DEFINITIONS

Definition of Income:
The term ‘Income’ in Section 2(24) of Income Tax Act, 1961 includes the following:
(i) profits and gains;
(ii) dividend:
(iii) voluntary contributions received by a trust created wholly or partly for charitable or
religious purposes or by an institution established wholly or partly for such purposes or
by an association or institution referred to in clause (21) or clause (23) or by a fund or
trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or
other educational institution referred to in sub-clause (iii ad) or sub-clause (vi) or by any
hospital or other institution referred to in sub-clause (iliac) or sub-clause (via) of clause
(23c) of Section 10 or by an electoral trust.

Explanation - For the purpose of this sub-clause, 'trust' includes any other legal obligation;
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of
section 17;

(iii a) any special allowance or benefit, other than perquisite included under sub-clause
(iii) specifically granted to the assessee to meet expenses wholly, necessarily and exclusively
for the performance of the duties of an office or employment of profit;
(iii b) any allowance granted to the assessee either to meet his personal expenses at the
place where the duties of his office or employment of profit are ordinarily performed by him or
at a place where he ordinarily resides or to compensate him for the increased cost of living;
(iv) the value of any benefit or perquisite, whether convertible into money or not obtained
from a company either by a director or by a person who has a substantial interest in the
company, or by a relative of the director or such person and any sum paid by any such
company in respect of any obligation which, but for such payment, would have been
payable by the director or other person aforesaid;
(iva) the value of any benefit or perquisite whether convertible into money or not obtained by
any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section
160 or by any person on whose behalf or for whose benefit any income is receivable by the
representative assess. (such person being hereafter in this sub-clause referred to as the
'beneficiary') and any sum paid by the representative assessee in respect of any obligation
which, but for such payment, would have been payable by the beneficiary;
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or
section 59;
(va) any sum chargeable to income-tax under clause (iiia) of section 28;
(vb) any sum chargeable to income-tan under clause (iiib) of section 28;
(vc) any sum chargeable to income-tax under clause (iiic) of section 28;
(vd) the value of any benefit or perquisite taxable under clause (iv) of Sec 28;
(ve) any sum chargeable to income-tax under clause (v) of section 28;
(vi) any capital gains chargeable under section 45;
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(vii) the profits and gains of any business of insurance carried on by a mutual insurance
company or by a cooperative society, computed in accordance with section 44 or any surplus
taken to be such profits and gains by virtue of provisions contained in the First Schedule;
(vii a) the profits and gains of any business of banking (including providing credit facilities)
carried on by a cooperative society with its members;
(viii) Omitted;
(ix) any winnings from lotteries, crossword puzzles, races including horse races, card games
and other games of any sort or from gambling or betting of any form or nature whatsoever;
Explanation - For the purposes of this sub-clause,
(1) 'lottery' includes winning from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever, under any scheme or arrangement by
whatever name called;
(2) 'card game and other game of any sort' includes any game show, an entertainment
programme on television or electronic mode, in which people compete to win prizes
or any other similar game.

(x) any sum received by the assessee from his employees as contributions to any provident
fund or superannuation fund or any fund set up under the provisions of the Employees' State
Insurance Act, 1948 or any other fund for the welfare of such employees;
(xi) any sum received under a key man insurance policy including the sum allocated by way of
bonus on such policy.
Explanation.—"Key man insurance policy' means a life insurance policy taken by a person on
the life of another person who is or was the employee of the first mentioned person or is or was
connected in any manner whatsoever with the business of the first mentioned person."
(xii) any sum referred to in clause (va) of section 23;
(xiii) any sum referred to in clause (v) of sub-section (2) of Section 56;
(xiv) any sum referred to in clause (vi) of sub-section (2) of Section 56;
(xv) any sum of money or value of property referred to in clause (vii) of sub-section 2 of
Section 56.
Entry 82 of List I of the Seventh Schedule to the Constitution empowers Parliament to levy taxes
on income other than "agricultural income." Income should not be read in a narrow sense. It
follows that in addition to receipts mentioned in section 2(24) any other receipt is taxable
under the Act, if it comes within the general and natural meaning of the term 'income.'
Though there are different concepts of 'income' for the purpose of taxation, income is broadly
defined as the true increase in the amount of wealth which comes to a person during a stated
period of time.

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The following judicial principles will be helpful to understand the concept of income:—
1. Income may be received in cash or kind. When income is received in kind, its valuation is to
be made according to the rules prescribed in the Income-tax Rules. If, however, there is no
prescribed rule, valuation thereof is made on the basis of market value.
2. It is a fundamental rule of the law of taxation that, unless otherwise expressly provided, the
same income cannot be taxed twice
3. Income arises either on receipt basis or on accrual basis. Income may accrue to a taxpayer
without its actual receipt. Moreover, in some cases, income is deemed to accrue or arise to
a person without its actual accrual or receipt.
4. The income-tax law does not make any distinction between income accrued or arisen from a
legal source and income tainted with illegality. By bringing the profits of an illegal business
to tax, the State does not condone it or take part in crime, nor does it become a party to the
illegality. The assessee might be prosecuted for the offence and yet be taxed upon profits
arising out of its commission.
5. Income-tax assessment cannot be held up or postponed merely because of existence of a
dispute regarding the title of income. The recipient is, therefore, chargeable to tax, though
there may be rival claims to the source of the income.
6. For the purpose of income-tax there is no distinction between temporary and permanent
income. Even temporary income is taxable.
7. Income, whether received in lump sum or in instalments, is liable to tax. For instance, arrears
of bonus, received in lump sum, are income and taxable as salary
8. Income includes loss. While income and profits and gains represent 'plus income', losses
represent 'minus income'. The Supreme Court held that loss is a negative income and in
calculation of total income of an assessee, both negative and positive income should be taken
into account.

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 Agricultural Income
(a) Definition of Agricultural Income. According to section 2(1A) of Income Tax Act, 1961,
'agricultural income' means :—
(a) any rent or revenue derived from land which is situated in India and is used for agricultural
purposes;
(b) any income derived from such land by—
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily
employed by a cultivator or receiver of rent-in-kind to render the produce raised or received
by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by
him, in respect of which no process has been performed other than a process of the nature
described in paragraph (ii) of this sub-clause:
(c) any income derived from any building owned and occupied by the receiver of rent or
revenue of any such land, or occupied by the cultivator or the receiver of rennin-kind, of any
land with respect to which, or the produce of which, any process mentioned
(b) Instances of Agricultural Income: The following are held as agricultural income based
on judicial decisions
(i) Income from growing flowers and creepers in cultivated gardens.
(ii) Rent for agricultural land received from sub-tenants by mortgagee in possession. [Mustafa
Ali Khan v. CIT, 1(1948) 16 ITR 330 (PC)).
(iii) The fees collected from owners of cattle normally used for agricultural purposes for
allowing them to graze on forest lands covered by jungle and grass grown spontaneously. (CIT
v. R.B. Rai Shamsherjang Bahadur, (1953) 24 ITR 1 (All.))
(iv) Where denuded parts of the forest are replaced and subsequent operations in forestry are
carried out, the income arising from the sale of replanted trees. (CIT v. Benoy Kumar Sahas Roy,
(1957) 32 ITR 466 (SC)).
(v) Interest on capital received by a partner from the firm engaged in agricultural operation.
[CIT v. M.1. Mahindra, (1978) 112 ITR 323 (Gauhati)
(vi) Share of profit of a partner from a firm engaged in agricultural operation (Similarly, salary
received by him for rendering services is agricultural income as salary is only a mode of
adjustment of the firm's income). (UT v. R.M. Chidambaram Pillai, (1970) 771 TR 494 (Mad.))

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 (c ) Non-Agricultural Income.
The following are not agricultural income based on judicial decisions :—
I. Income from fisheries.
II. Royalty income of mines.
III. Income from butter and cheese-making.
IV. Income from poultry farming.
V. Dividend paid by a company out of its agricultural income.
VI. Interest received by a money-lender in the form of agricultural produce.
VII. Income of salt produced by flooding the land with sea water, as it is not derived from land
used for agricultural income.
VIII. Income from sale of forest trees, fruits and flowers growing on land naturally and
spontaneously and without the intervention of human agency.
IX. Interest on arrears of rent payable in respect of agricultural land as it is neither rent nor
revenue derived from land.
X. Profit accruing from the purchase of a standing crop and resale of it after harvest by a
merchant having no interest in land except a mere license to enter upon the land and
gather, upon the product, since land is not, the direct, immediate or effective source of
income.

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Section 4 of the Income Tax Act, 1961 is the charging section, it lays down that where any
Central Act enacts that income tax shall be charged for any assessment year at any rate or
rates. Income tax at the rate to those rates shall be charged for the year in accordance with and
subject to the provision(including provisions for the levy of additional income tax) of this Act in
respect of the total income of previous year of every person.
There are seven categories of persons:
1. an individual,
2. a HUF,
3. a company,
4. a firm,
5. an association of persons or a body of individuals, whether incorporated or not,
6. a local authority, and
7. every artificial juridical person, not falling within any of the preceding persons.
Every person may accrue income from one or more sources of income depending upon his
capacity. For the purpose of computation of total income of a person/assessee, the sources
were divided into 6 Heads. Section 14 formulates these Heads for the purpose of computation
of total income. They are:
A. Salaries.
B. Interest on securities.,
C. Income from house property.
D. Profits and gains of business or profession.
E. Capital gains.
F. Income from other sources.
Out of the above SIX Heads, the Head B. "Interest on Securities.' was omitted by the Finance
Act, 198 with effect from 1-4-1989, and the income accrued on interest on securities has been
added in the Head "Income from other sources".
Each Head has its own separate provisions for the computation of income under that source.
Income from all these heads shall be computed separately; according to those provisions:
Income computed under these heads shall be aggregated, i.e. added together. Each Head has
its own deductions, exemptions. The aggregated income shall be adjusted past and present
losses if any. This total income is called "Gross Tota1 Income". Out of this total "Gross Total
Income", there are certain deductions allowed under Section 80 shall be deducted as per the
provisions. After deductions from "Gross Total Income” "Total Income" shall be arrived. On
this total income, the tax shall be imposed, according to the rate of tax is in force in the
previous year upon the assessee. Therefore, it is often called Income tax is one tax and not the
aggregation of taxes under various heads of income. Income-tax is only one tax. There are no
different income-taxes on different heads.

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Salary income is the head of income out of five head as per the Income Tax Act, 1961. Section,
15 to 17 explain about ‘Salary Income’. Income from salaries is chargeable to tax on due basis.
Definition Section 17(1) defines “salaries”
Sec 17(1) “Salaries” include’
(i) Wages
(ii) Any annuity or pension
(iii) Any gratuity
(iv) Any fee, commissions, perquisites or profits in lieu of in addition to any salary or wages
(v) Any advance of salary
(vi) Any payment received by an employee in respect of any period of leave not availed by
him;
(vii) the annual accretion to the balance at the credit of an employee participating in a
recognized provident fund, to the extent to which is chargeable to tax under rule 6 of part A
of the fourth schedule and
(viii) the aggregate of all sums that are comprised in the transferred balance as referred to in
sub rule (2) of rule 11 of part A of the fourth schedule of an employee participating in a
recognized provident fund to the extent to which it is chargeable to tax under sub-rule(4)
thereof:

CHARACTERISTICS OF SALARY

The following are the characteristic features of salary.

1. Relationship of employer and employee: The relationship between payee and receiver
should have the relationship of employer and employee. The employer may be Central/State
Government. Public Corporation, Firm, HUF, Association of persons, even an individual. A
partner of a Partnership firm though receives salary from the firm is not an employee for the
purpose of 'Income from salaries.’ The salary of a partner should be dealt with the head
'Income from Profits and gains of Business and Profession. The relationship of employer and
employee is the first test to compute income of the assessee under the head 'income from
salaries'.
Perquisites or benefits, Commissioner, or any other remuneration received from persons other
than the employer by the employee shall be computed for the purpose of Income tax under
the head 'income from other sources'.
For example : A professor of a college receives certain remuneration for correction of papers
or acting as an examiner. Such sum shall be computed under the head income from other
sources.
2.Place of income: The salary received by the employee is the place where he works, and for
whom he works. Sometimes he may be transferred from one department to another on
deputation. Sometimes he may be employed to work outside India for his employer. The
income place of the employee shall be the place of employer. The Central Government
employs its servants to work in foreign countries. The income of such employees is accrued in
India only, even though they work in foreign countries.
3. Previous Year: The previous year for the income under the head 'Salaries' shall always be
financial year of the Government of India, i.e. 1st April to 31st March.

