UNIT-1

Taxing Powers Of Parliament, State Legislature And

Local Bodies
 Introduction
1. Taxes in India are levied by the Central Government and the state
governments.
2. Some minor taxes are also levied by the local authorities such as the
Municipality.
 Authority to Tax
1. The authority to levy a tax is derived from the Constitution of India which
allocates the power to levy various taxes to the Centre and the State.
2. Article 265 of the Constitution puts a restriction on this power by stating that
"No tax shall be levied or collected except by the authority of law".
3. Therefore each tax levied or collected has to be backed by an
accompanying law, passed either by the Parliament or the State
Legislature.
4. Any tax levied by the government which is not backed by law or is beyond
the powers of the legislating authority may be struck down as
unconstitutional
 Constitutionally established scheme of taxation
1. Article 246 of the Indian Constitution, distributes legislative powers
including taxation, between the Parliament of India and the State
Legislature.
2. Article 246A is inserted empowering Union Government and State
Governments to make laws with respect to goods and services(GST)
3. Prior to the enactment of the GST Act, 2016, the states did not possess the
'authority to levy tax on services or manufacture of goods, with the
exception of alcoholic liquor for human consumption, opium, Indian
hemp and other narcotic drugs.
4. Schedule VII distributes these subject matters in three lists:
 List - I entailing the areas on which only the parliament is competent
to make laws
 List - II entailing the areas on which only the state legislature can
make laws
 List - Ill listing the areas on which both the Parliament and the State
Legislature can make laws upon concurrently
 Union and the States have no concurrent power of taxation
5. Article 254(1) provides that any inconsistency between laws enacted by the
Parliament and the State Legislatures, is to be resolved in favor of the
Parliament, rendering the opposing State law void to that extent.
6. The Constitution provides for the creation of the GST Council (GSTC),
which shall among other things make recommendations to the Union and
the States on Model GST Laws, Levy principles, IGST, Place of supply
laws, Tax rates, floor rates with bands, special rate for natural
calamity/disaster, special provisions for particular states
  Parliament Taxation Areas

1. Taxes on income excluding agricultural income,

2. Custom duty,
3. Excise duty on tobacco and other goods manufactured or produced in
India except Alcohol, opium and other such narcotic drugs etc.,
4. Corporations
5. Taxes on capital and assets excluding agricultural land,
6. Estate duty excluding agricultural land,
7. Terminal taxes on carrying goods or passengers by railway, sea or
air,
8. Taxes on railway fares and freight

 State Taxation Areas

1. Land revenue,
2. Taxes & Duties(including estate) on agricultural income,
3. Taxes on lands and buildings,
4. Taxes on mineral rights,
5. Excise duty on alcohol, opium, Indian hemp and other narcotic drugs
6. Taxes on entry of goods into a local area for consumption, use or sale
therein (VAT),
7. Taxes on the consumption or sale of electricity,
8. Taxes on the sale or purchase of goods other than newspapers,
9. Taxes on advertisements other than advertisements published in
newspapers , by radio or television,
10. Taxes on goods and passengers by roads or on inland waterways,
11. Road Taxes on vehicles,
12. Taxes on animals and boats,
13. Tolls, Taxes on profession, trades, callings and employments,
14. Capitation taxes,
15. Taxes on luxuries, including taxes on entertainments, amusements, betting
and gambling,
16. Stamp duty

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Doctrine of Immunity of Instrumentalities

1. Meaning
1. Based on fundamental principle of mutual tolerance and non-interference.
2. Stipulates that both the State and Central Governments possess immunity
from being subjected to taxes imposed by the other.
3. This immunity applies to entities established by these governments,
specifically Statutory Corporations established by them.
4. The doctrine signifies that a discriminatory tax imposed by one government
on the activities of another is considered invalid.
2. Origin
 1. Can be traced back to the United States, where although it not explicitly
outlined in the American Constitution it developed as a judicial
interpretation.
2. It came into prominence through the landmark case of McCulloch v.
Maryland, where the State of Maryland was prohibited from taxing a
federally chartered bank.
3. Purpose
1. Safeguard the central government against potential encroachments by
States which could potentially impose taxes to such an extent that it might
impede the functioning of national authorities within their designated
sphere of action.
4. Position in India
1. The scope of doctrine is quite limited in India. These immunities are
primarily addressed in Articles 285, 287, 288 and 289 of the Indian
Constitution.
2. Article 285 : establishes that property owned by the Union is
immune from taxation imposed by a State or any State authority
within a State except allowing a State to impose taxes on Union
properties that were previously liable for taxation by the State
before the Constitution’s commencement, as long as such taxes
continue to be levied by the State and no contrary legislation is
enacted by Parliament.
3. Articles 287 and 288 grant immunity to specific activities conducted
by the Union, rather than its property specifically exempting the
consumption or sale of electricity or water by Union agencies from
any State taxation.
4. Article 289 restricts the Union’s taxing authority by exempting
State property and income (generated from business operations of
the State or State property )from its taxation but introducing an
exception, allowing for the taxation if authorized by Parliament
and further stipulating that if a trade or business is declared
incidental to the ordinary governmental functions, it would be
exempted from taxation.
5. Exception to Doctrine of Immunity of Instrumentalities
1. The Parliament has the authority to enact laws allowing a State or
any authority within a State to impose taxes on Union property.
2. 285(1) : The primary purpose is not to completely prevent State or
local taxation of Union Property, but rather to bring such taxation
under the control and regulation of Parliament.
3. 285(2) empowers local bodies to tax Union properties that were
previously liable for taxation before the commencement of the
Constitution, unless Parliament legislates otherwise.
6. Case Law: Corporation of Calcutta Vs Governor-General of India in Council
1. In this case, the Calcutta Corporation, operating under Section
141 of the Calcutta Municipal Act, assessed the value of
premises, including land and buildings, for the purpose of
taxation.
2. The central issue in the case revolved around whether
additional buildings constructed on the premises after April
 1, 1937 (when Part III of the Act came into effect), were
exempt from taxation.
3. The court’s decision in this case established that, for
assessment purposes, the valuation of the property in
question should be based on its composition as of March 1,
1937. Any buildings constructed after that date should be
entirely excluded from the assessment.

