Direct Taxation in India
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This article is written by Meenal Sharma, a student of Vivekananda Institute of Professional Studies. The author, in this article, has discussed the concept of the Income Tax Act, 1961, and also the Direct Tax Vivad se Vishwas Act, 2020 which has been recently passed. 

Introduction

Direct taxation in India, is not a legacy of the British rule but is one of the ancient and well-established institutions. In Manu Smriti and Arthasashtra, references have been made to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras.

The historical antecedents of personal taxation reveal that the Government utilized the generation of income tax for meeting the revenue exigencies faced by it for fighting wars, maintenance of law and order, and protecting the boundaries of the State. 

In India, the financial difficulties faced by the Government following the Sepoy Mutiny of 1857 were responsible for introducing the Income Tax Act of 1860 which was premised majorly on Income Tax law then in vogue in England. The Act was abandoned in 1865, re-imposed in 1869 but abandoned in the same year. The process of re-drafting Income Tax law resulted in the passing of the Act of 1886 which was subsequently replaced by the Act of 1918, with the primary objective of tightening the administrative machinery, doing away with the compartmentalization of a person’s income into various classes, giving up compounding of taxes for a series of years, etc. 

The Act of 1918, however, enjoyed only a brief span of life and was replaced by a more comprehensive Income Tax Act 1922, which introduced, inter alia, taxation of income on a previous year basis. The Indian Income-tax Act of 1922 was subsequently amended by nearly forty amending Acts, notably in 1939. It was this very Act that India inherited from the British on attaining its Independence.

With the advent of political Independence in 1947, too many amendments had made the Income-tax Act, 1922. The matter was referred to the Law Commission in 1956. After two years of deliberations, the Law Commission submitted its 12th Report, incorporating the Bill of new legislation. The Direct Taxes Administration Enquiry Committee (1958) also considered the matter. Finally, the Income-tax Bill, 1961, was passed in the twelfth year of the Republic of India, and the Income-tax Act, 1961, came into force from 1st April 1962, thus replacing the Income-tax Act 1922.

Income Tax Act, 1961

The Act provides the framework for computation and charges of the total income of a person and also stipulates the manner in which it is to be subjected to taxation, along with the exemptions, deductions, rebates, and reliefs. It further lays down the appointment of authorities for assessing the income tax, their powers and jurisdiction, and their manner of enforcement

Important Definitions

The Act of 1961 consists of the following important terms:

  1. Assessee: The term ‘assessee’ is defined under Section 2(7) of the Act. An assessee is a person who is liable to pay tax under the Act. As per the Act, a person can also be an assessee in the following conditions:
    • If any proceedings under this Act have been initiated against a person.
    • If a person is deemed to be an assessee, i.e., a deceased person’s legal representative or the legal guardian of any minor, only if the minor has been separately taxed.
    • If a person fails to comply with duties which are imposed upon him under the Act, he is an assessee in default. For instance, an employer paying salary to his employees or a person who is paying interest to another is required to deduct tax at source and deposit that with the government. If this is not done, such a person would be considered to be an assessee in default.
  2. Person: As per Section 2(31), an individual, a Hindu Undivided Family, a company, a firm, an association of person or a body of individuals, a local authority, and each and every artificial juridical person, is a person. A group of persons or an authority or a juridical person, all would be deemed a person, irrespective of that body or persons was made or established with the express motive of gaining gains, income or profits. Every assessee would be a person, but each and every assessee is not necessarily an assessee. However, a person may not have his own assessable income but may still be an assessee. 
  3. Assessment year: Commencing from 1st April of every year, a period of 12 months is called the assessment year, i.e., 1st April to 31st March. It is defined in Section 2(9). For example, the assessment year 2020-2021 will commence on 1.4.2020 and will end on 31.3.2021. In each assessment year, the tax is levied with respect to or on the total income earned by the assessee in the previous year.
  4. Previous year: According to Section 3, a ‘previous year’ stands for a financial year just before the assessment year. Income-tax is payable on income earned in the previous year and it is assessed in the immediately succeeding financial year called an assessment year. If:
    1. a business or profession is newly set up, or 
    2. a new income source rises arrives into existence in the financial year.

Then from the date on which such business was set up or the date on which the new source came into existence till the last day of the financial year i.e. 31st of March shall be the first previous year for that business or source of income. 

Exceptions to Previous Year:

Such incomes get taxed as the income of the year preceding the assessment year at the applicable rates to such a person.