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4. Salary: The term 'salary' includes
1. wages;
2. any annuity or Pension;
3. any gratuity;
4. any fees, commission, perquisites or profits in lieu of or in addition. any salary or wages;
5. any advance of salary;
6. any payment received by an employee while in service in respect of any period of leave not
availed of by etc..
7. But the term 'salary' does not include:
8. retirement gratuity/death gratuity:
9. reimbursement of cost of medical treatment;
10. value of leave travel concession;
11. sumptuary allowance and uniform allowance:
12. cash equivalent of leave salary in respect of earned leave at credit received at the time of
retirement on superannuation or otherwise.

5. Employer's liability: It is the liability of employer to deduct tax at source of the employee
to whom he pays salary
6. Deductions, rebates etc.: Certain deductions and rebates are allowable to the
assessee/employee.
7. Profits in lieu of salary: Section 17 (2) (3) defines profits in lieu of salary which includes—
(1) The amount of any compensation due to or received by an assessee from his employer or
former employer or in connection with the termination of the employment of the modification
of the terms and conditions relating thereto.
(2) Any payment other that any payment referred to clause (10) , clause 10(B), clause (11),
clause(12) or clause(13 A) of section 10 due to or received by an assesses from an employer or
a former employer or from a provident or other fund (not being an approved superannuation
fund), to the extent to which it does not consists of contributions by the assesses or interest on
such contributions.
8. Perquisites: Some perquisites are included in the salary for the purpose of computation of
tax. Some perquisites are exempted.
Refer topic 6B for perquisites
9. Arrears of Salary: An amount of salary received from present or past employer during
relevant previous year and which relates to some earlier previous years, is treated as
arrears of salary. It is taxable in the year in which received and not to the year to which it
belongs.

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10. Computation:
Gross Salary :
Salary [u/s 17(1)] Rs……..
Allowances [17(3)(ii)] Rs……..
Perquisites [17(2)] Rs……...
Profits in lieu of salary [17(3)] Rs…….
Less: Rs.......
Standard deduction [u/s 16(i)] Rs…….
Entertainment allowance [16(ii)] Rs…..
Tax on employment, Viz Rs…
Professional tax, etc [16(iii)] Rs…..
Income taxable Rs……
Less: Rs......
Rebate of tax u/s 88 viz LIC,NSS etc if any Rs…..
Net Income taxable Rs……

PROFITS IN LIEU OF SALARY

Section 17(3) (ii) deals with “Profit in lieu of salary”. These are akin of perquisites. They are
also treated as part of perquisite. Allowance paid to the employee are in addition to the salary.
These allowances are fully taxable subject to exemption given under section 10(13A) and
10(14). These allowance are the “Profits in lieu of salary”. They are:

1. House Rent Allowance: Rent-free accommodation provided by the employer to the

employee is a perquisite, and is taxable at the hands of employee. Where the employer is not
in a position to provide ‘Rent-free accommodation’, he pays allowance in lieu of rent free
accommodation. Such allowance is called “House Rent Allowance”. HRA is its abbreviated
form. Out of the total house Rent Allowance received by the employee an amount equal to the
minimum of the following three items is exempted from tax u/s 19(13A) read the Rule 2A.
Balance amount shall be added to the employee for the tax purpose
(i) the actual amount of the allowance received by the assesses In respect of the relevant Period;
or
(ii) the amount by which the expenditure actually incurred by the assesses in payment of rent in
respect of the residential accommodation occupied by him exceeds one-tenth of the salary
amount of due to the assesses relevant period; or
(iii) an amount equal to
(a) Where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, one-half of the
amount of the salary (50%) due to the assessee in respect of the relevant period; and
(b) where such accommodation is situate at any other place, two- fifth of the amount of the
salary due to the assessee in respect of the relevant period.

Where the employee resides in his own house, or the house to which he does not pay any rent,
but receives H.R.A. from his employer, such H.R.A. is fully taxable and shall be added to his
salary. H.R.A. received by Judges of High Court and Supreme Court is fully exempted. .
Sections 15 to 17 of Chapter-lV explain about “income from salaries” Section 15 defines
'Salaries Section 16 provides deductions from salaries.

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Section 17 (2) defines 'Perquisite'. Rule 3 of Income Tax Rules, 1962 explains the mode of
valuation of perquisites.

MEANING

Perquisite: Perquisite is a gain or profit incidentally made from employment in addition to

regular salary or wages, especially one of a kind expected or promised.
Perquisite is a property acquired otherwise than by inheritance; a casual profit; anything left
over that a servant or other has by custom a right to keep; a tip expected upon some occasion;
emoluments; something regarded as falling to one by right. ". (The Chambers Twentieth
Century Dictionary)

Examples:
(a) A is an employee of B.H.E.L. The company provided a rent-free accommodation to A. That
accommodation costs Rs. 1,000/- per month in general in the City. This amount of Rs. 1000/- is
a perquisite, and includible in the salary ot A.
(b) A is an employ of B-Company B pays insurance premiums of A This insurance premium is a
perquisite, and includible in the salary of A, for the purpose of computation of income and
income-tax of A.

IMPORTANT POINTS
• Perquisites may be provided in cash or in kind.
• Perquisites are includible in salary for the purpose of income and income-tax.
• The employer may provide perquisites to the employee/employees voluntarily Or
contractually.
• Perquisites are valued on the basis of their value to the employee and not on the basis of
the cost to the employer for providing such perquisites.
• Sometimes, the employer provides certain perquisites by virtue of an agreement with
trade union. Where an employee does not avail such perquisite, such perquisite shall not
be added in the salary of such employee while computing his income.
• The value of all perquisites is includible in the total income of an employee under the
head 'Salary’
• The value of perquisites received by the assessee from other than his employer are
taxable under the heads "Profits and gains of business or profession'. or "income from
other sources". H. Perquisite is an additional benefit. It is procured by the Assessee into
his own pocket, including salary.
• Perquisite is some sort of addition to wages or salary.

TYPES OF PERQUISITES :

Section 17(2) defines 'Perquisite', and enumerates several perquisites those shall be includible
in the salary, and also exempts certain perquisites from such inclusion. Basing upon the
definition the perquisites can be divided into three division,

Exempted perquisites;
Taxable Perquisite in all cases and Taxable Perquisites in specified cases.

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TAXABLE PERQUISITES IN ALL CASES
The following perquisites are taxable in all cases:
1. Rent-free accommodation : Section 17(2)(i) provides that the value of rent free
accommodation provided to the assessee by the employer shall be a taxable perquisite.
However the valuation of rent-free accommodation differs from employee to employee,
depending which organisation he works. There are three categories of employees for this
purpose they are
A. employee working in Central and State Government
B. employees working semi government number
C. employees working in private sector
A. employees working in Central and state government: The value of an furnished for rent
free accommodation will be the rent which has been determined as payable by such person or
officer in accordance with the rules framed by government for allotment of residence to its
offices. In case of furnished house the value will be increased by 10% of original cost of
furnishing or actual rent charges in case furniture is hired.
Example: Mr Raju is a government employee he is provided an unfurnished rent free house.
The rent fixed by the government is Rs. 500/-per month. Mr Raju draws Rs. 4200/- per month
Rs. 6000/- shall be added to his salary(Rs. 500/- X 12 months
B. Employees working in semi government: example of semi government organisation are
RBI BHEL APSRTC Visakhapatnam port Trust, any public corporation established by a Central
or State Government etc.,
(i) 10% salary of employee or fair rental value whichever is less shall be calculated in case
the accommodation is unfurnished
(ii) if the accommodation is furnished 10% of the salary of employee or fair rental value of the
house which ever is less+ 10% annum of the original cost of the furniture and if the furniture is
hired from the third party than 10% of salary + Such hiring charges.
C. employee working private-sector: value of prerequisite shall be 10% of salary + excess of
fair rental value over 50% of salary( in case the employees working in Calcutta, Madras,
Bombay and Delhi - 10% of salary + excess fair rental value over 60% of salary keeping in
view of the heavy population and expenditure in those cities fair rental value of excess has
been increased from 50 % to 50% for the employees working in the cities)

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FAIR RENT VALUE
Fair rental value is called F.R.V in abbreviated air rent of a house shall be highest of the
following two:
(1) Municipal valuation of the house depending upon the locality fixed by Municipal
authorities;
(2) The rent which can be recovered from a similar type of house situated in similar type of
locality or in the same locality.
2. Concessional rent accommodation
Section 17 2(ii) provide that if the accommodation is provided at a concessional rent such
concessional accommodation value shall be included in employee salary. The value of the
concession shall be amount by which the rent free accommodation value exceeds the rent
paid by the employee.
Example: Mr. Raju is provided concessional rent accommodation by his employer's Rs. 500/-
to his employer. whereas the rental value is Rs. 1000/-
Actual rent value Rs. 1000x12 12000
Employee Paid Rs. 500x12 6000
Value of concessional accommodation 6000
3. Obligation met by employer: section 17(2)(iv) provides that any sum paid by the
employer in respect of any obligation which but for such payment would have been payable
by the employee e.g electricity charges, salary of watchmen, salary of gardner, salary of
domestic servants, club charges etc., are taxable and shall be includible in the salary of the
assessee.
4. provident fund deposit linked insurance fund: Section 17(2)(v) provide that any sum
payable by the employee whether directly or through a fund other than a recognised
provident fund or an approved superannuation fund or a deposit linked insurance fund
established under section 3C of Coal Mines Provident Fund and miscellaneous provisions act
1946 (46 of 1948) or as the case may be section 6C of the employees provident fund and
miscellaneous provisions Act 1952(19 of 1952) to affect and assurance on the life of assessee or
to effect a contract for an annuity

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EXEMPTED PERQUISITES

The following perquisites are exempted from tax. They are

1. Medical facilities to the employees:

Position before Finance Act 1991: Medical facilities provided to the employees and their
families by the employer were perquisite in the hands of employees and shall be included in
the salary for the purpose of taxation.
Position after Finance Act 1991: The Finance Act 1991changed the position. Now the medical
facilities provided by the employer to his employees are fully exempted perquisites, subject
to certain restrictions laid down by the Central Board of Direct Taxes from time to time. The
following medical facilities are fully exempted perquisites.
I. The value of any medical treatment provided to an employee or any member of his family
in any hospital maintained by the employer:
II. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment of nay member of his family.
a. In any hospital maintained by Government or any local authority or any other
hospital approved by the Government for the purpose of medical treatment of his
employees;
b. In respect of the prescribed diseases or aliments in any hospital approved by the
chief commissioner having regard to the prescribed guidelines. The employee
shall attach with his return of income a certificate from the hospital specifying the
diseases or aliment for which medical treatment was required and the receipt for
the amount paid to the hospital.
III. Any portion of the premium paid by the employer in relation to an employee to effect or
to keep in force in insurance on the death of such employee under any scheme approved
by the Central Government.
IV. Any sum paid by the employer in respect on any premium paid by the employee to effect
or to keep in force an insurance on health or the health of any member of his family under
any scheme approved by the Central Government for the purpose of section 80D.
V. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment of any member of his family other than the treatment
referred to in clauses (i) and (ii); so however, that sum does not exceed Rs. 10,000/- in
the previous year;
VI. Any expenditure incurred by the employer on:
a. Medical treatment of the employee, or any member of the family of such employee
outside India.
b. Travel and stay abroad of the employee or any member of the family of such
employee for medical treatment.
c. Travel and stay aboard one attendant who accompanies the patient in connection
with such treatment, subject to the condition that
i. The expenditure on the medical treatment and stay abroad shall be
excluded from perquisite only to the extent permitted by the Reserve Bank
of India; and

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 ii. The expenditure on travel shall be excluded from perquisite only in the case
of an employee whose gross total income as computed before including
therein the said expenditure does not exceed Rs. 2,00,000/-
VII. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee for any of the purpose specified in clause (vi) subject to the conditions
specified in or under that clause.

