Topic 1: Introduction to Taxation Law

Concepts of Tax, Cess, and Surcharge

1. Tax:

o A mandatory financial charge imposed by the government to generate

revenue for public purposes.

o Types:

▪ Direct Taxes: Paid directly by individuals or entities to the

government (e.g., Income Tax).

▪ Indirect Taxes: Collected by intermediaries (e.g., GST).

2. Cess:

o A tax levied for a specific purpose (e.g., Education Cess).

o Applied as an additional charge on tax liability.

3. Surcharge:

o An additional charge on tax, typically imposed on individuals earning

above a certain threshold or entities with high profits.

Types of Taxes

1. Direct Taxes: Levied directly on income or wealth, such as:

o Income Tax

o Corporate Tax

2. Indirect Taxes: Levied on goods and services, such as:

o GST (Goods and Services Tax)

o Customs Duty

Definition of Income

• Section 2(24) of Income Tax Act, 1961:

Includes:

o Profits and gains.

o Dividends.
 o Voluntary contributions to charitable trusts.

o Perquisites.

Key Ingredients:

1. Profits and Gains: Includes profits from business, trade, or profession.

2. Dividends: Income from investments in shares of companies.

3. Voluntary Contributions: Contributions to trusts or institutions are considered

income.

4. Perquisites: Benefits received by an employee from an employer.

5. Capital Gains: Gains arising from the transfer of a capital asset.

6. Winnings: Includes winnings from lotteries, horse races, etc.

2. Section 3: Previous Year

• Key Ingredients:

o Income is assessed for the financial year immediately preceding the

Assessment Year.

o Exceptions: Income may be assessed in the same year in special cases

(e.g., discontinued business).

3. Basis of Charge (Section 4)

• Key Points:

o Income is taxed based on its accrual, receipt, or arisal in India.

o The Act provides for tax liability on global income for residents.

Application of Income or Diversion by Overriding Title

• Application of Income: Income already accrued and applied for a specific

purpose.

• Diversion by Overriding Title: Income never becomes part of the taxpayer’s

hands because it is diverted to another person or authority by an overriding title.
Case Law:

CIT v. Sitaldas Tirathdas (1961)

o Distinction between diversion at source and application of income after
receipt.

o Held: Income diverted by overriding title is not taxable in the hands of the
taxpayer.

• Facts:
o The taxpayer had a legal obligation to pay part of his income to his wife and
children under a court decree.
o The question was whether this diverted income could be taxed in his hands.
• Issue:
o Whether the income was "diverted by overriding title" or merely "applied"
after receipt.
• Contentions:
o Revenue: The income was not diverted at source but applied after accrual and
is therefore taxable.
o Taxpayer: The income never accrued to him due to the overriding title.
• Ratio Decidendi:
o "Diversion by overriding title" occurs when income is directed to another
person by a pre-existing obligation before it accrues to the taxpayer.
o Income applied after receipt is taxable in the hands of the recipient.
• Decision:
o The court held that the income was applied after receipt and hence taxable in
the taxpayer's hands.

Capital Receipt vs. Revenue Receipt

• Capital Receipt: Not taxable unless specifically mentioned (e.g., capital gains).

• Revenue Receipt: Taxable under Income Tax.

• Tests to Distinguish:

o Origin and purpose of the receipt.

o Whether it forms part of fixed capital or circulating capital.

Example:

• Salami: A lump sum payment for granting lease rights is considered a capital
receipt.
Key Definitions under Income Tax Act, 1961

1. Assessee:

o Any person liable to pay tax or any other sum under the Act.

o Includes individuals, HUF, companies, firms, etc.

2. Previous Year (Section 3):

o The financial year immediately preceding the assessment year.

3. Assessment Year:

o The year in which income earned in the previous year is assessed for tax
purposes.

Basis of Charge

1. Receipt: Income physically received in India.

2. Accrual: Income earned but not yet received.

3. Arisal: Income arising in India, irrespective of receipt or accrual.

General Scheme of Income Tax Act, 1961

• Scope: Regulates taxation of income in India.

• Structure: Comprises of:

o Definitions and scope (e.g., Section 2).

o Basis of charge (e.g., Section 4).

o Computation of income under various heads.

o Deductions and exemptions.

o Tax administration and procedures.

Key Case Laws

CIT v. G.R. Karthikeyan (1993):

Facts:

• The assessee, G.R. Karthikeyan, won the first prize in an All India Highway Motor
Car Rally in 1974, earning ₹22,000 as the prize money.

• The Income Tax Officer (ITO) included this prize amount in the assessee's taxable
income for the assessment year 1974-75, claiming it as income under Section
2(24) of the Income Tax Act, 1961.

• Karthikeyan challenged the taxability of the prize, arguing that the prize amount
was not income under the Act and should not be subject to taxation.

Issues:

• Whether the prize money won by the assessee in the motor car rally constitutes
taxable income under the Income Tax Act, specifically under Section 2(24) as
"income."