  1. The income of a person who is either leaving India permanently or for a long period.
  2. The income of the person who tries to alienate his assets to avoid the taxes.
  3. The income of a discontinued business.
  4. The income of a non-resident company which does not have any Indian representative.
  • Income: The most important definition is that of income. Under Section 2(24) the definition of income is inclusive but not exhaustive. It includes:
  1. Illegal income arising to the assessee
  2. Income received at irregular intervals
  3. Taxable income received from a source outside India
  4. Subsidy, relief or reimbursement 
  5.  Gift exceeding the value of Rs 50,000 without consideration by an individual or HUF
  6. Prize or income from lotteries or horse race gambling etc.
  • Total Income: As per Section 2(45), total income means the total amount of income referred to in Section 5, computed in the manner laid down in this Act. Income computed under the five heads of income (discussed later)is aggregated and the aggregated amount is known as Gross Total Income (after clubbing provisions and making adjustments of set-off and carry forward of losses)

Gross Total Income – Deductions (Sections 80C to 80U) = Total Income

Application of Income v/s Diversion of Income

Application of Income: Where an assessee applies an income, he discharges an obligation after the income reaches the hands of the assessee, it would be an application of income taxable in the hands of the assessee. Here, the income is transferred, but not the source of the income. 

Diversion of Income: There is a diversion of income before it reaches the hands of the assessee. Therefore, it cannot be treated as his income and thus it is not taxable in the hands of the assessee. Income is diverted from the assessee by an overriding title. 

Test to determine whether there is Application of Income or Diversion of Income: It has to be determined whether the amount sought to be diverted reached the assessee or not as his income. It has to be seen whether the disbursement of income made by the assessee for the fulfilment of an obligation on him has been done before or after it has reached the assessee. 

Instances of Application of Income: 

    1. Voluntary foregoing of salary by an employee which was due to him is an example of the application of income.
    2. Where an assessee which is a race club claimed a deduction of the net proceeds of the race on certain days on the ground that on those days races had been held specifically for charity, there was no legal obligation on them to conduct the races. This was held to be a case of application of income but not diversion even though the assessee was not using it. 
    3. Income from property (rental income) part of which was paid as maintenance allowance and with a court’s decree is an application of income.

Instances of Diversion of Income: 

  1. The payments made by the surviving members in the discharge of their obligation to maintain the widow of a deceased coparcener in a HUF is a diversion of income. Here, the surviving members will pay the tax and not the HUF.
  2. A & B prepare an article for publication. Remuneration for publication was total Rs 2500 (Rs 1250 per person). Total remuneration was received by A and B received nothing from the publishers. Here, A is supposed to pay Rs 1250 to B. A does not own the entire income. Therefore, he will not pay taxes on all of it. It is an example of a diversion of income.

Capital Receipts and Revenue Receipts 

Capital Receipts: A receipt which is capital will always be exempted from tax unless provided in the Act, 1961. These receipts are on account of fixed capital.

Capital gains are defined in Section 45 of the Income-tax Act, 1961.

Revenue Receipts: They are always taxable unless specifically exempted under the Act, 1961. These receipts are on account of circulating capital.

One has to go by the nature of the receipts in the hands of the assessee. Therefore, even if the amount paid out of capital, it may partake the character of revenue receipt in the hands of the recipient/assessee. 

Receipts in lieu of source of income is a capital receipt. For instance, the Voluntary Retirement Scheme is not taxable. Compensation for loss of employment. 

Compensation in lieu of income is a revenue receipt. For instance, compensation for temporary disablement of employment is a revenue receipt. 

There are certain receipts which are though revenue receipts but are exempted from tax (they do not form part of total income):

  1. Agricultural Income.
  2. Dividends/ income from a domestic company or the Union Trust of India or Mutual Funds under Section 10 of the Income-tax Act, 1961.
  3. The income of units in Special Economic Zones under Section 10AA of the Income-tax Act, 1961.
  4. Income from property held for charitable or religious purposes under Sections 1113.
  5. The income of Political Parties under Section 13A.
  6. Voluntary contributions received by Electoral trusts under Section 13B.

Other examples of Revenue Receipts: Where an asset is held as stock in trade, the sale proceeds of such assets is a revenue receipt. But when an asset is not held as stock in trade then it is a capital receipt.

Cases on Capital Receipts:

  1. Commissioner of Income-tax v/s Shree Balaji Alloys (2016) 287 CTR 459 (SC): In this case, it was held that excised refund and interest subsidy received by the assessee in pursuance of industrial policy of the government would be a capital receipt.
  2. Commissioner of Income-tax, Delhi v/s Mrs Tara Singh 2017-LL-0811-3: Where an assessee who enjoyed a stature in the advertising industry entered into a non-compete agreement which incorporated a covenant not to be involved in any business of advertisement of India. Compensation thus received in lieu of such said agreement is a capital receipt.
  3. Roma Sengupta v/s Commissioner of Income-tax (2016)-TIOL-553-HC-KOL-IT: Lump sum alimony received by the assessee is in the nature of capital receipt.

Cases on Revenue Receipt:

  1. Maneklal Agarwal v/s Deputy Commissioner Income-tax (2017) 84 taxmann.com 116 (SC): In this case, the assessee had leased out his property to his own family members to show less income in his hands. The lease rent so received is taxable as a revenue receipt. 
  2. Bikram Singh v/s Land Acquisition Collector 224 ITR 551 SC: The interest received on delayed payment of the compensation determined under the Land Acquisition Act, 1894 is a revenue receipt.