2. Refreshments means tea etc: Where the employer provided free refreshments to his
employees during office hours in office premises, such perquisites are exempted from tax.
Some organizations/companies provide free meals to their employees. Such facilities are
fully exempted perquisites.
3. Electricity, water etc: Where the employer provides free electricity, water facilities to
the employees with his own resources, such facilities are fully exempted perquisites.
4. Transport: Where the employer provides free transport from the residence of the
employee to work spot, such facilities are fully exempted perquisites.
5. Rent-free accommodation, conveyance: Rent-free accommodation, conveyance
facilities etc., provided to the judges of High Court, Supreme court, ministers, Leaders of
opposing officers of parliament etc are fully exempted perquisites.
6. Family Planning expenses, Incentives: Family planning incentives are provided by
the Central state Governments some welfare organization and some well established
companies. Such incentives and expenses are fully exempted.
7. Government Servant in abroad: The Central Government provides certain perquisites
to those employees working abroad. Such perquisites are fully exempted.
8. Free Ration: The Central Government provides free ration to the soldiers etc. Such free
ration is fully exempted.
9. Telephone: Sometimes some companies provide telephone facilities to its important
employees for the purpose of the business of such companies. Such telephone facility is
fully exempted perquisite in the hands of employee.
10. Refresher Courses: Sometime some employees are sent for refresher courses with the
expenses of the company. Such expenses are fully exempted perquisites
11. Goods: The employer sells his goods to his employee at concessional rate. Such
facilities are fully exempted perquisites.

Chapter-Iv from Sections 14 to 59 explains about Computation of total Income under various
heads. Part-C of Chapter-IV from Sections 22 to 27 explains about "Income from house
property”. Section 22 is the Charging section upon income from house property. Section 23

14
deals with Annual value how determined. Section 24 deals with deductions from Income from
house property.

CHARGEABILITY : Section 22 is the charging section upon income from house property
Sec. 22 Income from house property. The annual value of property consisting of any building
or lands appurtenant thereto of which the assessor, is the owner, other than such portions of
such property as he may occupy for the purposes of any business of profession carried on by
him the profits of which are chargeable to income-tax, shall be chargeable to income-lax
under the head "income from house property".

CONDITIONS

1. Owner : The assessee should be owner of the property. The term "Owner" means, he
should be a legal owner. Owner may be an individual, company, co-operative society, trust,
firm, association of persons. Hindu undivided family etc. The tax shall be imposed upon the
owner and on the income of the house-property of previous year. He may not be owner in the
assessment year. Deemed owner is also treated as an owner for the purpose of income-tax, viz.
house property of one spouse is the income source of other spouse; house-property of a minor
is the income source of the parent If there is any dispute regarding the ownership in a Court of
law the income tax Department is competent to collect the tax from a person to whom it
believes to be the legal owner for the purpose of income-tax without waiting for judicial
Judgment.
2. Buildings or lands appurtenant thereto: The income from house property must be
accrued from any building or lands appurtenant thereto. The terms 'building' and 'lands
appurtenant thereto' have not been defined in the Act Webster's Dictionary defines 'buildings "
That which is built; specifically, as now generally used, a fabric, or edifice, framed or
constructed, designed to stand more or less permanently, and covering a space of land, for
use as a dwelling, store house, factory, shelter for beasts or some other useful purpose:
building in this sense does not include a mere wall fence, monument, hoarding or similar
structure though designed for permanent use where it stands; not a steam boat, ship or other
vessel of navigation.
"Land appurtenant thereto" does not mean the vacant land without building. The land
attached to building, and other constructions in it. viz. bathrooms, watchman room, car-
garage, store-room, water-tank. etc. connected to the main building and its vacant land
include "land appurtenant thereto".

3. BUILDING USED FOR BUSINESS: The owner of the building should not use his building for
his own business or profession. The owner of the building may use his building for his own
residence or he may let it out. Where an Owner uses his building for his profession or
business, such income is chargeable under the head "Income from business and profession".
Therefore, such building is not chargeable to tax under the head "Income from house
property".

EXEMPTIONS

Certain property Incomes are exempted from tax liability in the following cases:

15
1. Farm house : Farm house appurtenant to agricultural land is exempted from tax under
Section 2(1A)
2. Hospital: The building utilised for hospitals and medical institutions etc. are exempted.
(Soc. 10 (22A)
3. Educational institutions: The buildings utilised for Universities and educational institutions
are exempted. (Sec.10 (22)
4. Trade Union: The buildings owned by Trade unions are exempted. (Sec 10 (24)
5. Political parties: The building owned by political party is exempted. (Sec. 13A)
6. Building used for own business or profession: Where an assessee uses his own property
for his own business or profession, such house is not taken into consideration under the head
“Income from house property". NO deductions also shall be allowed in such case. (Sec. 22)
7. One self-occupied property: Where an assessee has more than one house. one house shall
be deemed under his occupation and other houses are deemed to be let out. One house
depending upon choice is exempted from computation. Remaining houses are taken into
consideration for computation under the head "Income from house property'. (Sec. 23(2)
8. Charitable purposes: The houses used for charitable purposes are exempted. (Sec. 13A)
9. One Palace of Ex-Ruler: One Palace of Ex-Ruler is exempted from income from house
property. The remaining palaces are computed. (Sec. 10(19A)
10. Local authorities: Local authorities, viz. Municipalities, Grain Panchayats, Notified Area
Committees. etc. own certain buildings. The income from such buildings is exempted.
(Sec.10(20)
11. Games association : Property owned by Genres association is exempted.
12. Ladakh: Property Income accrued by the residents of Ladakh is exempted.
(Sec. 10(23) (Sec. 10(26A)

DEDUCTIONS FROM INCOME FROM HOUSE PROPERTY

Section 24 provides certain deductions from Income from house property. Section 23(1) also
97430 certain concessions in case of newly constructed houses
1. Repairs collection of rents : Every house requires certain repairs. Therefore. the genuine
repairs are entitled to be deducted. Collection of rent is a risky work. The expenses required
for collection of rent are also entitled to be deducted. However. such deductions shall not
exceed a sum equal to one-fifth of the annual value.
2. Insurance premium: If the assessee pays any premium towards the insurance, such sum is
deductible.
3. Charge: If the assessee mortgages or subjects it to an annual charge such amount shall be
deductible. However, such mortgage or charge should be genuine. It should not be created
one by the assessee voluntarily or a capital charge
4. Ground rent: Where the property is subject to a ground rent. the amount of such ground
rent is deductible.
5. Interest: Where the property has been acquired, constructed, repaired renewed or
reconstructed with borrowed capital, the amount of any interest payable on such capital.
However, there is a condition, Where the property has been acquired or constructed with
borrowed capital, the interest, if any payable on such capital for the period prior to the
previous year in which the property has been acquired or constructed as reduced by part
thereof allowed as a deduction under any other provision of this Act, shall equal instalments for
the said previous year and for each of the four immediately succeeding previous years.
6. Land revenue: Any amount paid towards the land revenue shall be deducted.

16
 7. Vacancy allowance: Where the property is let and was vacant during a part of the year,
that Part of the annual value which is proportionate to the period during which the property is
wholly unoccupied or where the property is let out in part that portion of the annual value
appropriate to any vacant part which is proportionate to the Period which such part is wholly
unoccupied. The deduction shall be made irrespective of whether the period during which the
property, or as the case may be part of the property was vacant precedes or follows the period
dm', which it is let.
8. Unrealised amounts: In case, where the tenant did not pay the rents, and the house-owner
could not realise such amounts, such unrealised amounts shall be deductible
9. Municipal taxes: Municipal taxes shall be deductible.
10. Concession for newly constructed houses: Concession for newly constructed houses are
provided by section 23(1). The rates of concession differ from 1970 to 1992. However, the
following conditions shall have to be observed :
(i) the property is let out;
(ii) the property shall be used fot residential purposes. These concessions shall be allowed
for a period of five years from the date of completion of construction of house.

VACANT PLOT : Section 22 chargeable section imposing tax on income from house property
Section 22 clearly mentions "Income from house property or land appurtenant thereto”.
Therefore, where a vacant site without house is situated, and the assessee accrues income by
letting it, such income shall be charged under "Income from other sources” or “Income from
business or profession”. Such income shall not be charged under the head income from house
property.

Income from sub-letting : The first condition of Section 22 is that the assessee should be the
owner of the house Property. Incase where a tenant sub-lets the property on higher rents, and
accrues more income. In such a case such income shall be charged under the head “income
from other sources".

Deduction of Tax at source : Section 194-1 has been inserted by the Finance Act, 1994, and it
is effective from 01-06- 1994. Tax © 20% shall be deducted at source if the amount of rent
exceeds Rs 1,20,000/- in a financial year.

Chapter-IV deals with “Computation of total income “ Part Bof Chapter IV from Section 28 to
44D explains about “profits and gains” of business or profession. The Income shall be
computed in accordance with the provisions contained in sections 30 to 43D.

17
Definition: Section 2(13) defines “Business”. “Business” includes any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
MEANING: The term 'Business includes any
(a) trade
(b) commerce
(c) manufacture Or
(d) any adventure or concern in the nature of trade, commerce or manufacture.

CHARGEABILITY: Section 28 Is the charging section on the income accrued in the business
or profession.

1. Business or Professional Income: Section 28 (i) provides that the profits and gains of any
business or profession which was carried on by the assessee at any time during the previous
year. Business may or may not be continuous one. It may be casual and non-recurring nature.
But it should be done in the previous year. Illegal business also comes under Section 28,1
Where the Income of an illegal business is taken into consideration, the expenses Incurred to
conduct such illegal business shall also have to be allowed as deduction. Business done in
India and business done outside India are taken into consideration on similar footing under
Section 28(1)
2. Compensation : Section 28(ii) lays down that any compensation or other payment due to or
received by the following Persons shall be chargeable to income-tax under the head “Profits
and gains of business or profession".
(a) any person whatever name called, managing the whole or substantially the whole of the
affairs of an Indian company at or in connection with termination of his management or the
modification of the terms and conditions relating thereto;
(b) any person by whatever name called managing the whole or substantially the whole of the
affairs in India or any other company, at or in connection with the termination of his office or
the modification of the terms and conditions relating thereto;
(c) any Person by, whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person at or in connection with the termination of
the agency or the modification of the terms and conditions relating thereto;
(d) any person for or in connection with the vesting in the Government or in any corporation
owned or controlled by the Government under any law for the time being in force of the
management of any property or business.
3. Income of a Trade or Association or Professional Association: Section 28(iii)lays down
that the income derived by a trade , professional or similar association from specific services
performed for its members. Trade association or professional Association is body formed with
the members of that trade or profession. The object of such association is to promote such
trade or profession. Social clubs do not come under this Category.
4. Profits on sale of Licence: Section 28(iiia) lays down that the profits on sale of a license
granted under the imports (control) order, 1955, made under the imports and Exports(control)
Act 1947(18 of 1947) is chargeable to tax under this head.
5. Cash assistance : Section 28(iiib) provides that the cash assistance (by whatever name
called) received or receivable by any person against exports under any scheme of the
Government of India is chargeable to tax.

