Tax Law - 2022

Tax – Meaning

• Are considered to be the ‘cost of living in a society’.

• Are levied to meet common welfare expenditure of the society.
• Constitute the basic source of revenue to the government.
• Revenue raised is utilized for meeting the expenses of the government.

Constitutionality
• Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law.

• Article 246 read with Schedule VII divides subject matter of law made by legislature into three categories:
• Union list (only Central Government has power of legislation on subject matters covered in the list)
• State list (only State Government has power of legislation on subject matters covered in the list)
• Concurrent list (both Central &State Government can pass legislation on subject matters).

• Following major entries in the respective list enable the legislature to make law on the matter:
• Union List (List I) Entry 82 - Taxes on income other than agricultural income i.e. Income-tax
• State List (List II) Entry 46 - Taxes on agricultural income.
Modern History

• In modern India, Income Tax was introduced for the first time in the year 1860 by Sir James Wilson.

• In 1918 a new income tax Act was passed but it was replaced by another new Act which was passed in the
year 1922. This Act remained in the force up to the year 1961-62.

• In the year 1958, a report on new Income Tax Act was submitted by the Law Commission and based on these
recommendations, Income-tax Act,1961 came into existence with effect from 1st of April, 1962.

Administration of Tax Law - Taxation is handled by Finance Ministry

Components of Income Tax Law

• Income Tax Act, 1961
• Annual Finance Act
• Income Tax Rules, 1962
• Circulars and Notifications
• Case Laws
Types of Taxes
Direct Tax Indirect Tax
Impact and incidence fall on the same person i.e Impact and Incidence fall on two different persons
Person who pays the tax cannot recover it from i.e. Person paying the tax passes on the incident to
some body else some other person
DT is based on income earning ability of people. IDT is borne by consumer irrespective of financial
ability.
Income Tax GST

Rate of Tax
Proportional rate of Tax Progressive rate of Tax

Taxes in which the rate of tax remains constant Taxes in which the rate of tax increases are called
though income changes progressive taxes
A proportional tax extracts a constant proportion of A progressive tax extracts an increasing proportion of
rising income rising income
Heads of Income
Section 2 [31] Person includes-

1. Individual
2. Hindu Undivided Family
3. Company
Section 2(17) Company means –
i. any Indian company, or
ii. any body corporate incorporated by or under the laws of a country outside India, or
iii. any institution, association or body which is or was assessable or was assessed as a company for any
assessment year under the Indian Income-tax Act, 1922 (11 of 1922) or which is or was assessable
or was assessed under this Act as a company for any assessment year commencing on or before the
1st day of April, 1970, or
iv. 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;
4. Firms
5. Association of Person / Body of Individuals
6. Local Authority
7. Artificial Juridical Person

Explanation – AOP/BOI/Local Authority/AJP shall be deemed to be a person whether or not incorporated with the
object of deriving income, profits, gains.
Assessee [Section 2(7)]

“Assessee" means a person by whom any tax or any other sum of money is payable under this Act, and includes—
(a) every person in respect of whom any proceeding under this Act has been taken
• for the assessment of his income or the loss sustained by him or the amount of refund due to him
• For the assessment of the income of any other person in respect of which he is assessable, or the loss
sustained by such other person, or the amount of refund due to such other person ;

(b) every person who is deemed to be an assessee under any provision of this Act ;
(c) every person who is deemed to be an assessee in default under any provision of this Act ;

PTR
• Every assesse is a person but every person need not be an assesse

Assessment [Section 2(8)]

• This is the procedure by which the income of an assesse is determined by the assessing officer.
• It may be by way of a normal assessment or by way of reassessment of an income previously assessed.
Assessment Year Section 2(9) - The period of twelve months commencing on the 1st day of April every year

Previous Year Section 2(34) rw section 3 - The financial year immediately preceding the assessment year

Section 4 Charge of Income Tax

o Tax is levied, in each assessment year, on the total income earned by the assesee in the previous year
o Year in which income is earned is the PY, such income is taxable in the immediately following year which is
the assessment year
o Income earned in the PY 21-22 is taxable in AY 22-23

Proviso to section 3 - Business or profession newly set up during the financial year – 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.

Exceptions
1) Shipping Business of non-resident [sec 172]
2) Assessment of person leaving India [sec 174]
3) Assessment of BOI/AOP/AJP formed for a particular event or purpose [sec 174A]
4) Assessment of person likely to transfer property to avoid tax [sec 175]
5) Discontinued Business [ sec 176]
Practice Questions
1. A is running a business from 1993 onwards. Determine PY for AY 2022-23.
2. An advocate sets up his profession on 1.7.2021. Determine the PY for AY 2022-23.
Income
• Section 2(24)
• Inclusive definition; wide scope; in addition to receipt mentioned in section 2(24), any other receipt is taxable under
the act, if it comes within the general and natural meaning of the term “income”.
• Periodical return ‘coming in’ with some sort of regularity from definite sources. [CIT v Shaw Wallace]
• Income is broadly defined as the true increase in the amount of wealth which comes to a person during a stated
period of time. [ Comm. Of corporation and taxation v Filoon]