Difference between Tax Evasion & Tax Avoidance

# Parameters Tax Avoidance Tax Ev

It is the legal strategy used to reduce tax liability It is a fraudulent and unlawfu
1 Meaning without violating any law. eliminating tax liability

2 Usage Tax hedging Tax concealment

Immoral since includes exploiting the loopholes of

3 Attributes the law without breaking it. Unlawful and objectionable

Intentional account manipula

4 Concept Making the most out of the loopholes in the tax laws fraudulent activity

5 Implications Use of lawful and justified means Use of approaches prohibited

6 Occurrence Before the tax liability arises After the occurrence of tax li

7 Act Legal and legitimate Criminal/punishable offence

8 Repercussions Deferment Imprisonment or penalty fee

 Inter-State Trade and Commerce

1. Meaning
1. An “interstate commerce” is any trade(buying &
selling of goods), commerce, transportation, or
communication between several States.
2. The movement of goods between two locations is
called “inter-course.” including both commercial and
non-commercial movements.
3. It is an important requirement for economic unity,
stability, and prosperity in a two-tier polity is the
free movement of trade, commerce, and intercourse
within and across interstate borders.
4. The state must provide facilities, including roads, to
ease the flow of interstate commerce and trade.
 o Constitutional Provisions(Part XIII of the Indian Constitution - Articles
301-307 & 366)
1. Provides for freedom of trade, commerce, and intercourse. The
general principles of commerce and trade are laid down in Article
301, while the restrictions under which trade operates are outlined
in Articles 302 to 304.
1. Article 301 : which states that trade, commerce and inter-
course are exempted from any taxation throughout India
except for the provisions mentioned in Article 302, 303, and
304
2. Article 302 : empowers the parliament to impose
restrictions on trade and commerce in view of public interest.
3. Article 303 : Discrimination against the different State
Governments is not permitted under the law except when
there is a scarcity of goods in a particular state , only by the
Parliament and in keeping with the law.
4. Article 304 : permits a State Government to impose taxes on
goods imported from other States and Union Territories
but it cannot discriminate between goods from within the
State and goods from outside the State.
5. Article 305 & 306: The State can also exercise the power to
impose some restrictions on freedom of trade and
commerce within its territory.
6. Article 307 : Appointment of authority for carrying out the
purposes of Article 301-304
7. Article 366 : Gives the definition of Goods, Services,
Taxation, State, Taxes that are levied on the sale/purchase
of goods, Goods and service tax etc.

Meaning, Essentials, Types & Elements of Tax

 Meaning
o A tax may be defined as a mandatory contribution by individuals directly
or indirectly to generate revenue for government’s expenditure.
o It is a payment exacted by the legislative authority which is used to carry
out functions such as social welfare, Infrastructure, Security and Law and
order
 Elements
1. Taxpayer : Any individual or organization who pays ta
2. Tax Base : Valuation of every thing which is subject to taxation
3. Tax Rate : Tax amount represented as a percentage of Tax base
4. Tax Period : Period of Tax assessment
5. Tax Administration : Authority responsible for tax collection and
other related activities
 Essentials : A good tax system as a whole should be

1. Equitable
2. Fair leading to equal distribution of wealth
 3. Effective to yield the required revenue for the
government.
4. Lead to economical collection of taxes
5. Promote trade and industry
6. Give a clear picture of the revenue to the
government
7. Based on comprehensive, up-to-date statistical
information for accurate forecasting
8. Simple and elastic to respond to the new needs
of the State.
9. Consider the ability of the tax-payers

 Classification of taxes & their impacts. Government imposes two types of taxes
namely Direct taxes and Indirect taxes.