18
6. Duty of Customs or Excise repaid: Section 28(iiic) provides that any duty of customs or
excise re-paid or re-payable as drawback to any person against experts under the Customs
and Central Excise Duties Drawback Rules, 1971 is chargeable to tax
7. Perquisite: Section 28(iv) provides that the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a profession is
chargeable to lax under this head. Perquisites received by en employee are added to salary to
that employee under the head 'Income from salary’ Perquisites or benefits received during the
business by an assessee other than employees are chargeable to tart under the head 'income
from business or profession'.
8. Salary, interest, bonus, commission or remuneration received by a partner from a
firm : This is a new provision. Section 28(v) has been inserted by the Finance Act, 1992 with
effect from assessment year 1993-94 any salary, interest, bonus, commission or remuneration
received by a Partner of a firm from firm registered is chargeable to tax in the hands of the
partner under this head. However, there are Certain restrictions and deductions in computing
the Income of the partner under section 40(b) which is also a new provision inserted by the
Finance Act 1992
9. Speculation business : Explanation 2 to section 2B provides that where speculative
transactions carried on by an assessee are of such a nature as to constitute a business, the
business (hereinafter referred to as 'speculation business') shall be deemed to be distinct and
separate from any other business.
Speculative transactions is transaction In which a contract for the purchase or sale of any
commodity, including stocks and shares, is periodically or ultimately settled otherwise than by
the actual delivery or transfer of the commodity or scripts. Where the goods are actually
delivered it is not speculative. Where only the difference of amount of the goods is paid, but
the goods not delivered, such transaction is a speculative business. The loss in one
speculative-business can be set off in the profits accrued in another speculative business of the
same previous year.
10. Illegal business: Often the question arises, whether the profits accrued in an illegal
business can be taxable or not. The Supreme Court while disposing the case “C.LT. Vs. Pira
Singh (1972)” held that the profit accrued in an illegal business is taxable. Therefore, the
income obtained from smuggling, illicit liquor, etc. shall be chargeable under the head
"Income from business". For the purpose of income tax, there is no difference between - legal
or illegal income. The expenses incurred in illegal business are allowable. However, the loss
accrued in illegal business cannot be set off in the profits accrued in legal business. Further,
the expenses incurred by the assessee to meet the criminal proceedings of the State shall not
be deductible or allowed.
11. Profession: The head denotes specifically the income gained by the assessee by way of
business or profession. Doctors, Lawyers, Consultants, Interior decorators. architects, etc. are
the professionals. They get their income through their services.

COMPUTATION
19
1. Previous year : Income or gain to be taxed must relate to the previous year. Each year is a.
self contained accounting period.
2. Assessee: The assessee may be individual, partnership firm, association of persons,
company, etc. The assessee must accrue his profit or gain by his business or profession. He
may get such profit or gain by his own services, or by employing other persons.
3. Ownership: An assessee under this head must enjoy the legal ownership of his firm. He
should also have beneficial ownership. Benamidar is not assessed under this head.
4. Deductions: For every business or profession, there are certain expenditures to be
incurred. Such expenses shaft be deducted from the gross income.
5. Dissolution: The profit arising from some of the assets after dissolution of a business shah
not be taxable, but the profit on the sale of stock-in-trade is taxable.
6. Tax: The rate of tax is different depending upon the category of the assessee, viz individual,
partnership firm, company etc. The tax shall be levied on the net profit or net gain. The
income referred to in section 28 shall be computed in accordance with the provisions
contained in Ss. 30 to 43D.

PAN – PERMANENT ACCOUNT NUMBER

20
(SECTION I39A)
1. Every person
(i) if his total income or the total income of any other Person in respect of which he is
assessable under this Ant during any previous year exceeded the maximum amount
which is not chargeable to income-tax: or
(ii) carrying on any business or profession whose total sales, turnover or gross receipts are
or is likely to exceed five lakh rupees in any previous year, or
(iii) Who is required to furnish a return of income under sub-section (4A) of Section 139,
or
(iv) being an employer who .is required to furnish a return of fringe benefit under
section.115-WD
(v) and who has not been allotted any permanent account number, shall, within such time as
may be prescribed, apply to the Assessing Officer for the allotment of a permanent
account number.

(1A) Notwithstanding anything contained in sub-section (1), the Central Government may, by
notification in the Official Gazette, specify, any class or classes of persons by whom tax is
payable under this Act or any,. or duty is payable under any other law for the time being in
force including importers and exporters whether any tax is payable by them or not and such
person shall, within such time as mentioned .in that notification, apply to the Assessing Officer
for the allotment of a permanent account number.
(1B) Notwithstanding anything contained in sub-section (1), the Central Government may, for
the purpose of collecting any information which may be useful for or relevant to the purpose of
this Act, by notification in the Official Gazette, specify, any class or classes of persons who
shall apply to the Assessing Officer for the allotment of the permanent account number and
such persons shall, within such time as mentioned in that notification, apply to the Assessing
Officer for the allotment of a permanent account number.
(2) The Assessing Officer, having regard to the nature of the transactions as may be
prescribed; may also allot a permanent account number, to any other person (whether any tax
is payable by him or not); in the manner and in accordance with the procedure as may be
prescribed.
(3) Any person, not falling under sub-section (1) or sub-section (2), may apply to the Assessing
Officer for the allotment of a permanent account number and, thereupon, the Assessing Officer
shall allot a permanent account number to such person forthwith.
(4) For the purpose of allotment of permanent account numbers under the new serried, the
Board may, by notification in the Official Gazette, specify the date from which the persons
referred to in sub-section (I) and (2) and other persons who have been allotted permanent
account numbers and residing in a place to be specified, apply to the Assessing Officer for the
allotment of a permanent account number ender the new Serried and upon allotment of such
permanent account number to a person the permanent account number, if any, allotted to him
earlier shall cease to have effect:
Provided that the persons to whom permanent account number under, the new serried has
already been allotted shall not apply for such number again.
5) Every person shall-

21
(a) quote such number in all his returns to, or correspondence with, any income-tax authority;
(b) quote such number in all challans for the payment of any sum due under this Act;
(c) quote such number in 01 documents pertaining to such transactions as, may be prescribed
by the Board in the interests of the revenue, and entered into by him.
(5A) Every person receiving any sum or income or amount from which tax has been deducted
under the provision of Chapter XVII-B of this Act shall intimate his permanent account number
to the person responsible for deducting such tax under that chapter.
(5B) Where any sum or income or amount has been paid after deducting tax under Chapter
XVIIB, every person deducting tax under that Chapter shall quote the permanent account
number of the person to whom such sum or income or amount has been paid by him:-
(i) In the statement furnished in accordance with the provisions of sub-section.(2C)
of Section 192;
(ii) in all certificates furnished in accordance with the provisions of section 203;
(iii) in all returns prepared and delivered or caused to be delivered in
accordance with the provisions of section 206 to any income-tax authority;
(iv) in all quarterly statements prepared and delivered or cause to be delivered
in accordance with section 203(3).

4 ) For the purpose of allotment of permanent account numbers under the new serried, the
Board may, by notification in the Official Gazette, specify the date from which the persons
referred to in sub-section (I) and (2) and other persons who have been allotted permanent
account numbers and residing in a place to be specified, apply to the Assessing Officer for the
allotment of a permanent account number ender the new Serried and upon allotment of such
permanent account number to a person the permanent account number, if any, allotted to him
earlier shall cease to have effect:
Provided that the persons to whom permanent account number under, the new serried has
already been allotted shall not apply for such number again.
5) Every person shall-
(a) quote such number in all his returns to, or correspondence with, any income-tax authority;
(b) quote such number in all challans for the payment of any sum due under this Act;
(c) quote such number in 01 documents pertaining to such transactions as, may be prescribed
by the Board in the interests of the revenue, and entered into by him.
(5A) Every person receiving any sum or income or amount from which tax has been deducted
under the provision of Chapter XVII-B of this Act shall intimate his permanent account number
to the person responsible for deducting such tax under that chapter.
(5B) Where any sum or income or amount has been paid after deducting tax under Chapter
XVIIB, every person deducting tax under that Chapter shall quote the permanent account
number of the person to whom such sum or income or amount has been paid by him:-
(i) In the statement furnished in accordance with the provisions of sub-section.(2C) of
Section 192;
(ii) in all certificates furnished in accordance with the provisions of section 203;

22
(iii) in all returns prepared and delivered or caused to be delivered in accordance with
the provisions of section 206 to any income-tax authority;
(iv) in all quarterly statements prepared and delivered or cause to be delivered in
accordance with section 203(3).

FILING OF RETURN
23
The provisions regarding filing of return are as follows:
(i) Return of Income (Section 139) (1) every person
a) being a company or a firm if his total income of any other person in respect of which he is
assessable under this Act during the previous Year exceeded the maximum amount which is
not chargeable to income tax, shall, on or before the due date, furnish a return of his income or
the income of such other person during the previous year in the prescribed form and verified
in the prescribed manner and setting forth such other particulars as may be prescribed.
(ii) Return of Loss [Section 139(3)]
If any person who has sustained a loss in any previous year under the head "Profits and gains
of business or profession" or under the head "Capital gains" and claiming that the loss or any
part thereof should be carried forward and under Section 72 (1 ) or 73 (2) or section 74 (I) or
Section 74 (3) Or Section 74A(3), he may furnish within the time allowed under Section 139 (1),
stated above, a return of loss in the prescribed form and verified in the prescribed manner
and containing such other particulars as maybe prescribed and all of the provisions of this Act
shall apply as if it were a return than under Section 139 (1).
(iii) Belated Return [Section 139 (4)]
Any person who has not furnished within the time allowed to him under Section 139 (1) or
within the time allowed under a notice issued under Section 142 (1) may furnish the return for
any previous year at any time before the expiry of one year from the end of the relevant
assessment year or before the completion of the assessment year, whichever is earlier:
Provided that where the return relates to a previous year relevant to the assessment year
commencing on 1-4-88 or any earlier assessment year, the reference to one year, aforesaid
shall be construed as reference to two years from the end of the relevant assessment year.
(iv) Revised Return [Section 139 (5)]
if any person having famished a return under Section 139 (1) or in pursuance of a notice issued
under Section 142 (1) discovers any omission or any wrong statement therein, he may furnish a
revised return at any time before the expiry of one year from the end of the relevant
assessment year or before the completion of the assessment, whichever is earlier:
Provided that where the return relates to the previous year relevant to the assessment year
commencing on 1-4-88 of any earlier assessment year the reference to one year aforesaid shall
be construed as a reference to two years from the end of the relevant assessment.
However, an assessee who has furnished false return knowing it to be false cannot claim the
benefits of the section therefore cannot avoid the liability by filing a revised return.
Thus, the provision of this sub-section applies only to bonafide errors or omissions and not to
deliberate false returns. The offence of filing a deliberate false return punishable under
Section 277 cannot be condoned by the filing of a revised return and penalty may be imposed
under Section 211 in respect of the previous false return even if a revised return and is filed.
Thus, the consequences of the, deliberate omission in the return filed by the assessee cannot
be avoided by merely filing a revised return
In Kunwar Jagdish Chandra Sinha v. C.I.T, the Supreme Court has made it clear that a person
filing return under Section 139(4) is not entitled to file revised return under Section 139(5). In
24
the opinion of the court, it cannot be said that the language employed in clause (c) of Section
153(1) contemplated the filing of a revised return even in a case where original return is filed
under Section 139(4) Section 139 makes it clear that a person who has furnished a return
under sub-section ( 1) or sub-section (2) may famish a revised return, at any time before the
assessment is made if he discovers any omission or wrong statement in the original, return.
(v) Consequence of non-furnishing of the Return [Section 139(8)]
Where, the return under sub-section (1) or sub- Section (2) or sub-section (4) for an
assessment. year is furnished after the specified date, or is not furnished then (whether or not
the Assessing Officer) has extended the date for furnishing the return under sub-section (1)
or sub-section (2) the assessee shall be liable to pay simple interest at 15 percent per annum ,
reckoned from the day immediately following the specified date to the date of the furnishing of
the return or, where no return has been furnished, the date of completion of the assessment
under section 144, on the amount of the tax, payable on the total income as determined on
regular assessment, as reduced by the advance tax, if any, paid, and tax deducted at source.
(vi) When return defective [Section 139 (9)]
Where the Assessing officer considers that the return of income furnished by the assessee is
defective, he may intimate the defect to the assessee and give him an opportunity to rectify
the defect within period of fifteen days from the date of such intimation or within such further
period which, on an application made in this behalf, the Assessing Officer may, in his
discretion, allow; and if the defect is not rectified within the said period of fifteen days or, as
the case may be, the further period so allowed, then, notwithstanding anything contained in
any other provision of this Act, the return shall be treated as an invalid return and provisions
of this Act shall apply as if the assessee had failed to furnish the return.
VII. Filing of return in electronic form section ( 139 D)
The Board may make rules providing for :
(i) The class or classes of persons who shall be required to furnish the return in
electronic form
(ii) The from and the manner then in which the return electronic form may be
furnished;
(iii) The documents, statements, receipts, certificated or reports of audit which
may not be. furnished along with the return in electronic form but shall be
produced before the Assessing Officer on demand.
(iv) The computer resource or the electronic record to which the return in
electronic form may be transmitted .