• Whether the nature of the event (a skill-based rally) made the prize taxable, as
distinct from gambling or a game of chance.

Court's Reasoning:

1. Definition of Income:

o The Court first examined the definition of "income" under Section 2(24) of
the Income Tax Act, 1961. This section provides a comprehensive list of
what constitutes income, and among these, it includes "any sum received
by the assessee as a prize."

o The word "prize" under Section 2(24) is not limited to winnings from
lotteries, betting, or gambling. The Court noted that the section provides
for a broader interpretation, which includes prizes received in various
competitive events.

2. Distinction from Gambling or Lottery:

o The Court then distinguished between prize money received from skill-
based events and winnings from games of chance, such as lotteries or
betting. While winnings from lotteries, crossword puzzles, or gambling are
taxable under Section 2(24)(ix), this case involved a competitive event
based on skill.
 o In this case, the prize was awarded for skill and performance in an event
(the rally), rather than a game of chance. The Court explained that skill-
based events, where the winner is determined by personal capability or
effort, do not fall under the category of "winnings from lotteries or
gambling."

3. Application of Tax Provisions:

o The Court noted that prize money, as received by the assessee, was not a
casual windfall but a reward for successful participation in an event that
required skill, effort, and performance. Hence, it fit the definition of
income.

o According to the Court, there was no reason why the prize money should
be excluded from income for tax purposes simply because it was
obtained from a skill-based competition.

4. Taxability under "Income from Other Sources":

o The Court stated that income derived from a prize in a competitive event
based on skill would be classified as "income from other sources," under
Section 56 of the Income Tax Act.

o The key distinction was that this was not a case of "winnings from
lotteries or gambling" but one where the prize was earned through skill,
which is considered a legitimate source of income under the Act.

Decision:

• The Supreme Court upheld the decision of the Income Tax Officer, agreeing that
the prize money earned by Karthikeyan was indeed taxable.

• The Court emphasized that the nature of the event and the manner of earning the
prize (based on skill) justified its classification as taxable income.

• It was held that income from prizes awarded in skill-based competitions was
taxable, and it was not exempted simply because the prize was received in a
competitive event.

Ratio Decidendi:

• The Court's reasoning hinges on the broader interpretation of "income" under

Section 2(24), which includes prizes, and the distinction between skill-based
prizes and winnings from games of chance.

• The prize money received in skill-based competitions (like rallies) is taxable

under "Income from Other Sources" as per Section 56 of the Income Tax Act.
1. CIT v. Sitaldas Tirathdas (1961):

o Established the principle of "diversion by overriding title."

2. CIT v. Sunil J. Kinariwala (2003):

Facts:

• The assessee, Sunil J. Kinariwala, was a partner in the firm M/s. Kinariwala R.J.K.
Industries, holding a 10% share.

• On December 27, 1973, he executed a trust deed, transferring 50% of his 10%
share in the partnership to a trust named 'Sunil Jivanlal Kinariwala Trust.'

• The beneficiaries of the trust were his mother, sister-in-law, and niece.

• The Income Tax Officer (ITO) added ₹20,141 to the assessee's income, arguing
that the income from the partnership, though diverted to the trust, was still
taxable in the hands of the assessee.

Issue:

• Whether the income from the partnership firm, diverted to the trust, should be
included in the assessee's taxable income under Section 60 of the Income Tax
Act, 1961.

Court's Reasoning:

• Section 60 Analysis: The Court examined Section 60, which deals with the
transfer of income without the transfer of assets from which the income arises. It
was noted that the assessee had transferred only a portion of his share in the
partnership to the trust, retaining the remaining 5%. Therefore, the transfer did
not result in the complete transfer of the income-producing asset.

• Diversion of Income at Source: The Court distinguished between a diversion of

income at source and an application of income. In this case, the income was not
diverted at source but was merely applied after its accrual. The trust did not
receive the income directly from the partnership; instead, the income was first
received by the assessee and then transferred to the trust.

• Retention of Capital: The Court observed that the assessee retained his capital
in the partnership firm. The transfer was limited to a portion of the income, not
the capital. This retention indicated that the transfer was not absolute and did
not constitute a complete transfer of the income-producing asset.

Decision:
 • The Supreme Court upheld the decision of the Gujarat High Court, ruling that the
income from the partnership firm, though diverted to the trust, was still taxable
in the hands of the assessee. The Court concluded that the transfer did not
amount to a diversion of income at source but was an application of income
after its accrual.

Summary Table of Key Case Law Principles

Case Name Key Principle Established

CIT v. G.R. Casual receipts are taxable if they fall within the statutory definition
Karthikeyan of income.
CIT v. Sitaldas Distinction between "application of income" and "diversion by
Tirathdas overriding title."
CIT v. Sunil J. Substance over form; tax liability based on the real nature of
Kinariwala transactions.
Topic 2: Agricultural Income

Topic 2: Agricultural Income – Meaning and Scope

Definition of Agricultural Income (Section 2(1A))

Agricultural income includes:

1. Rent or Revenue: Derived from land situated in India and used for agricultural
purposes.

2. Income from Agricultural Operations: Includes income derived by cultivating,

harvesting, or processing agricultural produce.