1. Direct tax - Where burden of tax is directly

on the payer e.g income tax, wealth tax etc.
2. Indirect tax - Paid by the person other than
the person who utilizes the product or service
e.g. Excise duty, Custom duty, Service tax,
Goods and service Tax(GST).
3. Allocation Effect of different Taxes : The
allocative effects of direct taxes are superior
to those of indirect taxes. Direct Tax would
imply a lesser burden than an indirect tax
4. Distributive Effect of different Taxes : Direct
taxes are progressive and reduce inequalities
than indirect taxes which are regressive and
widen inequalities.
5. Administrative Costs : The administrative costs
of direct taxes are more than that of indirect
taxes
6. Built-in Flexibility and Stability : Direct taxes
are more flexible than indirect taxes.
7. Growth Orientation : Indirect taxes are more
growth oriented than direct taxes.

 Types of Taxes :

1. Sales tax: It is an indirect tax because liability to pay tax is that

of shopkeeper who in turn realises the tax amount from the
customer by including it in the price of the commodity.
2. Excise duty: It is paid by the producer (manufacturer) of
goods, who recovers it from Whole sellers and retailers,
3. Custom duty: It is charged from importer of goods from a
foreign country which is recovered from retailers and
customers,
4. Entertainment tax: It is charged from cinema owners, who
recover it from cinema viewers,
 5. Service tax: It is imposed on selling services (like serving
meals in hotels) to customers. ,
6. Octroi (chungi)
7. Value added tax ( now GST)' : 'Value added tax' is other
examples of indirect taxes. In short, all taxes levied on goods
and services in different forms (like on production, sale,
transport, etc.) are called indirect tax.

 Difference between Tax & Fee

Basis Tax

To generate revenue for different public purposes the It is a voluntary pay

Definition government imposes taxes on its citizens as a matter of law in exchange for it's
for which the taxpayer receives neither a direct nor a defined interest, but which p
benefit in exchange. specific benefit.

Measured Calculated as a percentage of the transaction's total cost. Closely correlated w

the service .

Levy & Collection Taxes levied that pay for general government services Fee is a levied in or
people.

Administration & Taxes are used for providing social welfare, infrastructure, Money obtained is t
Application security, Law & Order particular service.

Example Taxes include things like income tax, wealth tax, VAT, etc. Fees include stamp
government registra

1. Case Laws: Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar

of Sri Shirur Mutt
o The distinction between a tax and fee was first addressed where Supreme
Court ruled that a tax constitutes a fee when,
1. The money obtained through the levy is related to the costs incurred by
the government in providing the service. Therefore, a quid pro quo
component is required.
2. The money raised must be explicitly designated for the costs the
government incurs in providing the services and not combined with the
Consolidated Fund.

 Difference between Tax and Cess

Tax Cess

Type Fee Tax

 Definitio To generate revenue for public Tax on tax which is levied for a specific purpose
n welfare purposes

To generate revenue for the

Utilizes it specifically for that purpose alone for which its
Purpose government for welfare
raised
programs, infrastructure etc.

Direct Tax – tax levied directly

on personal or corporate
Types income Usually in regard to Local taxes like Land /Property taxes.
Indirect Tax – tax levied on the
price of a good or service

Infrastructure Cess, Krishi Kalyan Cess on Service Value,

Examples Swachh Bharat Cess, Education Cess, Duty on Tobacco an
Income Tax, Wealth Tax, VAT
Tobacco Products, Health and Education Cess on Income
Tax

Centre - State Tax Relations

1. Centre's power on Taxation : In taxation the power is concentrated in

Centre's hand.
 On one hand, through 101st Constitutional Amendment Act, 2016 it
has divested the states of their powers to tax sale or purchase of
goods, except for specified goods, by substituting Entry 54 of List
II(State List) of the Seventh Schedule to the Constitution.
 On the other hand, the Union has not divested itself of the power to
tax sale/purchase/supply of any goods in the course of inter-State
trade or commerce the supply of which has already have suffered
GST
2. Article 266 & 267 (Central & State Government Funds )

1. Consolidated Fund of India (Article 266)

1. This is the most important of all accounts of the
government & provisions defined in 266(1)
2. This fund is filled by:
1. Direct and indirect taxes
2. Loans taken by the Indian
government
3. Returning of loans/interests of
loans to the government by
anyone/agency that has taken it
3. The government meets all its expenditure from
this fund.
4. The government needs parliamentary
approval to withdraw money from this fund.
 5. Each state can have its own Consolidated
Fund of the state with similar provisions.
6. The Comptroller and Auditor General of
India audits these funds and reports to the
relevant legislatures on their management.
2. Public Accounts of India (Article 266(2))

1. All other public money (except Consolidated Fund of

India) received by or on behalf of the Indian
Government are credited to this account/fund.
2. Made up of:
1. Bank savings account of the various
ministries/departments
2. National small savings fund, defense fund
3. National Investment Fund (money earned
from disinvestment)
4. National Calamity & Contingency Fund
(NCCF) (for Disaster Management)
5. Provident fund, Postal insurance, etc.
6. Similar funds
7. The government does not need permission to
take advances from this account.
8. Each state can have its own similar accounts.
9. The audit of all the expenditure from the Public
Account of India is taken up by the CAG

3. Contingency Fund of India (Article 267)

1. Provision for this fund is made in Article 267(1) for

centre & (2) of the Constitution of India.
2. Its corpus is Rs. 30,000 crores(2021-22). It is in the
nature of an imprest (money maintained for a specific
purpose).
3. The Secretary of, Finance Ministry holds this fund
on behalf of the President of India.
4. This fund is used to meet unexpected or unforeseen
expenditure.