Nature/ Concept
1. Form of Income – cash or kind
2. Income means net receipt and not gross receipt. Net receipt is arrived at after deducting the expenditure incurred in
connection with earning such receipts.
3. Income normally refers to revenue receipts. Capital receipt are normally exempt unless specifically included in the
definition of income.
4. Income is taxable either on accrue basis or receipt basis. [salary is taxable on receipt basis; capital gain is taxable in
the year in which transfer takes place]
5. For the purpose of taxation, the taint of illegality associated with income is immaterial.
6. Income includes loss – in calculation total income, both negative and positive income should be taken into account.
7. Same income cannot be taxed twice in the hands of the same person.
8. Source of Income need not exist in the AY
9. Income whether received in lump sum or in instalments is liable to tax.
10. Surplus from mutual activity – A body of individuals, raising contribution to a common fund for the mutual
benefits of members cannot be said to have earned income when it finds that it has overcharged members and
some portion of the contribution raised may be safely refunded. Income must be from outside agency. A person
cannot make income out of himself. [Chelmsford club v CIT; CIT v Cement Allocation & Co Ordinating Org.]
11. Interest earned from deposit of surplus funds in the bank by way of income is excluded from principle of
mutuality – Madras Gymkhana Club v CIT]
12. Entries in books of account are not conclusive. Income earned by the assesse becomes part of his total income
whether the income has been included in the books of account or not. Similarly a receipt which in law cannot be
regarded as income cannot become so merely because the assessee credited it to profit and loss account.
13. Personal Gift; Business Gift
14. Relief or reimbursement of expenses is not treated as income. E.g. reimbursement of travelling expenses for
official purpose to employee is not an income.
15. Award received by a sportsman

Cases
• CIT v. G. R. Karthikeyan - Prize money on winning a motor rally is income
Capital v Revenue Receipts

Capital Receipt Revenue Receipt

Income generated from non-operational Income generated from day to day
activity operational activities
Either creates liability or reduce asset Affects profit or loss of business
Disclosed in balance sheet Disclosed in profit and loss account
Generally non-recurring Generally recurring in nature

Tests
1. Capital Asset v. Stock in trade – Receipt on account of capital asset is a capital receipt whereas receipt on
account of stock in trade is a revenue receipt. [PTR - what is fixed asset for one may be trading asset for another]
2. Receipt in lieu of source of income. Where an amount is received in replacement of a source of income, it is
called a capital receipt. E.g. where a person receives compensation for termination of his service, it is capital
receipt.
3. Receipt in the hands of recipient is material. Source from which the payment is made has no bearing on the
question. e.g. payment received on redemption of debentures held as investment is capital receipt in the hands
of the recipients even if company makes payment out of profit.
4. Onus – on assesse
Cases
• CIT v. Vazir Sultan
• CIT v. Panbari Tea Co. Ltd
• Empire Jute Co. Ltd. v. CIT
Capital Receipt

1. Payment made by an insurance company to compensate for loss of machinery due to fire
2. Where the agency was found to be the sole business of the assessee, the receipt of compensation on account of
termination – CIT v Vazir Sultan
3. Compensation paid for agreeing to refrain from carrying on competitive business in commodities in respect of
which an agency was terminated – Gillanders Arbuthnot & co ltd . CIT
4. Salami received by lessor – CIT v Panbari Tea Co Ltd
5. Compensation received by a journalist from a foreign publisher upon termination of contract for performance of
authorship – CIT v Sharda Sinha
6. Profit on sale of shares acquired with the intention of obtaining a directorship and not of dealing in the shares –
CIT v National Finance Ltd
7. Amount realized by assesse from the sale of a property received as alimony from her husband in terms of decree
of divorce – Shrimati Roma Sengupta v CIT
Revenue Receipt

1. Compensation received by assessee, a dealer in land, from govt on account of requisition of land belonging to
assesse – Nawn Estates (P) Ltd v CIT
2. PQR Co Ltd received royalty in advance in lump sum
3. Compensation received in respect of loss of a trading asset – Shadbolt v Salmon Estate Ltd
4. Where property sold is a capital asset, profit is capital receipt; Where sale is in the course of business (property
sold is stock in trade), profit is revenue receipt.
5. Monthly alimony under a decree of court – revenue receipt; lump sum alimony paid for the extinguishment of the
right to maintenance – capital receipt – Maheshwaridevi v CIT
Application of Income
• When assesse does not alienate or assign the source of income but merely applies the income to discharge an
obligation after the income reaches the hands of the assesse so that it passes through his hand to be received
by another.
• It remains assesses’ income and is taxable in the hands of the assesse
• The purpose of application of income is immaterial
• Section 60

Cases
• CIT v Sitaldas Tirathdas
• True test is whether the amount sought to be deducted never reaches the assesse as his income
• Nature of obligation is the decisive fact
• There is a difference between an amount which a person is obliged to apply out of his income and an
amount which by the nature of the obligation cannot be said to be a part of the income of the assesse.
• P. C. Mullick v. CIT
• V. M. Raghavalu Naidu and Sons v. CIT
Diversion of income by overriding title
• If a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed
upon the income arising after the assignment of the source.
• Income so diverted cannot be treated as income of the assesse and is not taxable in the hands of the assesse.