3. Income from Farmhouses: Income from buildings used as dwelling houses,

storehouses, or other outbuildings, provided they are on or near agricultural
land.

Exemption of Agricultural Income (Section 10(1))

• Agricultural income is exempt from income tax under Section 10(1).

• Central and State governments cannot levy income tax on agricultural income,
but states may impose agricultural income tax.

Key Ingredients of Agricultural Income

1. Land: The income must arise from land situated in India.

2. Agricultural Use: Land must be used for agricultural purposes.

3. Direct Connection: There must be a direct link between agricultural activities

and the income generated.

4. Human Effort: Agricultural operations must involve human skill or effort.

Detailed Case Law Analysis

Case 1: Bacha F. Guzdar v. CIT, Bombay (AIR 1955 SC 74)

• Facts:

o The taxpayer received dividends from a company engaged in tea

cultivation.

o The issue was whether the dividend income was agricultural income.
 • Issue:

o Can dividends from a company engaged in agriculture be considered

agricultural income?

• Contentions:

o Taxpayer: Dividends should be treated as agricultural income because

the company’s income is agricultural.

o Revenue: Dividends are income from investments, not directly

connected to agricultural activities.

• Ratio Decidendi:

o Dividend income is not agricultural income because it is income from

investment in a company, not directly derived from land or agricultural
activities.

• Decision:

o The court held that dividends are not agricultural income and are taxable.

Case 2: CIT v. Benoy Kumar Sahas Roy (AIR 1957 SC 768)

Facts:

• The assessee, Raja Benoy Kumar Sahas Roy, owned approximately 6,000 acres
of forest land in West Bengal, predominantly consisting of sal and piyasal trees.

• The forest was of spontaneous growth, estimated to be over 150 years old, with
minimal human intervention.

• The assessee sold timber from these trees and reported the income as
agricultural income, seeking exemption under Section 4(3)(viii) of the Indian
Income-tax Act, 1922.

Issue:

• Whether the income derived from the sale of timber from the forest land, which
was of spontaneous growth and not cultivated through human skill and labor,
qualifies as agricultural income under Section 2(1) of the Indian Income-tax Act,
1922, and is thus exempt from taxation.

Court's Reasoning:

• Definition of Agricultural Income: The Court examined the definition of

"agricultural income" under Section 2(1) of the Indian Income-tax Act, 1922,
 which includes any rent or revenue derived from land used for agricultural
purposes.

• Agricultural Operations: The Court emphasized that agricultural operations

involve human skill and labor applied to the land to produce crops or other
products.

• Spontaneous Growth: In this case, the forest was of spontaneous growth, with
minimal human intervention. The Court noted that the trees grew naturally
without significant cultivation or care.

• Distinction from Cultivated Land: The Court distinguished between land that is
actively cultivated and land where products grow spontaneously. It was
observed that income from the sale of timber from spontaneously growing trees
does not result from agricultural operations.

• Precedent Consideration: The Court referred to previous decisions, including

the case of Raja Benoy Kumar Sahas Roy, where similar issues were addressed,
reinforcing the principle that income from spontaneously growing trees is not
agricultural income.

Decision:

• The Supreme Court held that the income derived from the sale of timber from the
forest land, which was of spontaneous growth and not cultivated through human
skill and labor, does not qualify as agricultural income.

• Therefore, such income is not exempt from taxation under Section 4(3)(viii) of the
Indian Income-tax Act, 1922.

Case 3: Premier Construction Co. Ltd. v. CIT (1948) XVI ITR 380 (PC)
• Facts:

o The taxpayer earned income from leasing land for agriculture.

o The issue was whether rent from leasing agricultural land qualifies as
agricultural income.

• Issue:

o Can rent from agricultural land be treated as agricultural income?

• Ratio Decidendi:
 o Rent or revenue from agricultural land qualifies as agricultural income if it
is directly derived from the use of land for agricultural purposes.

• Decision:

o The court held that rent from agricultural land is agricultural income and
exempt under Section 10(1).

Case 4: CIT v. Maddi Venkatasubbayya (1951) XX ITR 151 (Mad.)

Facts:

• The assessee, Maddi Venkatasubbayya, was a partner in a firm engaged in the

purchase and sale of tobacco.

• The firm purchased standing crops of tobacco, harvested them, and sold the
processed tobacco.

• The assessee claimed that the profits from these transactions were "agricultural
income" and thus exempt from taxation under Section 4(3)(viii) of the Indian
Income-tax Act, 1922.

Issue:

• Whether the profits derived from the purchase, harvesting, and sale of tobacco
constitute "agricultural income" under Section 2(1)(b) of the Indian Income-tax
Act, 1922, and are thus exempt from taxation.