Charging of Income Tax

Section 4 is the charging Section of income tax whereby no tax can be levied or collected in India except under the authority of law. Section 4 gives such authority of charging income tax. The base for levy of tax in any assessment year is normally the income of the previous year, except for some cases may be charged in respect of the income of the period other than the previous year.

Scope of Total Income 

Section 5 provides the scope of total income. Total Income of an assessee cannot be computed without determining his residential status in the previous year. The residential status of an assessee can either be:

i) Resident in India

ii) Non-resident in India

Resident in India 

Section 5(1) provides the scope of total income with respect to residents of India. 

Resident and Ordinarily Resident – In the case of individuals and HUF only

In case of resident and ordinarily resident in India following income from whatever source derived shall form part of total income:

  1. Any income which is received or deemed to be received in India during the relevant previous year by or on behalf of such person;
  2. Any income which accrues/ arises or deemed to accrue or arise in India during the relevant previous year;
  3. Any income which accrues or arises outside India during the relevant previous year. 

Resident but Not Ordinarily Resident – In case of individuals and HUF only

The proviso to Section 5(1) provides that in case of a resident but not ordinarily resident in India, following income from whatever source derived shall form part of total income: 

  1. Any income which is received or deemed to be received in India during the relevant previous year by or on behalf of such person;
  2. Any income which accrues/arises or deemed to accrue or arise in India during the relevant previous year;
  3. Any income which accrues or arises to him outside India during the relevant previous year if it is derived from a business controlled or a profession set up in India. 

Non-resident in India 

Section 5(2) provides the scope of total income with respect to non-residents of India. 

In case of a non-resident in India following income from whatever source derived shall form part of total income:

  1. Any income which is received or deemed to be received in India during the relevant previous year by or on behalf of such person;
  2. Any income which accrues/arises or deemed to accrue or arise in India during the relevant previous year.

Rules for determining Residential Status of Individuals 

Section 6(1) provides the rules for determining the residential status of individuals. 

Resident in India: An individual is a resident in India if one of the following conditions is satisfied:

  1. He stays in India for a period of 182 days or more in total during the relevant previous year, OR
  2. He stays in India for 60 days or more during the relevant previous year AND has been in India for a period of 365 days or more during the 4 previous years immediately preceding the relevant previous year. 

Exceptions: There are two exceptions or concessions to the above rule:

  1. In the case of an individual who, being an Indian citizen, leaves India in the previous year for reasons of employment. But, the second condition supra (as mentioned above) shall be inapplicable for the relevant previous year, in which he left India. We can say, in other words, that for that very specific previous year where he left India for the purpose of employment, he should be termed as the resident, but that too only if he is satisfying the condition No. 1 mentioned above. In similar cases, where an individual who is an Indian citizen, who left India in any of the previous years as a member of the crew of an Indian ship, the condition no. 2 mentioned above shall not be applicable.
  2. In the matter of an Individual, who being a citizen of India or of an Indian origin, while outside India, comes to India on a visit on any previous year, the condition Number 2 as mentioned before, in this case, would be inapplicable. This means that he shall not be an Indian citizen until and unless his Indian stay has been for at least 182 days, during the year where he visits India.

Person of Indian Origin: A person is said to be of Indian origin if he, or either of his parents or any of his grandparents was born in undivided India i.e. before India was partitioned. [Explanation to Section 115C(e)]. 

In the case of an individual, being a citizen of India a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, with respect of such a voyage, to ascertain in the manner and conditions as may be prescribed. 

Resident and Ordinarily Resident in India: An individual who is a resident in India,  is a resident and ordinarily resident in India if both the following conditions are satisfied:

  • He has been resident in India for 2 out 10 previous years immediately preceding the relevant previous year, AND
  • He stayed in India for about 730 days or more, throughout 7 previous years immediately prior to the relevant previous year.

Resident but Not Ordinarily Resident in India [Section 6(6)(a)]: An individual who is resident in India is said to be Not Ordinarily Resident in India if he does NOT satisfy some or all the conditions specified above, like under the case of Resident and Ordinary Resident.

Non-resident in India [Section 2(30)]: An individual is said to be a Non-Resident, if he is NOT a ‘Resident’ in India i.e. none of the conditions (with exception/concession) for Resident in India are satisfied. 

Residential Status of HUF 

Section 6(2) lays down the provision for the residential status of a Hindu Undivided Family. A Hindu Undivided Family is considered to be resident in India in every case except where during that year control and management of its affairs is situated wholly outside India (in which case, it shall be a non-resident).

A HUF is a resident and ordinarily resident in India if the following two conditions are satisfied:

  • Karta has to be a resident under 2 out of the 10 of the previous years immediately before the relevant previous year; AND
  • Karta must be in India for at least 730 days during 7 previous years immediately preceding the relevant previous year.