VIII. Return by whom to be signed (Section 140)

The return cadet section 115-WD or 139 shall be signed and verified—
(a) in the case of an individual
a. by the individual himself;
b. where he is absent from India by the individual himself or by some person duly
authorized by him in this behalf;
c. where he is mentally incapacitated from attending to his affairs, by his guardian or
any other person competent to act on his behalf; and
25
 d. where, for any other reason, it is not possible for the individual to sign the return,
by any person duly authorised, by him in this behalf;
e. Provided that in a case referred, in sub-clause (ii) or sub clause (iv), the person
signing the return holds a valid power, of attorney from the individual to do, so,
which shall be, attached to the return

(b) in the case of a Hindu undivided family, by the karta and, where the karta, is absent from
India or is mentally incapacitated from attending to his affairs, by any other adult member of
such family;
(c) in the case of a company, by the managing director thereof, or where for any unavoidable
reason such managing director is not able to sign and verify the return, or where there is no
managing director, by any director thereof:
Provided that where the company is not resident in India, the return may be signed and
verified by a person who holds a valid power of attorney from such company to do so, which
shall be attached to the return.

Section 2 ( c) of the Wealth-Tax Act 1957 defines “Assessee”

26
DEFINITION:
Sec.2( c) “Assessee” means a person by whom wealth-tax or any other sum of money is
payable under this Act, and includes –
(i) Every person in respect of whom any proceeding under this Act has been taken for
the determination of wealth-tax payable by him or by any other person or the
amount of refund due to him or such other person;
(ii) Every person who is deemed to be an assessee under this Act;
(iii) Every person who is deemed to be an assessee in default under this Act.
IMPORTANT POINTS:
a. There were different rates of wealth-taxes for individuals, Hindu Undivided Families,
Companies in Schedule-1. They are chargeable to wealth tax under Section3. The
Finance Act, 1992 removed the different rates of wealth taxes and limitations. Now there
is no wealth tax up to 15lakhs for individuals, Hindu Undivided families, Companies.
b. The rate of wealth tax is @ 1% after 15lakhs net wealth
c. Firms, co-operative Societies, Social club, political parties, Mutual Fund specified u/s 10
(23 D of the I.T.Act) a company solely engaged in transporting business by ships etc.
are not liable to pay wealth tax. Therefore, they are not assesses under Wealth Tax Act.
d. Assessee vs Residential status: Section 6 of the Wealth Tax Act excludes certain assets
and debts outside India. Section 6 provides that in computing the net wealth of an
individual who is not a citizen of India or resident but not ordinarily resident in India, or
of a company not resident in India during the year ending on the valuation date—
(i) The value of the assets and debts located outside India; and
(ii) The value of the assets in India represented by any loans or debts owing to the
assessee in any case where the interest, if any, payable on such loans or debts is
not to be included in the total income of the assessee under Section 10 of the
Income-tax Act.
Shall not be taken into Account.
Explanation 1: An individual or a Hindu Undivided family shall be deemed to be not
resident in India or resident but not ordinarily resident in India during the year ending
on the valuation date if in respect of that year the individual or the Hindu Undivided
family, as the case may be, is not resident in India or resident but not ordinarily resident
in India within the meaning of the Income-tax Act.
Explanation 1A: Where in the case of an individual the value of an asset in India is
represented by any debt owing to him, being any moneys to his credit in a Non-resident
(External) Account, the interest payable on which is not to be included in his total
income under sub-clause (ii) of clause (4) of section 10 of Income-Tax Act, the
provisions of this section shall, in relation to such asset, apply subject to the modification
that the reference in this section to an individual not resident in India shall be construed
as a reference to a person resident outside India as defined in clause (q) of section 2 of
the Foreign Exchange Regulation Act, 1973.

Explanation 2: A company shall be deemed to be resident in India during the year

ending on the valuation date, if –

27
 (a) It is a company formed and registered under the Companies Act, 1956 (I of 1956), or
is an existing company within the meaning of that Act; or
(b) During that year the control and management of its affairs is situated wholly in India
E. Wealth Tax not chargeable in certain cases:
Section 45 of the Wealth Tax, 1957 provides that the Act does not apply in certain cases, an no
wealth tax shall be levied in respect of the net wealth of the following persons:
1. A Banking company as defined in Section 5 of the Banking Companies Act, 1949;
2. An insurer within the meaning of the Insurance Act, 1938;
3. Transporting Company: any company solely engaged in the business of transporting
goods or passengers by ships;
4. Co-operative Society: any co-operative society;
5. Political Party: any political party;
6. Mutual Fund: a Mutual Fund specified under clause (23-D) of Section 10 of the Income-
tax Act;
7. Charitable Company etc: any company registered under Section 25 of the Companies
Act, 1956 for the purpose of promoting commerce, art, science, religion, charity or any
other useful object; and intends to apply its profits, if any, or other income in promoting
its objects, and to prohibit the payment of any dividend to its members;
8. Outside India Company: any company incorporated outside India which has no place
of business in India.
ASSETS
Section 2 (e) of the Wealth-tax Act, 1957 clearly defines that “Assets” include the property of
every description, movable or immovable. The same section exempts certain properties from
its purview. Section 2(ea) has been newly inserted by the Finance Act, 1992 with effect from 1-
4-1993. It further clearly exempts certain properties from the definition of Assets. The
definition of “assets” has been modified by the Finance Act, 1992.
Now the term “Assets” mean –
1. A guest house
2. A residential house
3. A farm house situated within 25kms, from the local municipal limits
4. Motor cars
5. Jewellery, bullion and furniture, utensils or any other article made wholly or partly of
gold, silver, platinum or any other valuable and precious metal or any alloy containing
one or more of such precious metals
6. Yachts, boats and aircrafts
7. Urban land situate within municipal limits of a municipality or cantonment board having
a population of not less than 10,000 or within 8kms of such limits
8. Cash in hand, in excess of Rs 50,000 in case of individuals, and HUF, and any
unrecorded amount in any other cases.

DEEMED ASSETS

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Section 2(m) of the Wealth-tax Act defines “net wealth”. According to which, “net wealth”
means the amount by which the aggregate value computed in accordance with the provisions
of this Act of all the assets, wherever located, belonging to the assessee on the valuation date
under this Act, is in excess of the aggregate value of all the debts owned by the assessee on
the valuation date which have been incurred in relation to the said assets.
The phrase “belong to the assessee” in Sec.2(m) shows that the assessee must exercise
rightful possession and ownership over the assets. Mere possession does not qualify him as the
owner. For ex: a tenant, a trustee. The fundamental principle is that the assets must belong to
the assessee. However, sometimes, certain properties, even though do not belong to the
assessee, are clubbed to the assets of the assessee, just like the minor’s income is clubbed
with his parent’s income. This type of clubbing is called “Deemed assets”. Section 4 of the
Wealth-tax Act enunciates such type of Deemed Assets. They are:
1. Assets possessed by the spouse of an individual assessee to whom such assets have been
transferred directly or indirectly, otherwise than for adequate consideration or in connection
with an agreement to live apart. Sec.4(1)(a)(i)
2. Properties possessed by a minor child of an assessee are clubbed with the assets of the
assessee. However, the assets of married minor child, or of a minor child suffering from any
disability of the nature specified in Section 80U of IT Act are not clubbed. Sec.4(1)(a)(ii)
3. Assets held by a person or association of persons to whom such assets have been
transferred by an individual, directly or indirectly, without adequate consideration, for the
immediate or deferred benefit of such individual himself, or his/her spouse. Sec.4(1)(a)(iii)
4. Assets held by a person or association of persons to whim such assets have been transferred
by the individual otherwise than under an irrevocable transfer. Sec4(1)(a)(iv)
5. Assets held by the son’s wife, of such individual, to whom such assets have been transferred
by the individual directly or indirectly, on or after the 1st day June, 1973 otherwise than for
adequate consideration. Sec.4(1)(a)(v)
6. Assets held by any person or association of persons to whom such assets have been
transferred by the individual, directly or indirectly. Sec.4(1)(a)(vi)
EXEMPTED ASSETS
Section 2 (ea) has been newly inserted by the Finance Act, 1992 with effect from 1-4-1993. The
term “Assets” has been broadly modified. The following terms are not “Assets”, and the term
“Assets” does not include them.
1. A house meant exclusively for residential purposes and allotted to a whole-time
employee, officer or director of a company, whose gross annual salary is less than
Rs2,00,000/-
2. A residential house, jewellery, bullion and other precious articles, used as stock-in-
trade;
3. Motor cars used in the business of running them on hire or as stock-in-trade;
4. Yachts, boats and aircrafts used for commercial purpose;
5. Urban land on which construction is not permissible;
6. Urban land occupied by any building which has been constructed with the approval of
the appropriate authority;

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 7. Any unused land for industrial purposes for a period of two years from the date of its
acquisition; and
8. Urban land held by the assessee as stock-in-trade for a period of three years from the
date of its acquisition.
Section 2 (m) of the Wealth-tax Act, 1957 defines “net wealth”
Sec 2(m) “Net wealth” means the amount by which the aggregate value-computed in
accordance with the provisions of this Act of all the assets, wherever located, belonging to the
assessee on the valuation date, including assets required to be included in his net wealth as on
that date under this Act, is in excess of the aggregate value of all the debts owed by the
assessee on the valuation date which have been incurred in relation to the said assets.
IMPORTANT POINTS:
A. Net worth is the value of the excess of assets over liabilities.
B. The net wealth is chargeable to pay wealth tax under Section 3
C. Before 1-4-1993, there were different rates of wealth taxes on net wealth belonging to
individuals, HUFs, Companies. The Finance Act, 1992 removed such differences. Now
there is only one slab rate on all the individuals, HUFs, Companies @ 1% over 15 lakhs
net wealth.
D. Firms, co-operative societies, social clubs, political parties are not liable to pay wealth
tax
E. The basic principle is that while computing the net wealth of an assessee, the assets
must belong to him. However, in certain occasions, he may be treated as deemed owner
over certain properties not belonging to him. (Refer Deemed assets)
F. The liability of wealth-tax is a personal liability of the assessee. It is created by the
statute.
G. Debts: The aggregate value of the debts/liabilities of the assessee owed on the
valuation date shall be deducted from the wealth so that the net wealth is computed.
H. Deemed Assets: Section 4 of the Wealth-tax Act includes certain assets not belonging to
the assessee, and clubs such properties alongwith his properties. Example: The assets
of his minor son or his wife shall be included in the net wealth of the assessee. Such type
of assets are called “Deemed Assets”. Section 4 gives an elaborate list of such “Deemed
Assets”.
EXEMPTIONS IN RESPECT OF CERTAIN ASSETS
Section 5 of the Wealth-tax Act relaxes and grants exemptions in respect of certain assets, and
the wealth-tax shall not be payable by an assessee in respect of such exempted assets. Such
assets shall not be included in the net wealth of the assessee. They are:
1. Trust: Any property held by him under Trust or other legal obligation for any public
purpose of a charitable or religious nature in India.
2. Coparcener property: The interest of the assessee in the coparcenary property of any
Hindu undivided family of which he is a member.
3. Building of Ruler: Any one building in the occupation of a Ruler, being a building
which immediately before the commencement of the Constitution (26th Amendment)
Act, 1971, was his official residence by virtue of a declaration by the Central
Government under paragraph 13 of the Merged States (Taxation Concessions) Order,
1949, or paragraph 15 of the Part-B States (Taxation Concessions) Order, 1950.