Court's Reasoning:

• Definition of Agricultural Income: The Court examined the definition of

"agricultural income" under Section 2(1)(b) of the Indian Income-tax Act, 1922,
which includes any rent or revenue derived from land used for agricultural
purposes.

• Agricultural Operations: The Court emphasized that agricultural operations

involve human skill and labor applied to the land to produce crops or other
products.

• Distinction from Business Operations: The Court distinguished between

income derived from agricultural operations and income derived from business
activities. In this case, the firm was engaged in the business of purchasing
standing crops, harvesting them, and selling the processed tobacco. This
constituted a business operation rather than an agricultural activity.

• Precedent Consideration: The Court referred to previous decisions, including

the case of Raja Benoy Kumar Sahas Roy, where similar issues were addressed,
 reinforcing the principle that income from the sale of standing crops purchased
for resale is not agricultural income.

Decision:

• The Madras High Court held that the profits derived from the purchase,
harvesting, and sale of tobacco did not constitute "agricultural income" under
Section 2(1)(b) of the Indian Income-tax Act, 1922.

• Therefore, such income was not exempt from taxation under Section 4(3)(viii) of
the Act.

Case 5: Sakarlal Naranlal v. CIT (AIR 1965 Guj. 165)

Facts:

• The assessee, Sakarlal Naranlal, was an individual holding agricultural lands.

• In 1952, he was advised by a friend to cultivate a vegetable known as "galka"

(botanical name: Luffa pentandra).

• The galka variety cultivated was not indigenous but was commonly grown in
regions like Formosa and Japan.

• The assessee imported galka seeds, prepared the land, and successfully
cultivated the crop.

• After harvesting, the galka was processed into loofahs, which were then
exported.

• The assessee claimed that the losses incurred during the processing of galka
into loofahs were agricultural losses and thus exempt from taxation under
Section 4(3)(viii) of the Indian Income-tax Act, 1922.

Issue:

• Whether the losses arising from the processing of galka into loofahs constitute
agricultural losses under Section 2(1)(b)(ii) of the Indian Income-tax Act, 1922,
and are therefore exempt from taxation.

Court's Reasoning:

• Definition of Agricultural Income: The Court examined Section 2(1)(b)(ii) of the

Indian Income-tax Act, 1922, which defines agricultural income to include any
process ordinarily employed by a cultivator to render the produce fit to be taken
to market.
 • Necessity of the Process: The Court noted that for a process to be considered
agricultural, it must be necessary to render the produce marketable.

• Change in Character of Produce: The Court emphasized that the process

should not change the original character of the produce.

• Application to the Present Case: In this case, the Court found that the galka did
not have a market in its raw state in India, and the processing was essential to
make it marketable. The process involved removing the skin and seeds, which
did not alter the fundamental nature of the galka.

Decision:

• The Gujarat High Court held that the losses incurred during the processing of
galka into loofahs were agricultural losses and thus exempt from taxation under
Section 4(3)(viii) of the Indian Income-tax Act, 1922.

Case 6: CIT v. H.G. Date (1971) 82 ITR 71 (Bom.)

Facts:

• The assessee, H.G. Date, was a cultivator of sugarcane.

• He converted the sugarcane into jaggery (gur) and sold it in the market.

• The assessee claimed that the income from the sale of jaggery was agricultural
income and thus exempt from taxation under Section 4(3)(viii) of the Indian
Income-tax Act, 1922.

Issue:

• Whether the income derived from the sale of jaggery, produced by converting
sugarcane into jaggery, constitutes agricultural income under Section 2(1)(b)(ii)
of the Indian Income-tax Act, 1922, and is therefore exempt from taxation.

Court's Reasoning:

• Definition of Agricultural Income: The Court examined Section 2(1)(b)(ii) of the

Indian Income-tax Act, 1922, which defines agricultural income to include any
process ordinarily employed by a cultivator to render the produce fit to be taken
to market.

• Necessity of the Process: The Court noted that for a process to be considered
agricultural, it must be necessary to render the produce marketable.

• Change in Character of Produce: The Court emphasized that the process

should not change the original character of the produce.
 • Application to the Present Case: In this case, the Court found that sugarcane
could not be stored as a crop, as it started losing its sugar content within 48
hours of being cut. Therefore, converting sugarcane into jaggery was a necessary
process to preserve it and make it marketable. The process did not change the
fundamental nature of the sugarcane.

Decision:

• The Bombay High Court held that the income derived from the sale of jaggery,
produced by converting sugarcane into jaggery, constituted agricultural income
under Section 2(1)(b)(ii) of the Indian Income-tax Act, 1922.

• Therefore, such income was exempt from taxation under Section 4(3)(viii) of the
Act.

Case 7: K. Lakshmanan & Co. v. CIT (1999) 239 ITR 597 (SC)

Facts:

• The assessee, K. Lakshmanan & Co., was engaged in sericulture, cultivating

mulberry plants and rearing silkworms to produce silk cocoons.