Residential Status of Firm, Association of Persons (AOP), Body of Individuals(BOI) and of other persons(except companies) 

Section 6(2) and 6(4) lay down the provision for the residential status of a firm, association of persons, the body of individuals, and other persons except for companies. 

Resident in India: If the direct control and management of affairs of a firm, association of persons, body of individuals and other persons (except companies) are situated wholly outside India during the previous year then such firm, AOP, BOI, etc will not be resident in India in the relevant previous year. In all other cases, such an entity will be a resident in India.

Non-resident in India: If the control and management of the affairs of these entities are wholly outside India during the relevant previous year then they are said to be non-resident. So, we can say that to be a Non-Resident, the part of management and control should not take place in India.

Residential Status of a Company 

Section 6(3) lays down the provision for the residential status of a company.

Resident in India: A company is said to be resident in India in any previous year, if- 

    • It is an Indian company; or
  • India is the place of effective management.

Non-resident in India: A company will be non-resident in any previous year if:

  • That is not an Indian Company; and
  • India is not the place of effective management.

Place of Effective Management (POEM): It means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made. 

  • Any determination of POEM will depend upon facts and circumstances of the given case.
  • POEM has to be seen on a year to year basis.
  • In case of a company engaged in active business outside India, POEM shall be presumed to be outside India, if the majority of the Board meetings of the company are held outside India. 
  • In the case of other companies, determination of POEM shall be done in 2 stages:
  1. Identification of the persons who actually make the key management and commercial decisions for the conduct of the business as a whole.
  2. Determination of the place where these decisions are in fact being made.

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Five heads of income

According to Section 14 Income Tax Act,1961, there are five heads of income under which an individual is taxed. The computation of income tax is a very important part and has to be calculated according to the income of a person. The classification of five heads of income is done for computation of income under the separate heads. The provisions and rules are according to the details mentioned in the Income Tax Act,1961. The five heads of income are:

  1. Income from Salary
  2. Income from House Property
  3. Income from Profits and Gains of Profession or Business
  4. Income from Capital Gains
  5. Income from Other Sources

Income from Salary

The first head of Income is Income from Salary. This head includes any income which is received as remuneration by an individual for services provided by him which are based on a contract of employment. The amount so received will only be taxed under this head if it comes from an employer-employee relationship between the payer and payee respectively. This also includes the basic wages, advances, commission, gratuity, perquisites, pension, as well as the annual bonus as a salary.

Allowances: An allowance is a fixed monetary amount paid to the employee by an employer which are expenses related to office work. These are generally included in the salary of the employee and taxed unless exemptions are available. As part of the salary, the employer allows the following exemptions:

  1. Conveyance Allowance: This allowance up to Rs 800/- per month is exempt from tax.
  2. House Rent Allowance (HRA): House Rent Allowance or HRA can be claimed by the employees who live in a rented house to lower the taxes. This can be either partially or completely exempt from taxes. The deduction available is the least of the following:
    1. Actual House Rent Allowance received 
    2. 50% of [Basic salary + Dearness Allowance] for those living in metropolitan cities and 40% for those living in non-metropolitan cities
    3. Actual rent paid less than 10% of the basic salary plus the Dearness Allowance
  3. Leave Travel Allowance (LTA): LTA is the travel expenses when the employee along with his/her family go on leave. This is tax-free twice in a block of four years. 
  4. Medical Allowance: Medical expenses are tax-free to the extent of Rs 15,000/– per annum, whether the bills for the employee are incurred by him or his family. 
  5. Perquisites (Section 17): They are, in general, the benefits which are received in addition to normal salary and to which an employee has a right by virtue of his/her employment. For example, rent-free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, however, there are some which are taxable when the employee belongs to a specific group and some that are tax-free.

Income from House Property

Sections 22 to 27 provide for the computation of the total standard income of a person from the house property or land which he or she owns. Instead of the amount of rent received, the charge is derived out of the property or land. However, if the property is utilized for letting out the normal course of business, the income from the rent will be considered.

Commissioner of Income-tax v/s Ansal Housing and Construction Ltd (2013) 354 ITR 1880 (Del): In this case, it was held that an assessee engaged in the business of construction and sale of flats is liable to pay tax on notional rent in respect of unsold flats owned by him.

Chennai Properties and Investment Ltd v/s Commissioner of Income-tax (2015) 373 ITR 673 (SC): The assessee company was incorporated with the main objective as stated in the Memorandum of Association as the main business to acquire the properties in the city and to let out those, the assessee also made advances upon the security of land and buildings or other properties. The assessee had rented out these properties. The income so earned or received will be taxed under the head profits and gains from business and profession.

Income from Profits and gains from business and profession

The third head of income is income from profits and gains from business and profession. The following income is chargeable under this head:

  1. Profits earned by the assessee during the assessment year
  2. Profits on income by an organization
  3. Profits on sale of certain licenses
  4. Cash received by an individual on export under any government scheme
  5. Salary, profit or bonus received as a result of a partnership in a firm
  6. Benefits received in a business

Income from Capital Gains

Any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head ‘Capital Gains’. 