30
4. Jewellery in possession of Ruler: Jewellery in the possession of any Ruler, not being
his personal property, which has been recognised before the commencement of this
Act, by the Central Government in this behalf, recognise as his heirloom at the time of
his first assessment to wealth-tax under this Act.
5. Foreign returned: In the case of an assessee, being a person of Indian origin or a
citizen of India, who was ordinarily residing in a foreign country and who, on leaving
such country, has returned to India with the intention of permanently residing therein,
moneys and the value of assets brought by him into India and the value of the assets
acquired by him out of such moneys within one year immediately preceding the date of
his return and at any time thereafter. This exemption shall apply only for a period of
seven successive assessment years commencing with the assessment year next
following the date on which such person returned to India.
6. One House: One house or part of a house belonging to an individual or a Hindu
undivided family.

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RESIDENTIAL STATUS OF AN ASSESSEE
NEED TO DETERMINE RESIDENTIAL STATUS?
The total income is different in case of a person resident of India and a person non-resident in
India. Further, in case of an individual and HUF being “not ordinarily resident in India”, the
meaning of total income shall be slightly different. Since the total income of an assessee varies
according to such residential status in India.
Tax is levied on total income of assessee. Under the provisions of Income-tax Act, 1961 the
total income of each person is based upon his residential status. Section 6 of the Act divides the
assessable persons into three categories:
(i) Ordinary Resident;
(ii) Resident but Not Ordinarily Resident; and
(iii) Non-resident
Residential status is a term coined under Income Tax Act and has nothing to do with nationality
or domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax
purposes, whereas an American who is a citizen of America can be resident of India for
Income-tax purposes. Residential status of a person depends upon the territorial connections
of the person with this country, i.e., for how many days he has physically stayed in India.
The residential status of different types of persons is determined differently. Similarly, the
residential status of the assessee is to be determined each year with reference to the “previous
year”. The residential status of the assessee may change from year to year. What is essential is
the status during the previous year and not in the assessment year.
IMPORTANT POINTS:
1) Residential status in a previous year: Residential status is to be determined for each
previous year. It implies that –
a. Residential status of assessment year is not important
b. A person may be resident in one previous year and a non-resident in India in
another previous year, e.g., Mr. A is resident in India in the previous year 2018-
19 and in the very next year he becomes a non-resident in India.
2) Duty of Assessee: It is assessor’s duty to place relevant facts, evidence and material
before the Income Tax Authorities supporting the determination of Residential Status.
3) Dual Residential Status is possible: A person may be resident of one or more
countries in a relevant previous year e.g., Mr. X may be resident of India during
previous year 2018-19 and he may also be resident/non-resident in England in the same
previous year. The emergence of such a situation depends upon the following:
a. The existence of the Residential status in countries under considerations
b. The different set of rules having laid down for determination of residential status

32
Determination of Residential status of different “Persons”
As we know that Income tax is charged on every person. The term “Person” has been defined
under Section 2(31) includes:
A. An individual
B. Hindu Undivided Family (HUF)
C. Firm
D. Company
E. AOP/BOI
F. Local Authority
G. Every other artificial juridical person not falling in preceding six sub-classes
Therefore, it is essential to determine the residential status of above various types of persons
and now we shall learn the calculation of residential status of each type of person.
Basic rules for determining Residential Status of an Assessee
The following basic rules must be kept in mind while determining the residential status:

• Residential status is determined for each category of persons separately e.g. there are
separate set of rules of determining the residential status of an individual and separate
rules for companies etc.,
• Residential status is always determined for the previous year because we have to
determine the total income of the previous year only
• Residential status of a person is to be determined for every previous year because it
may change from year to year. For example: A, who is resident of India in the previous
year 2017-18, may become a non-resident in previous year 2018-19
• If a person is resident in India in a previous year relevant to an assessment year in
respect of any source of income, he shall be deemed to be resident in India in the
previous year relevant to the assessment year in respect of each of his other source of
income [Section 6(5)]
• A person may be a resident of more than one country for any previous year. If Y is a
resident in India for previous year 2017-18, it does not mean that he cannot be a
resident of any other country for that previous year.
• Citizenship of a country and residential status of that country are separate concepts. A
person may be an Indian national/citizen, but may not be a resident in India. On the
other hand, a person may be a foreign national/citizen, but may be a resident of India.
• It is the duty of the assessee to place all material facts before the assessing officer to
enable him to determine his correct residential status.

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 COMPANY
Every Indian company[ i.e. A company cannot Any company, which is
which is incorporated under enjoy this status incorporated outside
Indian Law or is deemed as India and has its control
company under any law of the or management outside
country] is Resident of India during relevant
company. previous year is non-
In case of any other company, resident company.
which is incorporated outside
India but has its control or
management in India during
relevant previous year is also
a resident company
IN CASE OF EVERY OTHER PERSON
In case of every other person, Any other person Any other person, which
which has its control or cannot enjoy this has its control or
management wholly in India status management wholly
during relevant previous year outside India during
is resident relevant previous year is
non-resident.

Previous Year and Assessment Year - Assessment Year [Sec 2(9)]

According to Section 2(9) of the Income Tax Act, 1961, ‘assessment year’ means the period of
twelve months commencing on the 1st day of April every year. For instance, the assessment
year 2002-03 which commenced on April 1, 2002 will end on March 31, 2003. The period of
assessment year is fixed by statute. Income of previous year of an assessee is taxed during the
following assessment year at the rates prescribed for such assessment year by the relevant
Finance Act.
Previous Year [Sec 2(34) and Section 3]
According to Section 2(34) of the Income Tax Act, 1961, ‘previous year’ means the previous
year as defined in Section 3.For the purpose of this Act, ‘previous year’ means the financial
year immediately preceding the assessment year. Financial year starts from April 1 of every
year and ending on March 31 of the next year.
Income earned in a financial year is taxable in the following financial year. The year in which
income is earned is known as precious year and the next year in which income is known as
assessment year. For example, the income earned during the financial year 2001-2002 (i.e.,
assessment year). Previous year in the case of newly set-up business or profession:-
According to the proviso of Section 3, in the case of a business or profession newly set-up, or a
source of income newly coming into existence, in the said financial year, the previous year
shall be the period of beginning with the date of setting up of the business or profession or, as
the case may be, the date on which the source of income newly comes into existence and
ending with the said financial year.
Thus, in the case of a newly set up business or profession or new source of income, the first
previous year is a period of 12 months or less than 12 months. It can never exceed 12 months.
The second and subsequent previous years are always of 12 months each (i.e., April to March).

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The following are the incomes from other sources:
1. DIVIDENDS: Dividends are taxable under this head, even if they are derived from
shares held as stock-in-trade. They are taxable in the hands of a registered shareholder.
Every company maintains “Register of Shareholders”. Suppose, A is the registered
shareholder of a company. If he receives dividend from such company, his income shall
be computed under the head “Income from other sources”. A sells his shares to B, but
B’s name has not been yet registered in place of A, A receives the dividends from the
company, being a registered holder, and gives such income to B. The income on the
dividends of B shall be computed under the head “income from business-and-
profession”, not under the head “income from other sources”.
The dividend is deemed to be the income of the previous year in which it is declared,
distributed or paid. The quantum of dividend assessable to tax would be the fair market
value of the shares on the date of declaration of dividend. Generally, the companies pay
the dividends after deducting, the tax, and pay the T.D.S. The shareholder receives the
‘net’ dividend after deduction of tax at prescribed rates. Here, one important point is to
be noted that the amount chargeable to tax is the gross amount of the dividend, and not
net. Gross amount means the amount received as dividend + the amount of tax
deducted at source. Dividend paid by an Indian company outside India shall be deemed
to accrue or arise in India. Agricultural income is exempted from the tax. But the
dividends declared by an Agricultural company are not exempted. No deduction on
account of agricultural income of the company will be allowed to the shareholder.
However, amount received by way of dividend from the company out of compensation
of agricultural land received by the company is not assessable.
Deductions: While computing the taxable income derived from dividends, the following
deductions are allowed:
(i) Expenses incurred to procure such dividends, viz. bank charges, postal charges,
etc.
(ii) Interest paid on loans taken for purchase of shares, on which such dividends are
declared.

2. LOTTERY, CROSSWORD PUZZLES, ETC: Income derived from any lottery,

crossword puzzles, races including horse races, card games, gambling, betting etc. are
the casual income. Such casual income shall have to be included in the gross total
income.
3. HIRE OF MACHINERY, PLANT ETC: Where an assessee lets his machinery, plant,
buildings (inseparable from such machinery, plant), vacant land on hire, such income
shall be computed under this head, if it is not chargeable to income-tax under the head
“Profits and Gains of Business or Profession”.
4. INTEREST ON SECURITIES: Previously, there was a separate head “B. Interest on
Securities”. However, it was omitted by the Finance Act, 1988 with effect from 01-04-
1989. Now the income accrued on the interest on securities is computed under the head
“Income from other sources”.

35
Definition: Section 2 (28B) defines “interest on securities”.
Sec.2(28B) “interest on securities” means –
(i) Interest on any security of the Central Government or State Government;
(ii) Interest on debenture or other securities for money issued by or on behalf of a
local authority or a company or a corporation established by a Central, State
or Provincial Act.
MEANING:
Interest = Interest is the return which a person receives from another person for
bearing the risk of parting with the money and losing the income which he would have
received on such money had he deposited it in a Bank. It simply means the return
received by a creditor who has given his money as debt.
Security = A security is a document acknowledging the debt taken by a specific
authority from general public. Such acknowledgement is called “Debt”, “Loan”,
“Debenture”, “Security”, “Pronote”, “Certificate”, “Bonds” etc.
CONTENTS OF SECURITY: (1) The Central Government, (2) A State Government, (3) A
Local Authority, (4) A Company, (5) A Statutory Corporation may issue security. Such
security contains face value of date of maturity, rate of interest, date, place and period of
payment of interest, name/s of the security holder/s, etc. Securities are transferable.
Computation: Interest is taxable on due basis. It is immaterial whether the assessee
received such interest or not. Interest accrues to an assessee during the previous year,
and such interest is added in his gross total income, it is the liability of the security-
issuing authority to deduct the tax at source under section 193 before he makes the
payment to assessee, and such authority shall have to deposit the tax under the
Government account. There are few sections, no TDS shall be deducted at the payment
of interest. They are: 7-year National Savings Certificate (4th issue), National Defence
Bonds, Gold Bonds, National Development Bonds etc.

36
Sections 90 and 91 of the Income Tax Act, 1961 explain about “Double Taxation Relief”
MEANING: Where a resident tax-payer accrues income from source in another country, and
such income is charged to tax in both the countries, viz. country of residence of the tax-payer
and the country of the source of income. It imposes heavy burden upon the tax-payer. To avoid
such type of double taxation, the Indian Government has entered into agreement with foreign
countries, and to allow the tax-payer to pay tax in any one country convenient and beneficial to
him. This type of relief is called “Double Taxation Relief”.
OBJECT: Double Taxation causes heavy burden upon the tax-payer. Keeping in view of the
difficulties of such type of tax-payers, the Income Tax Act gives the relief in Section 90 and 91.
IMPORTANT POINTS:
A. The Indian Government may enter into bilateral agreements with other countries for
providing the double taxation relief to its citizens. Recently when Sri P.V.Narasimha Rao
visited America, our Government entered into a bilateral agreement with country to
have double taxation relief to tax-payers. Like this, India had entered agreements with
other countries.
B. AGREEMENTS: The Central Government may enter into an agreement with the
Government of any country outside India:
a. For the granting of relief in respect of income on which have been paid both
income-tax under the Income Tax Act, 1961 and the income-tax in that country, or
b. For the avoidance of double taxation of income under I.T.Act 1961 and under the
corresponding law in force in that country, or
c. For exchange of information for the prevention of evasion or avoidance of
income-tax chargeable under the I.T.Act or under the corresponding law in force
in that country, or investigation of cases of such evasion or avoidance, or
d. For recovery of income-tax under the I.T.Act and under the corresponding law in
force in that country.
And may, by notification in the Official Gazette, make such provisions as may be
necessary for implementing the agreement. Sec.90(1)
C. The agreement entered into by the two countries contains two alternatives:
a. Income which arises in one of the contracting States, is not taxed by other
contracting State. However, such income can be taken into account by the latter
State for determining the rate of tax applicable to the tax-payers other income, if
the law of that State so requires.
b. Income is taxed in both the countries according to their respective tax laws.
However, the country of the residence of the tax-payer allows him a credit against
the tax charged thereon in the country of the source of such income.
The provisions of the Income-Tax Act,1961 shall apply to the extent they are more
beneficial to that assessee. (Sec.90(2)).
D. Relief in case, where no agreement exists: Section 90 of the Income Tax Act provides the
relief to a tax-payer in case of whom income accrues in another country to which our
Indian Government has contract. Section 91 of the Income Tax Act grants the relief to the
tax-payers of the country to which India has no agreements. For ex: India has no
agreement with Pakistan.