• The company claimed that the income derived from the sale of silk cocoons was
agricultural income and thus exempt from taxation under Section 10(1) of the
Income-tax Act, 1961.

Issue:

• Whether the income derived from the sale of silk cocoons, produced by rearing
silkworms fed on mulberry leaves grown by the assessee, constitutes
agricultural income under Section 2(1)(b)(ii) of the Income-tax Act, 1961, and is
therefore exempt from taxation.

Court's Reasoning:

• Definition of Agricultural Income: The Court examined Section 2(1)(b)(ii) of the

Income-tax Act, 1961, which defines agricultural income to include any income
derived from land by agriculture or by the performance of any process ordinarily
employed by a cultivator to render the produce fit to be taken to market.

• Nature of Sericulture: The Court noted that sericulture involves two distinct
activities:

o Cultivation of Mulberry Plants: This is an agricultural activity, as it

involves growing plants on land.
 o Rearing of Silkworms: This is a non-agricultural activity, as it involves
breeding and nurturing silkworms, which is a form of animal husbandry.

• Income Attribution: The Court emphasized that while the cultivation of

mulberry plants is agricultural, the rearing of silkworms is not. Therefore, the
income derived from the sale of silk cocoons, which results from the rearing of
silkworms, does not qualify as agricultural income.

Decision:

• The Supreme Court held that the income derived from the sale of silk cocoons,
produced by rearing silkworms fed on mulberry leaves, is not agricultural income
and is subject to taxation under the Income-tax Act, 1961.

Summary Table of Case Law Principles

Case Name Key Principle Established

Dividends from agricultural companies are not agricultural

Bacha F. Guzdar v. CIT
income.

CIT v. Benoy Kumar Sahas Agricultural income requires basic and subsequent
Roy agricultural operations.

Premier Construction Co.

Rent from agricultural land is agricultural income.
v. CIT

CIT v. Maddi Income from processed agricultural produce retains its

Venkatasubbayya agricultural character.

Management income from agricultural land is not

Sakarlal Naranlal v. CIT
agricultural income.

Sale proceeds of agricultural produce qualify as

CIT v. H.G. Date
agricultural income.

K. Lakshmanan & Co. v. CIT Rent from land used for agriculture is agricultural income.
Topic 3: Residence and Scope of Total Income

Topic 3: Residence and Scope of Total Income

1. Residential Status of Assessee (Section 6)

Key Tests for Determining Residential Status:

1. Individual:

o Resident:

▪ Stayed in India for 182 days or more in the relevant previous year,
OR

▪ Stayed in India for 60 days or more in the relevant previous year

AND 365 days or more in the preceding four years.

o Non-resident: Fails to meet the above criteria.

o Not Ordinarily Resident (NOR): Resident in India but:

▪ Not resident in 9 out of the 10 previous years preceding the

relevant year, OR

▪ Did not stay in India for 729 days or more in the preceding 7 years.

2. Hindu Undivided Family (HUF), Firm, or Other Entities:

o Resident if the control and management of affairs is wholly or partly in

India.

o Non-resident if control and management is wholly outside India.

3. Company:

o Resident if:

▪ Incorporated in India, OR

▪ Its place of effective management (POEM) is in India during the

relevant previous year.

o Non-resident if neither of the above applies.

2. Total Income of Assessee (Sections 4 and 5)

1. Section 4: Basis of Charge:

o Total income is taxable as per rates prescribed for the relevant

assessment year.

2. Section 5: Scope of Total Income:

o Resident: Taxable on global income (earned in India and abroad).

o Non-Resident: Taxable only on income received, accrued, or deemed to

arise in India.

o NOR: Taxable on income received or accrued in India and income from a

business controlled or profession set up in India.

3. Income Deemed to Accrue or Arise in India (Section 9)

Key Provisions:

• Income is deemed to accrue or arise in India if:

1. It is earned through a business connection in India.

2. It arises from property, asset, or source in India.

3. It arises through the transfer of a capital asset situated in India.

4. Salary is paid for services rendered in India.

5. Dividend is paid by an Indian company.

4. Incidence of Tax Based on Residential Status

Residential Status Income Taxable in India

Resident Global income (earned in India and abroad).

Income received in India, accrued in India, or deemed to arise in

Non-Resident
India.

Not Ordinarily Income received in India, accrued in India, or earned from a

Resident (NOR) business/profession controlled from India.
Case Law Analysis
Apologies for the earlier inaccuracies. Based on the available information, here are the
detailed summaries of the two cases:

Case 1: V.V.R.N.M. Subbayya Chettiar v. Commissioner of Income Tax

Facts:

• The appellant, V.V.R.N.M. Subbayya Chettiar, was the Karta (head) of a Hindu
Undivided Family (HUF) residing in Ceylon (now Sri Lanka).

• The family owned businesses and properties both in Ceylon and British India.

• During the relevant assessment year, the appellant visited India multiple times,
spending a total of 101 days, primarily to manage legal and tax matters and to
initiate partnerships.