3. Article 268

1. This gives the duties levied by the Union government

but collected and claimed by the State governments
like stamp duties and excise duty on medicinal and
toilet preparations .

4. Article 269

1. Provides the list of various taxes that are levied and

collected by the Union and then assigned to States.
 2. Article 269(A)-IGST is newly inserted article which
gives the power of collection of GST on inter-state
trade or commerce to the Government of India i.e.
the Centre and is named IGST by the Law.

5. Article 270 gives provision for the taxes levied and distributed between the
Union and the States
6. Article 271 : When required Union Government decides to increase any of
the taxes /duties mentioned in article 269 and Article 270 by levying an
additional surcharge on them and the proceeds from which goes to centre
7. Grants-in-Aid (Article 273, Article 274, Article 275 and Article 282)
 It is Central Government financial assistance in the form of
grants to the states to balance/correct/adjust the financial
requirements of the units when the revenue proceeds go to
the centre but the welfare measures and functions are
entrusted to the states.
 These are charged to the Consolidated Fund of India and the
authority to grant is with the Parliament.
8. Article 276 : This article talks about the taxes that are levied, collected and
claimed by the state government. These are sales tax and VAT, professional
tax and stamp duty to name a few.
9. Article 277: Except for cesses, fees, duties or taxes which were levied
immediately before the commencement of the constitution by any
municipality or other local body for the purposes of the State, despite being
mentioned in the Union List can continue to be levied and applied for the
same purposes until a new law contradicting it has been passed by the
parliament.
10. Article 286 : This article restricts the power of the State to tax as the state
cannot exercise taxation on imports/exports nor can it impose taxes
outside the territory of the state and Only parliament can lay down
principles to ascertain when a sale/purchase takes place during export or
import or outside the state.
11. Article 289 : State Governments are exempted from Union taxation as
regards their property and income but if there is any law made by the
parliament in this regard then the Union can impose the tax to such extent.

Delegation of Taxation Power:

1. Doctrine of excessive delegation

1. The doctrine of excessive delegation is applied by the courts to
adjudge the validity of the provision delegating the power. Therefore,
too board power ought not to be vested in the executive matters of
taxation
2. The parent act ought to contain policy in the light of which the
executive is to exercise the power delegated to it.
2. Principles with regard to delegation of taxing legislation:
1. General principles of delegated legislation apply to taxing statutes
also.
 2. The power to impose a tax is essentially a legislative function under
article 265 and here law means law enacted by the legislature and
not made by the executive.
3. Therefore, the legislature cannot delegate the essential legislative
function of imposition of tax to an executive authority.
4. Subject to the above limitation, a power can be conferred on the
government to exempt a particular commodity from the levy of
tax.
5. A power may also be delegated to bring certain commodity under
the levy of tax.
6. The power to fix the rate of tax is a legislative function, but if the
legislative policy has been laid down, the said power can be
delegated to the executive.
7. Commodities belonging to the same category should not be subjected
to different and discriminatory rates in the absence of any rational
basis.
8. Argument that affairs of the taxing body (panchayat, municipality,
corporation, etc.,) are administered by the elected representatives
responsible to the people is wholly irrelevant and immaterial in
determining whether the delegation is excessive or otherwise.
9. A taxing statute should be strictly interpreted. If a provisions are
ambiguous, the interpretations that favor the assesse should be
accepted.
10. A distinction, however, should always be made between charging
provisions and machinery provisions should be construed liberally
so as to make charging provisions effective and workable.
3. Case Laws
1. Grant of power to a municipal corporation was upheld in corporation of
Calcutta vs liberty cinema, the court is generally more willing to uphold
delegation of fiscal power in favor of elected bodies such as panchayats or
municipalities.
2. Nagappa vs IO mines cess commissioner, the supreme court held that s 2 of
the iron mines labor welfare act 1958, which authorized the government to
levy and collect excise duty not exceeding 50% tone on iron ore by a
notification in the official gazette, was valid. The proceeds of the levy were to
be used fot the welfare of labour and the maxima had been laid down.
4. Several variants of formulae used to delegate power:
1. Power may be delegated to the government to exempt a commodity from
the purview of a tax. In orient weaving mills vs union of India, a provision
conferring power on the central government to exempt any excisable goods
from the whole or part of the duty leviable on such goods was held valid
against the plea of excessive delegation.
2. Power may be conferred on the government to bring additional
transactions, commodities or persons within the purview of a tax. In
Banarsidas' case a provision authorizing the government to bring any goods
within the purview of sales tax law was held valid.
3. Power may be conferred on the executive to fix from time to time the
rates of the tax itself. Law may impose a tax but may leave it to the executive
to quantify the rate at which it is to be levied. The terminal tax on railway
 passengers act, 1956 authorized the central government to fix rates of
taxation subject to the maximum fixed in the act.