Essential conditions for taxing capital gains:

  1. There must be a capital asset.
  2. The capital asset must be transferred.
  3. From the transfer, there must be profits/gains arising. 
  4. Such capital gain should not be exempt under Section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54GB.

Capital Asset means:

  1. Property of any kind held by an assessee whether or not connected with his business or profession. For instance, it includes license holding, lease holding rights. It includes any tangible/intangible, corporeal/incorporeal property. Corporeal refers to a property of material nature.
  2. Any securities held by Foreign Institutional Investor. Such securities must be held in accordance with regulations under the SEBI Act.

But it does not include:

  1. Any stock in trade [except under point ‘B’]. For instance, raw materials etc held for business and profession.
  2. Personal effects. It includes movable property including furniture, car, and wearing apparel. But if the car is used in business/ profession, it will not be treated as a personal effect. Exceptions to personal effects are jewellery, archaeological collections, paintings, drawings, sculptures, any work of art.
  3. Agricultural Land in India. It must be rural and not urban agricultural land.
  4. Gold Deposit Bonds issued under Gold Deposit Scheme 1999 or deposit certificates issued under Gold Monetization Scheme 2015 notified by Central Government.

Income from other sources

Other forms of income not mentioned above can be included in this category. Interest income from bank deposits, lottery awards, card games, gambling, or other sports awards are also included in this category. These incomes are attributed under Section 56(2) of the Income Tax Act, 1961, and are chargeable for income tax.

Incomes that do not form part of Total Income 

[Sections 10, 10AA and 11 to 13A]

There are certain incomes which are excluded from total income. They are exempt from tax. Certain incomes are totally exempt from tax or partially exempt from tax. Thus, to the extent these incomes are exempt, they are not included in the total income.

The following incomes do not form part of total income:

  1. Section 10: Incomes not to be included in the total income of any person;
  2. Section 10AA: Income of newly established units in Special Economic Zones;
  3. Sections 11-13: Income from property held for charitable or religious purposes;
  4. Section 13A: Income of political parties;
  5. Section 13B: Income of an Electoral Trust.

Incomes not to be included in the total income of any person

Section 10 mentions various incomes which are not to be included in the total income of any person. Section 10(1) to Section 10(50) provides such incomes. But the most important one is agricultural income.

Agricultural Income [Section 10(1)]: Agricultural income is defined under Section 2(1A) of the Income-tax Act and is exempt under Section 10(1) of the Act 1961. It includes:

  1. Any rent/revenue derived from land which is situated in India and is used for agricultural purposes. Here, rent means payment in cash or kind by any person to the owner of the land in question in respect of the grant of rights given to such person by the owner of the land to use such land. Fees or rent extracted from the grant of rights is derived from the land only if the land is immediate and effective source and not secondary and indirect source. For instance, interest on arrears of rent is not agricultural income. 
  2. Any income derived from such land by agricultural operations including processing of agricultural produce so as to render it fit for the market or sale of such products. Here, the agricultural operations include only the performance of any process ordinary employed to render the produce fit to be taken to the market, that is, make the product marketable.
  3. Any income which is attributable to a farmhouse subject to satisfaction of certain conditions specified in this regard in Section 2(1A). Such income from house property is exempt only if the following conditions are satisfied:
    1. House property must be in the immediate vicinity of the agricultural land.
    2. It must be occupied by the cultivator or the recipient of agricultural income.
    3. The cultivator or recipient by reason of his connection with the land requires it as his dwelling house or storehouse or another outhouse building.
    4. The land must be subject to land revenue or local tax and where the land is not assessed to land revenue, it should not be within the jurisdiction of Municipality Cantonment Board or which has a population of not less than 10,000 or where the Central Government specified by the notification in the Official Gazette.

Certain conditions which need to be satisfied to treat an income as an agricultural income are:

  1. Income should be derived from land (springing or arising from land) i.e. it should be a source from which the income springs. This source must be an immediate and effective source and not a secondary and remote source. [Commissioner of Income-tax v/s Kamakhya Narayan Singh (Raja Bahadur) (1948) 16 ITR 325 (PC)].
  2. Land should be situated in India.
  3. Land should be used for agricultural purposes. In Commissioner of Income-tax v/s Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466, the forest was 150 years old having spontaneous growth and the Income-tax Act does not extend to the forest of spontaneous growth. But as claimed by the assessee that now and then new plants were grown. So, the income attributable to those areas may be exempt under the Act. It was held that the land must be used for two types of operations together-
    1. Basic operations: They include cultivation of land for e.g., ploughing, tilling of land, sowing/planting seeds. In other words, those operations which demand human labour and skill. 
    2. Subsequent operations: These are resorted to by the agriculturists for efficient production of the crop for e.g., weeding, cutting, preventing crops from insects, etc. 

