent  such  individual  or  his  legal heir has been allowed a deduction under the 
Income-tax Act on account of any loss or damage caused by such disaster. 

  

9. ​Tax on non-monetary perquisites paid by employer [Sec.

10(10CC)]:

The  tax  actually  paid  by  the  employer  on  a  perquisite  provided  to  the  employee 
[other  than  the  perquisite  provided  by  way  of  monetary  payment  within  the meaning 
of section 17(2)] shall be exempt from tax in the hands of the employee. 

  

10.​ ​Provident Fund [Sec. 10(11)]:

Any  payment  from  a  provident  fund  to  which  the  Provident  Fund  Act, 1925 applies or 
from  Public  Provident  Fund  set  up  by  the  Central  Government  shall  be  exempt  from 
tax.   

  

11.​ ​Educational scholarships [Sec. 10(16)]:

Scholarships  granted  to  meet  the  cost  of  education  are  exempt  from  tax.  In  order  to 
avail  the  exemption,  it  is  not  necessary  that  scholarship  should  be  financed  by  the 
Government. 

  

12.​ ​Daily allowances of Members of Parliament [Sec. 10(17)]:

The following incomes shall be exempt from tax in the hands of the persons specified: 

a.
Daily  allowance  received  by  any  person  by  reason  of his membership of Parliament or 
of any State Legislature or of any Committee thereof; 

b.
Any  allowance  received  by  any  person  by  reason  of  his  membership  of  Parliament 
under the Members of Parliament (Constituency Allowance) Rules, 1986; 

c.
Any  constituency  allowance  received  by  any  person  by  reason  of  his  membership  of 
any State Legislature under any Act or Rules made by that State Legislature. 

   

13. ​Pension received by certain awardees/ any member of their

family [Sec. 10(18)]:

Any  income  by  way  of  pension/  family  pension  received  by  an  individual  or  any 
member  of  his  family  shall  be  exempt  from  tax  if  such  individual  has  been  in  the 
service  of  Central/  State  Government  and  has  been  awarded  Param  Vir  Chakra  or 
Maha Vir Chakra or Vir Chakra or such other gallantry award as may be notified. 
  

14. ​Exemption of the family pension received by the family members

of armed forces (including para-military forces) personnel killed in
action in certain circumstances [Sec. 10(19)]:

Where  the  death  of  a  member  of  the  armed  forces  (including  para-military forces) of 
the  Union  has  occurred  in  the  course of operational duties, in such circumstances and 
subject  to  such  conditions  as  may  be  prescribed,  the  family  pension  received  by  the 
widow or children or nominated heirs, as the case may be, shall be exempt from tax. 

  

15.​ ​Annual value of one palace of the ex-ruler [Sec. 10(19A)]:

The  ‘annual  value’  in  respect  of  any  one  palace  which  is  in  occupation  of an ex-ruler 
is  exempt  from  tax,  provided  such  annual  value  was  exempt  before  28.12.1971  by 
virtue of any law or order then prevailing. 

  

  

16.​ ​Income of minor clubbed in the hands of a parent [Sec. 10(32)]:

Under  section  64(1A),  the  income  of  a  minor  child  is  includible in the total income of 
the  parent  under  the  circumstances  mentioned  therein,  section  10(32)  provides  that 
such  parent  in  whose  income  the  minor’s  income  is  included  shall  be  entitled  to 
exemption  to  the  extent  such  income  does  not  exceed  of  `  1,500  in  respect  of  each 
minor  child,  whose  income  is  so  includible.  In  other  words,  the  exemption  shall  be 
allowed  to  the extent of the income of each minor child included or ` 1,500 per child, 
whichever is less. 
  

17. ​Capital gain on transfer of units of US-64 exempt if transfer

takes place on or after 1-4-2002 [Sec. 10(33)]:

Any  income  arising  from  the  transfer  of  a  capital  asset,  being  a  unit  of  the  Unit 
Scheme,  1964  where  the  transfer  of  such  asset  takes place on or after 1-4-2002, shall 
be exempt from tax. 

  

18. ​Dividend to be exempt in the hands of the shareholders [Sec.

10(34)]:

Any  dividend  declared,  paid  or  distributed  by  a  domestic  company  shall  be  liable  to 
dividend  distribution  tax  @  15%  plus  surcharge  @  10%  plus  education  cess  @  2%  plus 
secondary  and  higher  education  cess  @  1%  of  the  amount  so  declared,  distributed  or 
paid.  Hence,  such  dividend  received  by  the  shareholders  shall  be  exempt  from  tax  in 
their hands. 

  

19. ​Income from units to be exempt in the hands of the unit-holders

[Sec. 10(35)]:

Like  dividends,  income  received  on  units  of  UTI  (now  known  as  specified  undertaking 
and  specified  company)  and  Mutual  Funds  covered  under  section  10(23D)  shall  be 
exempt from tax in the hands of the unit-holders. 

  

20. ​Exemption of long-term capital gain arising from sale of shares

and units [Sec. 10(38)]:
Any  income  arising  from  the  transfer  of  a  long-term  capital  asset,  being  an  equity 
share  in  a  company  or  a  unit  of  an  equity  oriented  fund  shall  be  exempt  from  tax 
provided: 

a.
Such  equity  shares  are  sold  through  recognized  stock  exchange,  whereas  units  of  an 
equity  oriented  fund  may  either  be  sold  through  the  recognized  stock  exchange  or 
may be sold to the mutual fund. 

b.
Such transaction is chargeable to securities transaction tax. 

  

21. ​Exemption of amount received by an individual as loan under

reverse mortgage scheme [Sec. 10(43)]:

Any  amount  received  by  an  individual  as  a  loan,  either  in  lump  sum  or  in  instalment, 
in  a  transaction  of  reverse  mortgage  referred  to  in  section  47(xvi)  shall  be  exempt 
from tax.