UNIT-2

 Agricultural Income
1. Agricultural income is under Income Tax Act, 1961.
1. Revenue generated through rent or lease of a land is used for
agricultural purposes in India
2. Revenue generated through the commercial sale of produce gained
from an agricultural land
3. Revenue generated through the renting or leasing of buildings in
and around the agricultural land
 Characteristics
1. Income should be derived from land in the form of rent or
revenue:
1. Income should be derived from land not from any other
assets.
2. Income should be in the form of rent or revenue
2. Land must be situated in India(urban or rural area)

 Another condition is the land must be situated in India, whether

situated in urban areas or rural areas. Agricultural income from
foreign countries is considered as income from other sources
and it will not be exempted under Agricultural income.

3. Land must be used for basic operations of Agriculture

 Land should be used for the agricultural purpose.

 The term ‘Agricultural Purpose was defined by Supreme Court
in the case of CIT v. Raja Benoy Kumar Suhas Roy where it
laid down the principles regarding terms ‘Agriculture’ and
‘Agricultural Purposes as follows :
1. Basic operation includes the expenditure of human
skill and labor upon the land itself like tilling of land,
sowing of the seeds, planting, etc. Merely having an
agricultural land will not constitute agricultural
purposes.
2. Subsequent operation performed after the produce
sprouts from the land like weeding (removal of wild
plants), digging the soil around the growth, removal of
undesirable undergrowth, removal of the crop from
insects and pests, cutting, harvesting, rendering the
produce fit for the market etc.

4. Income from a Nursery : Income from a nursery is always exempted

from total income.
1. H.H. Maharaja Vibhuti Narain Singh v. State of
Uttar Pradesh : In this case, the Hon’ble Allahabad
 High Court held that income from a nursery is not an
agricultural income unless it is maintained by a farmer
as an aid to the primary process of agriculture, for
example, paddy nursery, nursery of tomato plants. Here
assessee used the nursery for ornamental plants which
can not be considered an adjunct to the primary
agricultural process.
 Under Section 10(1) of the Income Tax Act, 1961 the income earned from
agricultural land is exempted from taxes.
 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
 Any preparing(threshing of wheat, mustard, and so forth) done on Agricultural
produce to make it marketable is a piece of agricultural operations and such sum
recuperated will be dealt with as agriculture income only except in specific cases
like on account of tea, coffee, sugar stick where a noteworthy preparing (change of
exceptional nature of the item) is being done, then final product (tea, coffee, and
sugar) is taxed as non-farming pay and rest is absolved as rural salary.
 The Central Government do not have any power in relation to this, but the State
Government can collect agricultural income from other sources.
 Non-Agriculture Income : The below-mentioned list draws exception to that revenue
or income which is generated by doing agriculture work, but they are “non-agriculture
income. They are as follows :-

1. Revenue from the sale of processed products of agricultural nature

without actual agricultural activity.
2. Revenue from extremely processed products.
3. Revenue from trees that have been sold as timber.
4. Income from poultry farming.
5. Income from bee hiving.
6. Income from sale of spontaneously grown trees.
7. Income from dairy farming.
8. Purchase of standing crop.
9. Dividend paid by a company out of its agriculture income

Income from "Other Sources"

 These incomes under Section 56(2) of the Income Tax Act, 1961, and are chargeable
for income tax.
 Other forms of income not mentioned above can be included in this category.
1. Interest income from bank deposits,
2. lottery awards,
3. card games,
4. gambling,
5. other sports awards
2. Dividends are reported under the head ‘income from other sources’
3. One-time income earned from winning lotteries, crossword puzzles, and
races, including horse races, card games, gambling, or betting. These incomes
are chargeable to tax at a flat rate of 30% and cess at 4%
 4. The amount an employer receives from his employees as a contribution
towards provident fund (PF), employees’ state insurance (ESI), and
superannuation fund, among others. Such an amount will be taxable if the
employer does not credit the amount received from the employee towards
the respective funds’ account.
5. Income received as interest on securities
6. Advance money received or money received in negotiation for transfer of
a capital asset (provided the money is forfeited and it doesn’t result in the
transfer of such asset)
7. Income from letting out of plant, machinery, or furniture belonging to a
taxpayer
8. Income from renting out machinery or furniture with buildings, where
such letting is inseparable
9. Any sum received under Keyman insurance policy, including bonus
10. When issue price of a share is higher than Fair Market Value (FMV), tax
is chargeable to the amount received in excess of FMV

Income from Salary(Section 15) : Income chargeable to income tax under the head
salaries would include:

1. Any salary due to an employee(assessee) from current or former

employer in the previous year irrespective whether it is paid or not.
2. Any salary paid or allowed to the employee during the previous
year by current or former employer would be taxable under this
head even though such amounts are not due to him during the
accounting year.
3. Arrears of salary paid or allowed to the employee during the
previous year by current or former employer would be chargeable
during the assessment year in case where such arrears were not
charged to tax in any earlier year.
o Salary (SECTION 17(1)) - “Salary” includes:
1. Wages or Salary- Salary is generally used in respect of
payment for services of a higher class ,whereas ‘wages’ is
confined to the earnings of laborer.
2. Annuity - Annual grant made by the employer to the
employee.
3. Pension – Periodical payment for past services
4. Gratuity- Lump sum payment for past services
5. Fees and Commission- Remuneration to encourage employees
6. Perquisites (Section 17(2))- All benefits by the employer to
the employee. 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 are tax-free
7. Profit in lieu: Any amount of compensation in connection with
the termination of employment, any amount due or received
before or after the employment, any payment due or received
from a provident or other fund
 8. Advance of salary
9. Leave encashment
10. Taxable portion of Annual Accretion (Amount of Provident
Fund in excess of 12% and interest accrued)
11. Taxable portion of Transferred Balance ( Balance in
unrecognized provident fund recognized for the first time - the
employer's share)
12. The contribution made by the Central Government under
pension scheme in the previous year, the account of any
employee under a pension scheme referred to in Section 80CC
o Allowances: are expenses related to office work paid as fixed monetary
amount to the employee by an employer are generally included in the salary
of the employee and taxed unless exemptions are available. They are listed
below

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 partially or completely for
employees who live in a rented house to lower the 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 [Basic salary +
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.

o Deductions : The following amounts shall be deducted in order to arrive at

the chargeable income under the head `Salaries'.

1. Standard deduction: Omitted by Financial Act, 2005 - Section

16(i)
2. Entertainment allowance : in case of Government
employees: The minimum of the following shall be
available as deduction
1. Actual amount of entertainment allowance received
during the year
2. 20% of his salary exclusive of any allowance, benefit or
other perquisites.
3. '5,000.
3. Professional Tax or Tax on employment
 o Exemptions : The following items relevant to salaries have been discussed
under Incomes which do not form part of total income and are exempt from
tax, subject to the limits applicable for each:

1. Leave Travel Allowance

2. Remuneration of a person who is not a citizen of India
3. Allowances payable outside India
4. Remuneration of an employee working in Co-operative
Technical Assistance Programme
5. Death-cum-retirement gratuity
6. Amount received in commutation of Pension
7. Encashment of earned leave
8. Retrenchment compensation
9. Payment received from Statutory Provident Fund
10. Payment received from a recognized Provident Fund
11. Payment received out of an approved Superannuation
Fund
12. House rent allowance
13. Special allowances to meet the expenses of the duties
14. Salary income of a member of Scheduled Tribe
15. Salary income of a resident of Ladakh

3. Income from Profits and gains from business and profession(Section 28 to 44D)
o ‘Business’ has been defined in Section 2(13) of the Income Tax Act includes
any trade, commerce or manufacture or any (adventure or concern in the
nature of) trade commerce or manufacture.
o ‘Profession’ has been defined in Section 2 (36) of the Act to include any
vocation.
o Income under this head includes
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
o Important Sections

1. Section 28 : 'Charges' under the head ' Profits and Gains of

Business or Profession'
2. Section 30 : Rent, Rates, and Taxes of Premises
3. Section 31 : Insurance, Repairs of Plant, Machinery &
Furniture (PMF)
4. Section 35D : Amortization of Preliminary Expenses
5. Section 36(1) : Amount Expressly Allowed as Deduction
6. Section 37 : General Deduction
 7. Section 40A(2) : Unreasonable payment to Relatives/
Substantial interest
8. Section 40A(3) : Cash Expenditure
9. Section 43B : Expenses Deduction Allowed on actual payment
basis
10. Section 44AD, 44ADA & 44AE. : Presumptive Basis of
Taxation
11. Section 44AB : Compulsory Tax Audit

Income from Capital Gains(Section 45)

 Meaning
o Sections 45 of the Act provides that 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 under Section 45(1)

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 and its sub-
clauses

 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.
2. Any securities held by Foreign Institutional Investor held in accordance
with regulations under the SEBI Act.

 Not Capital Asset :

1. Any stock in trade [except under point ‘B’]. For instance, raw materials etc.
held for business and profession.
2. Personal effects which includes movable property including furniture, car(not
used for business), and wearing apparel.
3. Agricultural Land(rural not urban) in India.
4. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999 or deposit
certificates issued under Gold Monetization Scheme 2015 notified by Central
Government.

 Short & Long Term Capital Asset

o STCA ( Short-term capital asset ) An asset held for a period of 36 months or
less is a short-term capital asset.
 Post 2017, the criteria is 24 months for immovable properties such as
land, building and house property.
  The reduced period of the aforementioned 24 months is not applicable
to movable property such as jewellery, debt-oriented mutual funds etc.
 Some assets are considered short-term capital assets when these are
held for 12 months or less. This rule is applicable if the date of transfer
is after 10th July 2014 (irrespective of what the date of purchase is).
o LTCA ( Long-term capital asset ) An asset held for more than 36 months is
a long-term capital asset.
 Post 2017, the criteria is 24 months for immovable properties such as
land, building and house property.
 Post 2014, Criteria is 12 months for below mentioned assets
1. Equity or preference shares in a company listed on a
recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities
etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted
or not
5. Zero coupon bonds, whether quoted or not