Both the basic and subsequent operations must be done on the crop as they together form part of the integrated activity. Subsequent operations must be in conjunction with and in continuation of the basic operation. In other words, basic operation ought to be performed on the agricultural produce before the income from the sale of such products is called agricultural income.

Important cases on Agricultural Income

  1. Commissioner of Income Tax, Poona v/s H.G. Date (1971) 82 ITR 71 (Bom): In this case, the assessee had sugarcane on his agricultural land. He approached the nearby jaggery mill for sale of sugarcane but it was refused. Therefore, the assessee had to employ machines on his own to produce jaggery. He claimed an exemption under ‘agricultural income’. It was held that since there was no market for the sugarcane produced by the assessee, the income received by the assessee from the sale of jaggery will be exempted as it is agricultural income. 
  2. Commissioner of Income Tax v/s Maddi Venkatsubbayya 1951 LL 0316: In this case, the assessee purchased a standing crop of tobacco from a person who raised tobacco on the land. Then the assessee performed secondary functions like harvesting, curing (ordinarily employed by a cultivator of tobacco to render it fit for sale in the market), pruning etc. It was held that the income of the assessee is not exempted as it is not agricultural income since only secondary functions were performed.
  3. K. Lakshmanan & Co. v/s Commissioner of Income Tax (1999) 239 ITR 597 (SC): In this case, the assessee grew mulberry leaves and purchased silkworm eggs and fed them the mulberry leaves when they hatched to obtain silk cocoons. It was held that the income derived from the sale of silk cocoons is not agricultural income and therefore not exempted as there exists no relationship between mulberry leaves and the income from silk cocoons.
  4. Mrs Bacha F. Guzdar v/s Commissioner of Income Tax, Bombay AIR (1955) SC 74: In this case, the question was whether 60% of the dividend received by the assessee from two tea companies is agricultural income and exempt under Section 4(3)(viii) of the Act. It was held that it will be taxable as it is not agricultural income. There exists no relationship between the dividend and the land. The dividend income is not agricultural income and therefore the whole of income is liable to tax. 
  5. Brihan Maharashtra Sugar Syndicate Ltd v/s Commissioner of Income Tax (1946) 014 ITR 0611: In this case, the question was whether income from the sale of gur manufactured from sugarcane is agricultural income and therefore liable to be exempted. It was held that it is not agricultural income and therefore not exempted from tax as sugarcane is marketable without being turned into jaggery. The process is not required to render it fit to be taken to market.
  6. Commissioner of Income Tax v/s Soundarya Nursery (2000) 241 ITR 531: In this case, the issue was whether income from the sale of plants grown directly in pots and the sale of seeds can be treated as agricultural income. The assessee had a nursery business in Madras. The plants sold by the assessee in pots were a result of primary and subsequent operations. Therefore comprehended within the term ‘agriculture’. The income was therefore held to be agricultural income and thus exempt from tax. 

Newly established Units in Special Economic Zones 

In April 2000, for the first time, the Special Economic Zone Policy was announced to attract foreign investment in India. Initially, the Special Economic Zone functioned under the provisions of the Foreign Trade Policy. Gradually, the Special Economic Zones Act and Special Economic Zone Rules came into existence with effect from 2006. This benefit is available to Special Economic Zones. 

Under Section 10AA deductions of profits/gains shall be allowed to an assessee who is an entrepreneur from the export of articles or things or providing any service. Assessees like individuals, firms, companies, etc. who derive profit from being a unit engaged in the export of articles/things/ providing any service. 

Essential Conditions: The deductions shall be available to the Units who satisfy the following conditions:

  1. Which started manufacturing/ producing articles/ providing service during or after the previous year 2005-06 but before 01.04.2020 in any Special Economic Zone.
  2. The unit formed as a result of re-establishment, reconstruction, the revival of business of the assessee and satisfy the conditions under Section 33B. However, the Unit should not be a result of splitting up/ reconstruction of a business already in existence. 
  3. The unit must not be formed by the transfer of plant/machinery. However, there are two exceptions: 
    1. If a machinery/ plant used outside India by a person (who is not the assessee) satisfies the following:
      • It was not previously used in India.
      • Imported into India from a foreign country.
      • No such deduction previously allowed.
    2. If the total value of second-hand machinery/plant does not exceed 20% of the total value of machinery/plant used in the Unit, then the deduction will be available.
  4. Along with the return, form no 56F shall be furnished with a report that the deduction claimed is in accordance with this Section by a chartered accountant.
  5. If assessee carries on a specified business and claims a deduction under this section then any capital expenditure incurred is not eligible for a deduction under Section 35 AD.

Period for which deduction shall be applicable

The deduction shall be allowed for a period of 15 relevant assessment years. 

For the first 5 consecutive assessment years, 100% of profit/ gains shall be allowed deduction. 50% of profit/gains for the next 5 consecutive assessment years. For further 5 consecutive assessment years, not more than 50% of the amount shall be credited to the Special Economic Zones Reinvestment Reserve Account. This account is created and utilised according to Section 10AA(2) for the purpose of the business of the assessee. 