• The Income Tax authorities assessed the HUF as a "resident" under Section 4A(b)
of the Income Tax Act, 1922, making its global income taxable in India.

Issue:

• Whether the HUF could be considered a "resident" in British India under Section
4A(b) of the Income Tax Act, 1922, based on the appellant's activities and
presence in India.

Contentions:

• Appellant: Argued that the family's permanent residence and primary business
operations were in Ceylon, and the visits to India were occasional and for
specific purposes.

• Revenue: Contended that the appellant's presence and activities in India

indicated that the control and management of the family's affairs were not
wholly outside British India, thus qualifying the HUF as a resident.

Ratio Decidendi:

• The Supreme Court emphasized that for an HUF to be considered a non-

resident, its control and management must be "wholly" situated outside British
India.

• The term "control and management" refers to the central control and directing
power, not merely routine activities.
 • The Court noted that occasional visits to India for specific purposes do not
constitute central control and management being exercised from India.

Decision:

• The Supreme Court held that the HUF was a non-resident, as its central control
and management were situated wholly outside British India.

• The appellant's visits to India were deemed insufficient to establish residency

status for tax purposes.

Case 2: Narottam and Parekh Ltd. v. Commissioner of Income Tax

Facts:

• Narottam and Parekh Ltd., a company incorporated in Bombay (now Mumbai),

operated stevedoring (loading and unloading of ships) services in Ceylon.

• The company's registered office was in Bombay, but its primary business
operations were conducted in Ceylon through appointed managers.

• The question arose whether the company should be assessed as a resident in

India for tax purposes under Section 4A(c) of the Income Tax Act, 1922.

Issue:

• Whether the control and management of the company's affairs were "wholly"
situated in India, thereby making it a resident for tax purposes.

Contentions:

• Appellant (Company): Argued that the actual control and management (de
facto) were exercised by managers in Ceylon, and thus, the company should be
considered a non-resident.

• Revenue: Maintained that the company's registered office and board of directors
were in Bombay, indicating that the central control and management were in
India.

Ratio Decidendi:

• The Bombay High Court emphasized that the determination of a company's

residential status depends on where the central control and management (the
"head and brain") are situated.

• The Court distinguished between de jure (legal right) and de facto (actual)
control, focusing on where the central policy decisions are made.
Decision:

• The Court held that the company's central control and management were
situated wholly in Bombay, as the board of directors in India made key decisions.

• Therefore, the company was deemed a resident in India for tax purposes.

These cases highlight the importance of determining the "control and management"
location in assessing the residential status of entities for taxation under Indian law.

Case 3: Vodafone International Holdings B.V. v. Union of India (2012)

Facts:

• In 2007, Vodafone International Holdings B.V. (VIH), a Netherlands-based

company, acquired a 67% stake in Hutchison Essar Limited (HEL), an Indian
telecommunications company, from Hutchison Telecommunications
International Limited (HTIL), a company incorporated in the Cayman Islands.

• The Indian tax authorities contended that this transaction, involving the transfer
of shares in a foreign company holding controlling interest in an Indian company,
was subject to capital gains tax in India.

• Vodafone challenged this claim, asserting that the transaction was between two
non-resident entities and did not involve the transfer of any capital asset situated
in India.

Issue:

• Whether the Indian tax authorities have jurisdiction to tax the capital gains
arising from the offshore transaction between two non-resident companies,
where the controlling interest in an Indian company is acquired.

Court's Reasoning:

• Jurisdiction of Indian Tax Authorities: The Supreme Court examined the

provisions of the Income-tax Act, 1961, and the relevant Double Taxation
Avoidance Agreement (DTAA) between India and Mauritius. The Court concluded
that the Indian tax authorities did not have jurisdiction to tax the capital gains
from the offshore transaction under the existing legal framework.

Law Senate

• Doctrine of Piercing the Corporate Veil: The Court considered the applicability
of the doctrine of piercing the corporate veil, which allows the court to look
 beyond the separate legal personality of companies to their true nature. The
Court held that this doctrine could only be applied if it was proven that the
transaction was a sham or tax-avoidant. In this case, the Court found that the
transaction was genuine and not undertaken to evade tax.

Decision:

• The Supreme Court ruled in favor of Vodafone, holding that the Indian tax
authorities did not have jurisdiction to tax the capital gains arising from the
offshore transaction between two non-resident companies. The Court
emphasized that the transaction was genuine and not a sham designed to evade
tax.

Citation:

• Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613

This case is significant as it clarified the jurisdictional reach of Indian tax authorities
concerning offshore transactions and reinforced the principle that the doctrine of
piercing the corporate veil applies only when a transaction is a sham or undertaken with
the sole purpose of tax evasion.

Summary Table of Case Law Principles

Case Name Key Principle Established

V.V.R.N.M. Subbayya Income earned through a business connection in India is

Chettiar v. CIT deemed to accrue or arise in India.