1. Income from House Property (Sections 22 to 27)

 Taxable Income from House Property (Section 22)

o The annual value of the property consisting of any buildings or lands
under the ownership of the assessee , used for purposes other than any
business or profession carried on by him the profits of which shall be
chargeable to income tax under the head Income from House Property.
 Computation of Annual Value/Net Annual Value :
 1. Determine the Gross Annual Value
 2. Deduct municipal tax actually paid by the owner during the
previous year from the Gross Annual Value.
 Determination of Annual Value (Section 23)

1. Properties let out throughout the year[Section 23(1)]

1. Gross annual value shall be higher of

1. Expected Rent :The higher of Municipal value and fair rental
value shall be Expected rent.
2. Municipal Value: Municipal value is the value determined by
the municipal authorities for levying municipal taxes on use
property.
3. Fair rent: Fair rent is the amount which a similar property can
fetch in the same or similar locality, if it is let for a year.
4. Standard Rent: The standard rent is fixed under Rent Control
Act.
 5. Actual rent received or receivable :Actual rent is rent for let
out period.

2. Property occupied by the owner [Section 23(2)]

1. The annual value of such a house or part of the house shall be taken to
be nil where the property consists of one house or part of a house in the
occupation of the owner for his own residence, and is not actually let
during any part of the previous year and no other benefit is derived
therefrom by the owner,
2. Concession for one House only.
3. The provisions of this section shall not apply if
1. the house or part of the house is actually let during the whole or
any part of the previous year
2. any other benefit therefrom is derived by the owner.

3. House which is Partly Self-occupied and Partly Let Out[Section 23(3)]

1. When a portion of the house is self-occupied for the full year and a
portion is self-occupied for whole year, the annual value of the house
shall be determined as under:
1. From the full annual value of the house the proportionate
annual value for self occupied portion for the whole year shall
be deducted.
2. The balance under (i) shall be the annual value for let out
portion for a part of the year

 Deductions under this Head(Section 24)

(a) Standard deduction: A sum equal to 30% of the annual value

(b) Interest on borrowed capital : Where the property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable
on such capital upto INR 30,000

Residential Status and Tax Liability

( Section 6)
 Residential status of an assessee must be determined with reference to the previous
year in respect of which the income is sought to be taxed (and not with reference to
the assessment year)
 Test for resident status
o 1. Individual : According to the residential status, the assessee (an
individual) can either be

(i) Resident in India or

(ii) Non-resident in India
 o If an individual or HUF is a resident in India,they will be either;

(a) Resident and Ordinarily resident in India (ROR)

(b) Resident but not Ordinarily resident in India (RNOR)

o In case of persons other than individual and HUF, he will be either

resident in India or non-resident in India.
o An individual is said to be resident of India in any previous year if he:
1. He has been in India for at least 182 days during the previous
year
2. He has been in India for at least 60 Days during the previous
year and 365 days during the 4 preceding years the previous
year
3. Citizen of India who leaves India in any previous year as a
member of the crew of an Indian ship, or for the purpose of
employment outside India, or
4. Citizen of India or Person of Indian origin engaged
outside India (whether for rendering service outside or not)
and who comes on a visit to India in the any previous year.
5. An individual may become a resident and ordinarily
resident(ROR) in India if he satisfies both the following
conditions besides satisfying any one of the above mentioned
conditions:

(i) He is a resident in atleast any two out of the ten previous years immediately
preceding the relevant previous year, and
(ii) He has been in India for 730 days or more during the seven previous
years immediately preceding the relevant previous year
(f) An individual is (RNOR) not ordinarily resident in any previous year if he fulfills any
of the following

1. if he has been a non-resident in India in at

least nine out of the ten previous years
preceding that previous year,
2. has during the seven previous years preceding
that previous year been in India for a period of,
or periods amounting in all to, seven hundred
and twenty-nine days (729 days) or less
2. HUF, Firm or other Association of Persons : The test is based upon the
place of control and management of the affairs of the assessee concerned.

 Control and Management : It refers to the functions of decision-

making concerning concerning finance, marketing, production,
advertising, personnel etc.
 Place of Control and Management: Place of control and
management and not the places from where the business(day to
day operations) is carried on. The control and management is
situated at that place where policy decisions are taken.
 1. Control and Management of HUF: It is with Karta or its
Manager. A HUF can be "not ordinarily resident" If he does not
fulfill the tests applicable to individuals.
2. Control and Management of Firm/AOP: It is with
Partners/Members.
3. Control and Management of Company: It is with Board of
Directors. A place where Board meetings are held

 All Indian companies are always resident in India

regardless of the place of control and management of its
affairs. In the case of a foreign company the place of
control and management of the affairs is the basis on
which the company's residential status is determinable.
 A non-Indian company would be resident in India only
if the whole of the control and management of its affairs
throughout the relevant previous year are exercised
from India. Even if a negligible part of the control and
management is exercised from outside India the
company would be a nonresident for income-tax
purposes.