Mis-utilisation/ Non-utilisation

According to this Section 10AA(3), if a certain amount:

  1. Utilised for some purpose other than the business of the assessee, then that amount shall be deemed as profit and thus, taxed.
  2. Not utilised before 3 years then that amount shall be deemed as profit and thus, taxed.

Calculation of deduction

As per Section 10 AA(7) deduction is calculated as-

Profits from the business of the undertaking being the Unit = (ET of the undertaking of such article/service) / Total turnover of the business carried on by the undertaking 

Income from property held for charitable purposes

The income of religious or charitable trusts is exempt from taxation under Section 11 subject to certain conditions. But the profit/gain of any business carried on by such trust shall not be exempt if the business carried on by them is not incidental to attain the objectives of the trust and separate books of account are maintained for that business. 

Essential conditions: The following conditions must be satisfied to claim exemption:

  1. Such trust must have been created for a lawful purpose.
  2. It must be for a charitable/ religious purpose. According to Section 2(15), charitable purpose includes-
    • Relief of the poor
    • Education
    • Medical relief
    • Preservation of environment (including watersheds, forests and wildlife)
    • Preservation of artistic or historic interest (such as monuments/places/objects)
    • Advancement of any other object of public utility. However, if it involves the following, it shall not be a charitable purpose –
      1. Any activity in nature of trade or commerce or business, or
      2. Any activity rendering service in relatives to any trade/ commerce/ business.
  • For a fee/ cess/ consideration by such entity (irrespective of nature of use/ application/ retention of such income)
  • Exception: It shall continue to be a charitable purpose if the aggregate value of receipt does not exceed 20% of the total receipts in the previous year.
  1. Property from which income is derived must be held by such trust.
  2. The account of trust should be audited before giving effect to Section 11 or 12.
  3. Trust should be registered with the Principal Commissioner or Commissioner of Income Tax.
  4. If charitable trust created on or after 01.04.1962 following shall be satisfied:
    1. It should not be created for the benefit of a particular community/ caste.
    2. Their income should not directly/ indirectly benefit the settlor/other specified persons.
    3. The property must be held wholly for charitable purposes.

Which income is exempt?

Income from property held under trust for the following purposes is exempt:

  1. As per Section 11(1)(a) charitable or religious purposes.
  2. As per Section 11(1)(b) partly for religious or charitable purposes.
  3. As per Section 11(1)(c) charitable purposes outside India.

The abovementioned incomes are exempt to a certain extent. However, as per Section 11(1)(d), voluntary contributions forming part of the corpus are fully exempt. 

Registration of Trust 

Section 12A deals with the registration of a trust. For claiming exemption under Section 11/12 trust must be registered. If an application for registration is made, Section 11/12 shall apply from assessment year immediately following the financial year in which such application is made. 

Cancellation of Registration 

The cancellation of registration is provided under Section 12AA(3). If the Principal Commissioner or Commissioner is satisfied that activities of the trust are not being carried out in accordance with its objects then he can cancel its registration by written order. Opportunity to be heard must be provided before cancelling the registration. 

The income of Political Parties 

Section 13A deals with the income of political parties. Political parties must be registered under Section 29A of the Representation of the People Act, 1951.

Essential Conditions: Exemption shall be available only if the following conditions are satisfied:

  1. Books of accounts and other documents are maintained by the political party which shall enable the assessing officer to properly deduce the income.
  2. The political party maintains a record (name and address) of a person making voluntary contributions which exceed Rs 20,000/-.
  3. The political party has its accounts audited by a chartered accountant.
  4. A report under Section 29C(3) of the Representation of the People Act, 1951 for the relevant financial year shall be submitted by the treasurer or any authorised person. 

Which incomes are exempt [Section 13A]

The total income does not include:

  1. Income under the head ‘House Property’
  2. Income under the head ‘Other Sources’
  3. Voluntary contributions from any person
  4. Income by way of capital gains

The income of an Electoral Trust

Section 13B deals with the income of an electoral trust. Electoral trust refers to a trust approved by the Board in accordance with the scheme made by the Central Government under Section 2(22AAA). Voluntary contributions received by the electoral trust shall be exempt if the following conditions are satisfied:

  1. It functions in accordance with the rules made by the Central government. 
  2. To any political party (registered under Section 29A of the Representation of the People Act,1951), the trust distributes 95% of aggregate donations received by it in the previous year including the surplus.

The Direct Tax Vivad se Vishwas Act, 2020

As on 30th November 2019, about 4,83,00 cases with respect to income tax were pending before the courts. These disputed tax in these litigations amounts to about ₹9.32 trillion. To ensure speedy disposal of such litigations, the Direct Tax Vivad se Vishwas Bill, 2020 was introduced by Finance Minister Nirmala Sitharaman on 5th February 2020. It was passed in the Lok Sabha on 4th March 2020 and in Rajya Sabha on 13th March 2020. The Act consists of 12 sections and lays down a mechanism for resolution of pending disputes with respect to income tax and corporation tax. 