Cases
• Raja Bejoy Singh Dudhuria v. CIT
• Dalmia Cement Ltd. v. CIT
• Seth Motilal Manekchand v. CIT
Agricultural Income [Section 2(1A) rw 10(1)]

Agricultural Income 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—
(i) agriculture; or
(ii) the performance of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the
produce raised or received by him fit to be taken to market; or
(iii) the sale of such agricultural produce in the market.
(c) any income derived from any farm building required for agricultural operations.

• Section 10(1) provides that agricultural income is not to be included in the total income of the assesse. The reason for
total exception of agricultural income from the scope of central income-tax is that under the constitution, the central
government has no power to levy a tax on agricultural income.

• Definition is exhaustive in nature and only three categories of income which fall within the definition are exempt.
Entry 46 of State list (list ii)- taxes on agri income
Entry 82 of Union list (list i)-taxes on income other than agri income ie income tax
art 265- no tax collected except authority of law
• Categories of Income included u/s 2(1A)

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

1. Rent – payment in respect of grant of right to use land.

2. Rent received in cash or kind constitute agricultural income.
3. Revenue – covers income other than rent.
4. Not necessary that the recipient of rent or revenue should be the owner of the land.
5. ‘derived’ - land must be the immediate and effective source of the rent or revenue and not merely secondary
or indirect source
1. Examples -
2. Dividend paid by a company out of its agricultural income is not revenue derived from land - Case -
Bacha F. Guzdar v. CIT (1955)
3. Interest on arrears of rent payable in respect of agricultural land is not agricultural income – CIT v
Kamakshya Narain Singh
6. Land has to be situated in India;
7. Land should be used for agricultural purposes - CIT v. Benoy Kumar Sahas Roy (1957)
8. Surplus arising on transfer of agricultural land in urban area is not revenue derived from land – Expln. 1 to sec
2(1A)
b. Any income derived from such land by –

i. Agriculture - CIT v. Benoy Kumar Sahas Roy

1. Merchant who purchases a standing crop and sells it after harvest, his profit is not agricultural income - Case -
CIT v. M/s. Maddi Venkatsubbayya;

ii. the performance of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the
produce raised or received by him fit to be taken to market
1. Income arising by way of enhancement of value of produce by performing process to make the raw produce
fit for market
2. Process must be one which is ordinarily employed by a cultivator – it is immaterial whether the process in
manual or involves use of machinery.
3. Process must be applied to render the produce fit to be taken to market e.g. cleaning, thrashing, crushing,
drying etc.
4. The produce must retain its original character in spite of the process unless there is no market for selling it in
that condition. If there is no market to sell the produce then any process which is ordinarily employed to
render it fit to reach market would be covered.
5. If marketing process is performed on a produce which can be sold in raw form, income derived is partly
agricultural and partly non-agricultural
6. Case - Briham Maharashtra Sugar Syndicate Ltd. v. CIT

iii. Sale of such agricultural produce in the market

Rice processing Wheat processing
c. Income derived from any farm building required for agricultural operations
1. Income from house property is taxable on the basis of bona fide annual value. However, income from
house property which satisfies the following conditions are exempt from tax.
1. Building is occupied by the cultivator
2. It is on the land situated in India and used for agricultural purposes
3. Cultivator by reason of his connection with the agricultural land requires the building as a dwelling
house or store house
4. Land is assessed to land revenue or is situated in a rural area
2. Income is exempt only if land or building is used for agricultural purposes. Explanation 2

d. Explanation 3.—For the purposes of this clause, any income derived from saplings or seedlings grown in a
nursery shall be deemed to be agricultural income.
Agriculture Income
1. Income from growing commercial crop like jute, cotton etc.
2. Income derived from the sale of seeds – CIT v. Soundarya Nursery
3. Income arising by sale of trees grown on denuded parts of the forest after replanting and by carrying on
subsequent operations
4. Fee collected from owners of cattle used for agricultural purposes for allowing them to graze – CIT v Tamilnadu
Forest Plantation Corp.
5. Remuneration received by a partner from a firm engaged in agricultural operation – CIT v R.M.Chidambaram
Pillai
6. Income from saplings or seedlings grown in a nursery
7. Compensation received from insurance company for damages to crop due to natural calamities – CIT v B.Gupta
pvt. ltd

Non-agricultural Income
1. Income from breeding of livestock, poultry farming, dairy farming
2. Salary received by an employee from any business having agricultural income – Premier Construction Co Ltd. v
CIT
3. Dividend received from a company engaged in agricultural operation is non-agricultural income
4. Income from a land situated in Nepal used for agricultural purposes
5. Income from sale of trees and grass grown spontaneously
6. Receipt from TV serial shooting in farm house – B. Nagi Reddi v CIT