37
E. Section 91(1) provides that if any person who is resident in India in any previous year
proves that in respect of his income which accrued or arose during that previous year
outside India (and which is not deemed to accrue or arise in India), he has paid in any
country with which there is no agreement under section 90 for the relief of avoidance of
double taxation, income-tax, by deduction or otherwise, under the law in force in that
country, he shall be entitled to the deduction from the Indian income-tax payable by
him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate
of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the
rates are equal.
F. Sectio1n 91(2) provides that if any person who is resident in India in any previous year
proves that in respect of his income which accrued or arose to him during that previous
year in Pakistan he has paid in that country, by deduction or other-wise, tax payable to
the Government under any law for the time being in force in that country relating to
taxation of agricultural income, he shall be entitled to a deduction from the Indian
income-tax payable by him –
a. Of the amount of the tax paid in Pakistan under any law aforesaid on such income
which is liable to tax under this Act also: or
b. Of a sum calculated on that income at the Indian rate of tax; whichever is less.
G. Section 91(3) lays down that if any non-resident person is assessed on his share in the
income of a registered firm assessed as resident in India in any previous year and such
share includes any income accruing or arising outside India during that previous year
(and which is not deemed to accrue or raised in India) in a country with which there is
no agreement under Section 90 for the relief or avoidance of double taxation and he
proves that he has paid income-tax by deduction or otherwise under the law in force in
that country in respect of the income so included he shall be entitled to a deduction from
the Indian income-tax payable by him of a sum calculated on such doubly taxed income
so included at the Indian rate of tax of the said country, whichever is the lower, or at the
Indian rate of tax if both the rates are equal.

38
Chapter-XVII deals with collection and recovery of tax. Sections from 190 to 206C explain
about the provisions about the deduction of tax at sources.
MEANING: Generally, the income-tax is payable at the end of the assessment year. In certain
occasions, the assessee pays the payments to certain persons, who may or may not be the
assesses under the income-tax Act. For ex: an agriculturist deposits Rs50,000/- in a bank. The
interest accrued on it may be Rs6000/- in the year. He is not an assessee. The Bank authorities,
while paying the interest to him, shall have to deduct @10% on Rs3500/- (Rs2500/- is
exempted). Similarly A wins Rs1,00,000/- in a State lottery. The Lottery Authorities while
paying the amount shall have to deduct the tax @40% and pay such amount to the Government
at the same time. It is called “Deduction of tax at source”.
OBJECT: The provisions of Chapter XVII (TDS) are intended to avoidance and evasion of tax.
The tax is collected on the spot at the immediate source of income. The tax can successfully be
collected from the non-assessee/assesses at the time of income source, imposing the liability
upon the persons paying such huge amounts. It proved successful. A good revenue is proved
fact of its success.

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 VARIOUS PAYMENTS ON WHICH TAX HAS TO BE DEDUCTED AT SOURCE
Chapter XVII deals with collection and recovery of tax. Part-B of Chapter-XVII explains about
deduction at source from section 192 to 206B.
1. SALARIES: Section 192 deals with tax to be deducted at the payment of salaries. It lays
down that any person responsible for paying any income of chargeable under the head
“salaries” shall, at the time of payment, deduct income-tax on the amount payable at the
average of income-tax computed on the basis of the rates in force for the financial year
in which the payment is made, on the estimated income of the assessee under this head
for that financial year.
2. INTEREST ON SECURITIES: Section 193 provides that the person responsible for
paying any income by way of interest on securities shall, at the time of credit of such
income to the account of the payee or at the time of payment thereof in cash or by issue
a cheque or draft by any other mode, whichever is earlier, deduct income-tax at the
rates in force on the amount of the interest payable. Interest on securities are taxable if
the amount exceeds Rs2500/- in a year. Section 193 also gives certain exemptions, viz.
no tax shall be deducted from any interest payable on 4 ½% National Defence Bonds, 7-
year National Savings Certificates, Gold Bonds, 198, etc.
3. DIVIDENDS: Section 194 provides that the principal officer of an Indian Company or a
company which has made the prescribed arrangements for the declaration and
payment of dividends (including dividends on preference shares) within India, shall
before making any payment in cash or before issuing any cheque or warrant in respect
of any dividend or before making any distribution or payment to a shareholder, who is a
resident in India of any dividend, deduct from the amount of such dividend, income-tax
at the rates in force. If the dividend amount does not exceed Rs2500/- no tax shall be
deducted.
4. INTEREST OTHER THAN “INTEREST ON SECURITIES”: Sec 194A lays down that
any person, not being an individual, or a HUF, who is responsible for paying to a
resident any income by way of interest other than income by way of interest on
securities, shall, at the time of credit of such income to the account of the payee or at the
time of payment thereof in cash or by issue of a cheque or draft or by any other mode,
whichever is earlier, deduct income-tax thereon at the rates in force. Interest other than
interest on securities not exceeding Rs2500/- is exempted.
5. WINNINGS FROM LOTTERY OR CROSSWORD PUZZLE: Section 194B provides that
the person responsible for paying to any person any income by way of winnings from
any lottery or crossword puzzle in an amount exceeding Rs5000/- shall, at the time of
payment thereof, deduct income-tax.
6. WINNINGS FROM HORSE RACE: Section 194BB provides that any person, being a
bookmaker or a person to whim a licence has been granted by Government under any
law for the time being in force for horse racing in any race course or for arranging for
wagering or betting in any race course, who is responsible for paying to any person any
income by way of winnings from any horse race in an amount exceeding Rs 2500/- shall,
at the time of payment thereof, deduct income-tax.
7. PAYMENTS TO CONTRACTORS AND SUB-CONTRACTORS: Section 194C lays down
that any person responsible for paying any sum to any contractors and sub-contractors,
in pursuance of a contract for a works-contract exceeding Rs 10,000/- shall at the time of
credit of such sum to the account of the contractor or at the time of payment thereof in
cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct

40
 an amount equal to two percent (2%) of such sum as income-tax on income comprised
therein.
8. INSURANCE COMMISSION: Section 194D provides that any person responsible for
paying to a resident any income by way of remuneration or reward, whether by way of
commission or otherwise, for soliciting or procuring insurance business shall, at the
time of credit of such income to the account of the payee or at the time pf payment
thereof in case or by issue of cheque or draft or by any other mode, whichever is
earlier, deduct income-tax thereon at the rates in force. If the amount does not exceed
Rs 5000/- no tax shall be deducted.
9. PAYMENTS TO NON-RESIDENT SPORTSMEN OR SPORTS ASSOCIATION: Section
194E lays down that where any income referred to in Section 115BBA is payable to a
non-resident sportsman (including an athlete) who is not a citizen of India or a non-
resident sports association or institution, the person responsible for making the
payment shall, at the time of credit of such income to the account of the payee or at the
time of payment thereof in case or by issue of cheque or draft or by any other mode,
whichever is earlier, deduct income-tax thereon at the rate of 10 percent.
10. PAYMENTS IN RESPECT OF DEPOSITS UNDER NATIONAL SAVING SCHEME etc:
Section 194EE lays down that the person responsible for paying to any person any
amount referred to in Section 80CCA(2)(a) shall, at the time of payment thereof, deduct
income tax thereon at the rate of 20%. If the payment is less than Rs 2500/-, no tax shall
be deducted. No tax shall be deducted where such payment is made to the heirs of the
assessee.
11. REPURCHASE OF UNITS BY MUTUAL FUND OR UNIT TRUST OF INDIA: Section
194F provides that the person responsible for paying to any person any amount referred
to in Sec.80CCB(2) shall, at the time of payment thereof, deduct income-tax thereon at
the rate of twenty percent (20%).
12. COMMISSION ETC., ON THE SALE OF LOTTERY TICKETS: Section 194G lays
down that any person who is responsible for paying, on or after 01-10-1991, to any
person, who is or has been stocking, distributing, purchasing or selling lottery tickets,
any income by way of commission, remuneration or prize (by whatever name called) on
such tickets in an amount exceeding Rs1000/- shall, at the time of credit of such income
to the account of the payee or at the time of payment of such income in cash or by the
issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-
tax thereon @10%.
13. COMMISSION, BROKERAGE ETC.,: Section 194H lays down that any person, not
being an individual Hindu Undivided Family, who is responsible for paying, on or after
01-10-1991, but before 01-06.1992, to resident, any income by way of commission (not
being insurance commission referred to in section 194D) or brokerage, shall, at the time
of credit of such income to the account of the payee or at the time of payment of such
income in cash or by the issue of a cheque or draft or by any other mode, whichever is
earlier, deduct income-tax thereon at the rate of 10%. The tax is not deductable in the
commission, brokerage is less than Rs2500/-
14. RENT: It is new provision, Section 194-I lays down that any person, not being an
individual or a HUF, who responsible for paying to any person any income by way of
rent, shall, at the time of credit of such income to the account of the payee or at the time
of payment thereof in cash or by the issue of cheque or draft or by any other mode,
whichever is earlier, deduct income-tax thereon @20%. Such tax shall be imposed on
the rent amount exceeding Rs1,20,000/- in a financial year.

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15. OTHER SUMS: Section 195 provides any person responsible for paying to a non-
resident, not being company, or to a foreign company, any interest (not being interest
on securities) or any other sum chargeable under the provisions of this Act (not being
income chargeable under the head “Salaries” shall, at the time of creation of such
income to the account of the payee or at the time of payment thereof in cash or by the
issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax
thereon at the rates in force.
16. Section 196-A: imposes tax on income payable in respect of units of a Mutual Fund
specified under Sec 10(23D) to Unit holder being a foreign company and such tax shall
be deducted at source.
17. Section 196-B: imposes tax on income (including long-term capital gains) arising in
respect of units referring to in Section 115AB, payable to an Offshore Fund, and such tax
shall be deducted at source.
18. Section 196-C: Imposes tax on income (by way of interest or dividends or long-term
capital gains) arising from foreign currency bonds or shares of Indian Company to a
non-resident under Section 115AC, and such tax shall be deducted at source.
19. Tax on services: The Central Board of Direct Taxes issues a Circular No.681 dated 08-
03-1994, instructing deduction of tax at source with effect from 01-04-1994 on payments
made for services rendered by lawyers, physicians, surgeons, engineers, accountants,
architects, consultants etc. The rate of tax is @2% if the payment exceeds Rs10,000/- in
a financial year.