Narottam and Parekh Ltd. Income from a branch in India by a non-resident company is
v. CIT taxable in India.

Vodafone International India cannot tax indirect transfers unless expressly provided
Holdings by law (pre-amendment).
Topic 4: Heads of Income (Sections 14-59)

Topic 4: Heads of Income

The Income Tax Act, 1961 divides income into five distinct heads (Section 14):

1. Income from Salaries

2. Income from House Property

3. Profits and Gains of Business or Profession

4. Capital Gains

5. Income from Other Sources

These heads ensure a systematic classification of income for taxation purposes.

Are the Heads Mutually Exclusive?

• The heads of income are broadly mutually exclusive.

• Income cannot be taxed under more than one head, but the classification
depends on the nature of the income.

Head A: Income from Salaries (Sections 15 to 17)

Section 15: Income from Salaries

• Scope: Charges to tax any salary due from an employer or former employer to an
assessee in the previous year, whether paid or not. It also includes any salary
paid or allowed to him in the previous year by or on behalf of an employer or
former employer, though not due or before it became due.

• Key Components:

o Salary: Includes wages, annuity, pension, gratuity, fees, commissions,

perquisites, profits in lieu of salary, advance salary, and leave
encashment.

o Employer-Employee Relationship: Essential for income to be taxed

under this head.

1. Chargeability: Income is taxable as salary if it arises from an employer-

employee relationship.
 2. Key Terms:

o Salary: Includes wages, annuities, gratuities, pensions, etc.

o Perquisites: Benefits provided by the employer.

o Profits in lieu of salary: Amounts received in place of salary, such as

compensation for loss of employment.

Section 17: Definition of "Salary"

• Scope: Provides an inclusive definition of "salary" for the purposes of Sections

15 and 16.

• Key Components:

o Perquisites: Includes value of rent-free accommodation, concession in

rent, benefits or amenities provided free of cost or at concessional rates,
employer's contribution to provident fund exceeding specified limits, and
more.

o Profits in Lieu of Salary: Includes compensation for termination of

employment, payments from unrecognized provident funds, and other
specified payments.

Case 1: Ram Pershad v. CIT (1972)

Relevant Sections: Sections 15 and 17 of the Income Tax Act, 1961.

• Facts:

o Ram Pershad was appointed as the Managing Director of a company

under an agreement that specified his remuneration and powers.

o The agreement stipulated a monthly salary, a fixed car allowance, and a

commission based on the company's gross profits.

o The Income Tax Officer assessed his income under the head "Salaries,"
which was contested by Pershad, claiming it should be assessed under
"Profits and Gains of Business or Profession."

• Issues:

o Whether the remuneration received by Pershad as Managing Director

should be taxed under the head "Salaries" or "Profits and Gains of
Business or Profession."
 o Whether there existed an employer-employee relationship between the
company and Pershad.

• Contentions:

o Appellant's Argument:

▪ Pershad contended that he was not an employee but an agent of

the company, and therefore, his income should be assessed as
business income.

o Respondent's Argument:

▪ The Revenue argued that the terms of the agreement indicated a

master-servant relationship, making the income taxable under
"Salaries."

• Ratio Decidendi:

o The Supreme Court analyzed the nature of the employment relationship

between Pershad and the company, concluding that it bore the
characteristics of a master-servant relationship rather than that of an
independent agent or contractor.

o The Court emphasized that the designation of the relationship by the

parties is not conclusive; instead, the actual nature of the relationship, as
evidenced by the terms of the agreement and the degree of control
exercised by the company, is determinative.

• Decision:

o The Supreme Court upheld the High Court's decision, affirming that the
commission received by Ram Pershad was indeed taxable as 'salary'
under Section 7 of the Income Tax Act.

o The Court held that the income should be assessed under the head
"Salaries," given the existence of an employer-employee relationship.

Case 2: CIT v. L.W. Russel

Relevant Sections: Section 17 of the Income Tax Act, 1961.

• Facts:
 o L.W. Russel was an employee of the English and Scottish Joint Co-
operative Wholesale Society Ltd., incorporated in England.

o The Society established a superannuation scheme for the benefit of its

employees, contributing premiums towards a deferred annuity policy on
behalf of Russel.

o The Income Tax authorities sought to tax the employer's contributions as

a perquisite under the head "Salaries."

• Issues:

o Whether the employer's contributions towards the deferred annuity policy

constituted a taxable perquisite under Section 17 of the Income Tax Act.

o Whether such contributions resulted in any vested interest or benefit

accruing to the employee at the time of contribution.

• Contentions:

o Appellant's Argument:

▪ The Revenue contended that the employer's contributions were a

perquisite, forming part of the employee's salary, and thus taxable
under Section 17.

o Respondent's Argument:

▪ Russel argued that the contributions did not confer any immediate
benefit or vested interest upon him, as they were contingent upon
his reaching the age of superannuation.