The Act defines various terms such as appellant, appellate forum, declaration, designated authority, disputed fee, disputed income, disputed interest, disputed penalty, disputed tax, last date, specified date, tax arrears etc. 

As per the Act, the appellant refers to the income tax authority or any person whose appeal is pending as on 31st January 2020 before the Supreme Court, any High Court, the Income-tax Appellate Tribunals or the Commissioner. 

Resolution Mechanism

The Act lays down a resolution mechanism that allows the appellant to file a declaration to the designated authority. The designated authority refers to the Commissioner of Income Tax or any other officer higher than that rank which is notified by the Principal Chief Commissioner to manage the proposed resolution mechanism.

The designated authority then initiates the resolution of the pending direct tax disputes. The last date to file the declaration is the date that may be notified by the Central government in the official gazette. On the basis of such a declaration, the designated authority shall determine the amount that is payable by the appellant against the dispute. 

This is followed by a certificate that contains particulars of the payable amount. This amount has to be paid within 15 days of the receipt of the certificate and is not refundable. 

After this certificate has been issued by the designated authority, the pending appeals before the Income-tax Appellate Tribunals and the Commissioner (Appeals) are deemed to be withdrawn. However, the appellant is required to withdraw the appeal or petition if they are pending before the Supreme Court or any of the High courts. 

The payable amount is determined based on the fact that whether the disputes are related to payment of tax, interest, penalty, or fee. If the payable amount is required to be paid before 31st March 2020, an additional amount will be required to be paid after that date. 

For disputes relating to the payment of tax, if the amount is payable before 31st March 2020 then any interest or penalty associated with such tax will be waived if paid on time. However, after the due date, an additional amount that is 10% of the amount of disputed tax or interest or penalty to that tax, whichever is lower is required to be paid. 

For payment of fee, interest, or penalty, if paid before 31st March 2020, 25% of the amount under such dispute is payable. After the due date, an additional amount which is another 5% of the disputed amount will be payable. 

Waiver of rights of the appellant 

The appellant furnishes an undertaking which is the waiver of his rights seeking any remedy or claim with respect to the dispute under any law such as the Income Tax Act, 1961. Before the declaration is filed all such claims must be withdrawn. 

Immunity to the appellant

The designated authority cannot levy any interest or penalty with respect to a dispute that has been resolved. Moreover, no appellate forum can make a decision with respect to any dispute that has been resolved. These matters cannot be reopened through any proceeding under any law including the Income Tax Act, 1961. 

The revival of disputes

The declaration that an appellant files is invalid under the following circumstances:

  1. If the particulars of the declaration are false;
  2. If the appellant violated any condition mentioned under the Income Tax Act or;
  3. If the appellant seeks a remedy or claim with respect to such dispute.

As a consequence, the proceedings and claims that are withdrawn based on such declaration will be revived. 

Disputes not covered by the resolution mechanism 

The resolution mechanism under the Act does not cover certain disputes such as:

  1. Disputes where the prosecution has been initiated before the filing of the declaration;
  2. Disputes that involve persons who have been convicted or prosecuted for offences under laws like the Indian Penal Code, or for enforcement of civil liabilities; 
  3. Disputes involving undisclosed foreign outcomes or assets. 

Conclusion

The Income Tax Act, 1961 provides the procedure for direct taxation in India. It provides for the ability to charge income tax, along with the scope and residential status of the assessee such as Hindu Undivided Family, individual, firm, company, etc. It also deals with the five heads of income under which the income tax is computed. However, there are certain incomes which are not included under the total income and hence exempted from taxation. Also, under each head of income, certain deductions are available which are subject to judicial interpretation. 

To deal with a high number of pending income tax litigations, the Direct Tax Vivad se Vishwas Act, 2020 was introduced. The main objective of the Act is to reduce the pending income tax litigations and collection of revenue on time. Although provisions are made with respect to a speedy resolution of disputes, the Act does not cater to issues such as pending miscellaneous applications, condonation of delay, set off and carry forward of losses, etc.

References

  • History of​ Taxation Pre – 1922, Retrieved from “https://www.incometaxindia.gov.in/Pages/about-us/history-of-direct-taxation.aspx
  • http://www.bareactslive.com/ACA/ACT607.HTM
  • Radhabinod Pal and Balai Lal Pal, “The Law on Income Tax in British India- Being Act XI of 1922 as amended by Act VII of 1939 with Explanatory Notes and Commentaries”, Vol 1 Eastern Law House Calcutta, 1940
  • Systematic Approach to Taxation, Dr Girish Ahuja, Dr Ravi Gupta, 14th edition A.Y. 2017-2018
  • https://www.prsindia.org/billtrack/direct-tax-vivad-se-vishwas-bill-2020
  • https://www.prsindia.org/sites/default/files/The%20Direct%20Tax%20Vivad%20se%20Vishwas%20Act%2C%202020.pdf

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