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 CAPITAL GAIN
Capital assets are self-generated assets. These are transferable from one person to another.
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”, and shall be deemed to be
the income of the previous year in which the transfer took place. Capital gain is accrued by
two ways i.e. (i) short-term capital gain is a capital gain arising from the transfer of short-term
capital asset; and (ii) long-term capital gain arising from the transfer of a long-term capital
asset.
The following are the essential characteristic features of capital gain. They are:
1. TRANFERABILITY: Transferability is an essential characteristic feature of capital assets.
Due to transfer of capital asset from one person to another, the value increases. The
enhancement of value depends upon the period, locality, and other factors in the country.
Ex: (a) A purchased a house from B in 1978 for Rs 1,00,000/- A sold the said house for Rs
5,00,000/- to C in 1993. The difference between sale and purchase is Rs 4,00,000/- This four
lakh sum is capital gain; (b) A purchased a house from B in 1990 for Rs 1,00,000/-. A sold
the said house for Rs 80,000/- to C in 1992. The difference between sale and purchase is Rs
20,000/- This twenty thousand sum is capital loss.
2. VALUATION: Valuation is another characteristic feature of capital asset. Every capital asset
can be transferred by way of consideration. Consideration must be “fair market value”,
whether it is short-term or long-term. Section 2(22B) defines “Fair market value”.
Section 2(22B) “Fair market value”, in relation to a capital asset, means –
(i) The price that the capital asset would ordinarily fetch on sale in the open market
on the relevant date; and
(ii) Where the price referred to in sub-clause (i) is not ascertainable, such price as
may be determined in accordance with the rules made under this Act.
Enhancement of value is the characteristic feature of capital assets. They are self-
generated assets. Due to several factors, the value of the capital assets is increased
generally. Change of Central Government’s policies, change of State Government’s
policies, establishment of new factories, mines, increasing population, laying roads,
bridges, rupee devaluation, crazy in public, scarcity of the production, rumours, change
of governments, religious riots, etc. etc. are the reasons for enhancement of rates of
assets.
3. PREVIOUS YEAR: Any profits or gains arising from the transfer of capital asset effected in
the previous year, shall be chargeable to income-tax and shall be deemed to be the
income of the previous year in which the transfer took place.
4. CONVERSION: The profits or gains arising from the transfer by way of conversion by the
owner of a capital asset into or its treatment by him, as stock-in-trade of a business carried
on by him shall be chargeable to income-tax as his income of the previous year in which
such stock-in-trade is sold or otherwise transferred by him and , for the purposes of
computation, the fair market value of the asset on the date of such conversion or treatment
shall be deemed to be the full value of the consideration received or accruing as a result of
the transfer of the capital asset.
5. PARTNERSHIP FIRM: The profits or gains arising from the transfer of a capital asset by a
person to a firm or other association of persons or body of individuals (not being a
company or a co-operative society) in which he is or becomes a partner or member, by
43
 way of capital contribution or otherwise, shall be chargeable to tax as his income of the
previous year in which such transfer takes place and for the purpose of computation the
amount recorded in the books of account of the firm, association or body as the value of the
capital asset shall be deemed to be the full value of the consideration received or accruing
as a result of the transfer of the capital asset.
6. DISTRIBUTION OF CAPITAL ASSETS: The profits or gains arising from the transfer of a
capital asset by way of distribution of capital assets on the dissolution of a firm or other
association of persons or body of individuals (not being a company or a co-operative
society) or otherwise, shall be chargeable to tax as the income of the firm, association of or
body, of the previous year in which the said transfer takes place and, for the purposes of
computation, the fair market value of the asset on the date of such transfer shall be deemed
to be the full value of the consideration received or accruing as a result of the transfer.
7. COMPULSORY ACQUISITION: Where the capital gain arises from the transfer of a capital
asset, being a transfer by way of compulsory acquisition under any law, or a transfer the
consideration for which was determined or approved by the Central Government or the
Reserve Bank of India, and the compensation or the consideration for such transfer is
enhanced or further enhanced by any court, tribunal or other authority, the capital gain
shall be dealt with in the following manner, namely:
a. The capital gain computed with reference to the compensation awarded in the first
instance or, as the case may be, the consideration determined or approved in the
first instance by the Central Government or the Reserve Bank of India shall be
chargeable as income under the head “Capital gains of the previous year” in which
such compensation or part thereof, or such consideration or part thereof, was first
received; and
b. The amount by which the compensation or consideration is enhanced or further
enhanced by court, tribunal or other authority shall be deemed to be income
chargeable under the head “Capital gains” of the previous year in which such
amount is received by the assessee.
8. UNITS: The difference between the repurchase price of the units under Equity Linked
Savings Schemes and the capital value of such units shall be deemed to be the capital gains
arising to the assessee in the previous year in which such repurchase takes place.
9. AGRICULTURAL LANDS: Where the agricultural lands or buildings appurtenant thereto
are utilised purely for agricultural purpose, then such asset is not capital asset for the
purpose of Section 45, and is not chargeable to income-tax. If the agricultural land is sold
for the establishment of a factory, or house-sites, then such transaction and capital gain are
dealt as “Capital gain” and shall be taxed.

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RESIDENTIAL STATUS IN NUTSHELL
Ordinary Resident Resident but not Ordinary Non-Resident
Resident (NOR)
INDIVIDUAL
(a) He was in India for a (a) He was in India for a period or He fails to fulfil
period or periods periods totalling in all to 182 both the tests of
totalling in all to 182 days or more during relevant section 6(1)
days or more during previous year
relevant previous OR
year (b) He was in India for a period or
(OR) periods totalling in all to
(b) He was in India for a 60days or more during
period or periods relevant previous year and
totalling in all to 60 365 days or more during four
days or more during previous years preceding the
relevant previous relevant previous year. AND
year and 365 days or U/s6(6) was non resident in 9
more during four or 10 previous years out of 10
previous year. AND previous years preceding
Must be Resident in relevant previous year;
India in 2 out of 10 OR
previous years was in India for less than
preceding the 730days during 7 previous
relevant previous years preceding the relevant
year AND previous year.
Must be Resident in
India for 730 days or
more during 7
previous years
preceding the
relevant previous
year.
HUF, FIRM, AOP,
BOI
If control or This status is allowed only to HUF If control or
management of HUF, and others cannot claim it. HUF management of
FIRM, AOP, BOI was shall be NOR if its Karta can fulfil such HUF, FIRM,
wholly or partially in any one of the two tests given U/s AOP, BOI was
India during relevant 6(6) for an individual wholly outside
previous year India during
relevant
previous year.

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 RELEVANT IMPORTANT PROVISIONS OF AP GENERAL TAX AND VAT LAWS
VALUE ADDED TAX (VAT)
The Value Added Tax (VAT) in India is a state level multi-point tax on value addition which is
collected at different stages of sale with a provision for set-off for tax paid at the previous stage
i.e., tax paid on inputs. It is to be levied as a proportion of the value added (i.e. sales minus
purchase) which equivalent is to wages plus interest, other costs and profits. It is a tax on the
value added and can be aptly defined as one of the ideal forms of consumption taxation since
the value added by a firm represents the difference between its receipts and cost of purchased
inputs. Value Added Tax is commonly referred to as a method of taxation whereby the tax is
levied on the value added at each stage of the production/distribution chain. As against the
existing regime under which goods are charged to tax at Single point, or multi-point on the
value of the goods. Without any credit being given for taxes paid at the preceding stages. VAT
intends to tax only the value added at each stage and not the entire invoice value of the
product. By ensuring that only the incremental value is taxed, VAT aims at eliminating the
cascading effect of taxes on commodities, and thereby reduces the eventual cost to the
consumer.
It is one of the most radical reforms, albeit only in the sphere of State level taxes on sale, those
have been initiated for the Indian economy after years of political and economic debate
aiming at replacing complicated tax structure to do away with the fraudulent practices.
Advantages:
Various advantages of introducing VAT:
a. To encourage and result in better-administering system;
b. To eliminate avenues of tax evasion;
c. To avoid under valuation at all stages of production and distribution;
d. To claim credit on tax paid on inputs at each stage of value addition;
e. Do away with cascading effect resulting in non distortion of the business decisions;
f. Permits easy and effective targeting of tax rates as a result of which the exports can be
zero-rated;
g. Ensures better tax compliance by generating a trail of invoices that supports effective
audit and enforcement strategies;
h. Contribution to fiscal consolidation for the country. As a steady source of revenue, it
shall reduce the debt burden in due course
i. To help our country to integrate better in the WTO regime
j. To stop the unhealthy tax-rate was and trade diversion among the States, which had
adversely affected the interests of all the States in the past.

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Different methods of computation of VAT:
VAT can be computed by using any of the three methods detailed below:
(1) The subtraction method:
Under this method the tax rate is applied to the difference between the value of output
and the cost of input;
(2) The addition method:
Under this method the value added is computed by adding all the payments that are
payable to the factors of production (viz. wages, salaried, interest payments, etc);
(3) Tax Credit method:
Under this method, it entails set-off of the tax paid on inputs from tax collected on sales.
Indian States opted for tax credit method, which is similar to CENVAT;
Rate of Tax:
Four types of VAT rates: As contrasted to the multiplicity of rates under the existing regime.
VAT will have 4 broad rates.
1. 0% (exempted) for unprocessed agricultural goods, and goods of social importance,
1% for previous and semiprecious metals,
2. 4% for inputs used for manufacturing and on declared goods, capital goods and other
essential items,
3. 20% for demerit/luxury goods and
4. The rest of the commodities will be taxed at Revenue Neutral Rate of 12.5%
Registration:
Every dealer up to the retailer level is required to be registered with the Sales Tax department
to avail the credit of input tax. However, there would be a threshold turnover level. The
retailers with turnover below the threshold turnover level can opt not to register, but pay a
nominal composition tax. However, such dealers are not entitled to take credit of prior stage
tax, nor can they pass the credit to their buyers. In effect, the VAT chain breaks at their stage.
Those opting not to register under VAT can opt for general registration.
Registration of dealers with gross annual turnover above the threshold limit will be
compulsory. There will be provision for voluntary registration for dealers with gross annual
turnover of less than the threshold limit. All existing dealers will be automatically registered
under the VAT Act. A new dealer will be allowed 30days time from the date of his being liable
to get registered.
7. Where, in the case of an individual being a member of a HUF, any property having been the
separate property of the individual has, at any time after the 31st day of December, 1969, been
converted by the individual into property belonging to the family through the act of
impressing such separate property with the character of property belonging to the family or
throwing it into the common stock of the family or been transferred by the individual, directly
or indirectly, to the family otherwise than for adequate consideration (the property so
converted or transferred being hereinafter referred to as the converted property), then not-
withstanding anything contained in any other provision of this Act or in any other law for the
time being in force for the purpose of computing the net wealth of the individual under this Act
for any assessment year commencing on or after the 1 st day of April, 1972 –

47
a) the individual shall be deemed to have transferred the converted property, through the
family, to the members of the family for being held by them jointly;
b) the converted property or any part thereof shall be deemed to be assets belonging to the
individual and not to the family;
c) where the converted property has been the subject-matter of a partition (whether partial or
total) amongst the members of the family, the converted property or any part thereof which is
received by the spouse of the individual on such partition shall be deemed to be assets
transferred indirectly by the individual to the spouse and the provisions of sub-section(1) shall
so far as may be, apply accordingly. Sec.4(1A)
8. The value of any assets transferred under an irrevocable transfer shall be liable to be
included in computing the net wealth of the transferor as and when the power to revoke arises
to him Sec.4(5)
9. Where the gift of money from one person to another is made by means of entries in the
books of account maintained by the person making the gift or by an individual or a HUF or a
firm or an association of persons or body of individuals with whom or which he has business or
other relationship, the value of such gift shall be liable to be included in computing the net
wealth of the person making the gift unless he proves to the satisfaction of the Assessing
Officer that the money has actually been delivered to the other person at the time the entries
were made. Sec.4(5A)
10. For the purposes of this Act, the holder of an impartible estate shall be deemed to be the
individual owner of all the properties comprised in the estate Sec.4(6)
11. Where the assessee is a member of an association of persons, being a co-operative
housing society, and a building or a part thereof is allotted or leased to him under a house
building scheme of the society, the assessee shall, notwithstanding anything contained in this
Act or any other law for the time being in force, be deemed to be the owner of such building or
part and the value of such building or part shall be included in computing the net wealth of the
assessee to the society towards the cost of such building or part and the land appurtenant
thereto shall, whether the amount so payable is described as such or in any other manner in
such scheme, be deducted as a debt owned by him in relation to such building or part.
Sec.4(7).

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