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 exempted
from tax.
 The following incomes do not form part of total income:
 Section 10: Incomes not to be included in the total income of any
person;
 Section 10AA: Income of newly established units in Special Economic
Zones;
 Sections 11-13: Income from property held for charitable or religious
purposes;
 Section 13A: Income of political parties;
 Section 13B: Income of an Electoral Trust.
 Exempted Income

1. Income earned through agricultural means

2. Any amount received by an individual through a coparcener from an HUF
3. Income received by partners of a firm, as shared between them
4. Any interest that has been paid to a person who is not a resident Indian
5. Any interest that has been paid to the account of a person who is not a resident Indian
6. Any interest that has been paid to a person who is not a resident Indian, but of Indian
origin
7. Concession on travel given to an employee who is also a citizen of India
8. Any income earned or received by a Non-Indian citizen
9. Government tax paid on the income of a foreign firm
10. Allowances received by government employees stationed abroad
11. Income earned by foreign employees in India under the Cooperative Technical
Assistance Program
12. Income earned by a consultant
13. Income earned by a consultant's staff or employees
14. Income earned by any family member of a foreign employee in India under the
Cooperative Technical Assistance Program
15. Gratuity
16. The commuted value of the pension earned by an individual
17. Any amount earned via encashment of leave at the time of retirement
18. Compensation paid to workers due to relocation
19. Any remittance obtained as per the Bhopal Gas Leak Disaster Act 1985
20. Any compensation obtained in the event of a disaster
21. Compensation in lieu of retirement from a PBC or any other firm
22. Any income received through taxation on perquisites
23. Any amount acquired via a Life insurance policy
24. Any payment received via the Statutory Provident Fund
25. Any payment received via a recognised or authorised Fund
26. Any payment received through a Superannuation Fund
27. House Rent Allowance
28. Allowances utilised to meet business expenses
29. Income received in the form of interest
30. Income received by an Indian firm through the lease of an aircraft from a foreign firm
or government
31. Income in the form of a scholarship
32. Allowances granted to MLCs, MLAs or MPs
33. Income received in the form of a government award
34. Income received in the form of pension by winners of awards for heroism
35. Income received by family members of the armed forces in the form of pension
36. Income received from a single palace of an exruler
37. Income received by a localised body or authority
38. Income received by an association involved with scientific research
39. Income earned by a news or broadcasting agency
40. Income earned by certain Professional Institutes
41. Income acquired through Regimental Fund
42. Income acquired through an employee welfare fund
43. Insurance pension fund income
44. Income earned by village industry development institutions
45. Income earned by state level Khadi and Village Industries Board
46. Income earned by regulatory bodies of institutions affiliated with religion and charity
47. Income received by the European Economic Community
48. Income received through SAARC funded regional projects
49. Income received by the IRDA
50. Income received through Prasar Bharti
51. Income received by any individual through certain specified funds
52. Income earned via Mutual Funds
53. Income earned via a Securitisation Trust
54. Income earned through an IPF
55. Income received by the Credit Guarantee Trust for Small Industries
56. Income exemption of IPF
57. Income exemption of specified income received by Venture Capital Firms, Funds or
Businesses
58. Income earned by authorised trade unions
59. Income earned via provident funds and superannuation funds
60. Income earned via Employee's State Insurance Fund
61. Income earned by Schedule Tribe Members
62. Income earned by an individual of Sikkimese origin
63. Marketing regulation with regards to agricultural produce
64. Income earned by corporations established for the upliftment of backward tribes and
classes
65. Income earned by corporations established for the protection of Minority interests
66. Income earned by corporations established for former servicemen
67. Income earned by cooperative societies established for protection of scheduled castes
and tribes interests
68. Income received by Community Boards
69. Income earned in the form of subsidies via the Tea Board
70. Income earned in the form of subsidies via the concerned Board
71. Income earned by a child in accordance with Section 64 of the Income Tax Act
72. Income earned through Unit Trust of India capital asset transfer
73. Income earned in the form of dividends through an Indian firm
74. Income earned by a shareholder through the buyback of unlisted companies
75. Income received through the sale or transfer of Unit Trust of India units as well as
other mutual funds
76. Income from a securitisation trust that is exempt
77. Income received on the sale of shares under specific conditions
78. Any capital gains made on the mandatory acquirement of land in relation to urban
agriculture
79. Any long term capital gains made from share and security transfers that fall under the
purview of Security Transaction Tax
80. Any income received from any international event or function relating to sports
81. Any income acquired in the form of a grant from a company deemed to be a
subsidiary of the parent company
82. Any income received on any asset transfer of a company or project that conducts
power distribution, generation and transmission
83. Any income earned by any authority that has been established by more than one
country
84. Any income in relation to reversal of mortgage
85. Income generated through the NPS Trust
86. Any allowance or perks granted to the chairman or any member of the UPSC
87. Any income that comes under the category of 'specified income' with regards to
specific authoritative bodies
88. Any income that is exempt under the category of infrastructure debt fund
89. Any income earned by a foreign firm or company due to crude oil sales within India
90. Any income earned by the NFHC (National Finance Holdings Company)