• Ratio Decidendi:

o The Supreme Court held that unless a vested interest in the sum accrues
to an employee, it is not taxable.

o In this case, no interest in the sum contributed by the employer under the
scheme vested in the employee, as it was only a contingent interest
depending upon his reaching the age of superannuation.

• Decision:

o The Supreme Court dismissed the appeal, agreeing with the High Court
that the employer's contributions did not constitute a taxable perquisite
under Section 17, as no vested interest had accrued to the employee at
the time of contribution.
Head C: Income from House Property (Sections 22 to 27)
1. Section 22: Income from House Property

Annual value of property owned by an assessee, except for property used for
business or profession, is taxable.

• Scope: Charges to tax the annual value of property consisting of any buildings or
lands appurtenant thereto, of which the assessee is the owner, other than such
portions as he may occupy for the purposes of any business or profession
carried on by him.

• Key Components:

o Annual Value: The amount for which the property might reasonably be
expected to let from year to year.

o Ownership: Legal ownership is essential; mere possession or tenancy

rights do not suffice.

o Deductions:

▪ Standard deduction of 30%.

▪ Interest on borrowed capital (Section 24).

o Deemed Ownership (Section 27): Includes individuals who have

possession of property under certain conditions.

Section 28: Profits and Gains of Business or Profession

2. Scope: Charges to tax the profits and gains of any business or profession carried on
by the assessee at any time during the previous year.
3. Key Components:
o Business: Includes any trade, commerce, or manufacture or any adventure or
concern in the nature of trade, commerce, or manufacture.
o Deductions: Expenses incurred wholly and exclusively for the purposes of the
business or profession are allowable deductions.
Case 1: Commissioner of Income-Tax, West Bengal v. Biman Behari Shaw, Shebait
Citation: (1968) 68 ITR 815 (Cal)
Relevant Sections: Sections 22 to 27 of the Income Tax Act, 1961.

• Facts:

o Banku Behari Saha executed a will on November 24, 1925, establishing a

debutter estate and appointing shebaits to manage the deity's properties.

o The properties generated income, which was utilized for religious and
charitable purposes as per the will's directives.

o The Income Tax authorities sought to tax the income derived from these
properties.

• Issues:

o Whether the income derived from the deity's properties, managed by the
shebait, is taxable in the hands of the shebait.

o Whether such income, used exclusively for religious and charitable

purposes, qualifies for exemption under the Income Tax Act.

• Contentions:

o Appellant's Argument:

▪ The Revenue contended that the shebait, being the manager and
beneficiary of the deity's properties, is liable to be taxed on the
income generated from these properties.

o Respondent's Argument:

▪ The shebait argued that the income belongs to the deity and is
utilized solely for religious and charitable purposes, thus qualifying
for exemption from taxation.

• Ratio Decidendi:

o The Calcutta High Court examined the nature of the ownership and the
application of the income derived from the deity's properties.

o The Court emphasized that the income, being used exclusively for
religious and charitable purposes as per the founder's directives, does
not accrue to the shebait personally.

• Decision:
 o The Court held that the income derived from the deity's properties,
managed by the shebait and utilized solely for religious and charitable
purposes, is not taxable in the hands of the shebait.

o The income qualifies for exemption under the relevant provisions of the
Income Tax Act, considering its application towards specified charitable
purposes.

Case 2: East India Housing & Land Development Trust Ltd. v.

Commissioner of Income-Tax
Citation: (1961) 42 ITR 49 (SC)
Relevant Sections: Sections 22 and 28 of the Income Tax Act, 1961.

• Facts:

o The East India Housing & Land Development Trust Ltd. was incorporated
with the primary objective of purchasing land and developing markets.

o The company constructed shops and stalls on the acquired land and let
them out to various tenants, deriving rental income from these properties.

o The Income Tax Officer assessed this rental income under the head
"Income from House Property," which was contested by the company,
claiming it should be assessed under "Profits and Gains of Business or
Profession."

• Issues:

o Whether the rental income derived from letting out shops and stalls
should be assessed under the head "Income from House Property" or
"Profits and Gains of Business or Profession."

o Whether the nature of the company's primary objective influences the

classification of the rental income for tax purposes.

• Contentions:

o Appellant's Argument:

▪ The company contended that since its primary objective was to

develop and let out properties, the rental income should be
considered business income and assessed under "Profits and
Gains of Business or Profession."

o Respondent's Argument:
 ▪ The Revenue argued that the income derived from letting out
properties falls squarely under "Income from House Property,"
irrespective of the company's primary objective.

• Ratio Decidendi:

o The Supreme Court analyzed the distinction between property income

and business income, emphasizing that the mere fact of letting out
properties does not convert rental income into business income.

o The Court noted that the income received by the appellant from shops is
indisputably income from property; so is the income from stalls from
occupants.

• Decision:

o The Supreme Court held that the rental income derived from letting out
shops and stalls should be assessed under the head "Income from House
Property."

o The Court dismissed the company's appeal, affirming the assessment of

the rental income under "Income from House Property," as the primary
source of income was the occupation of the property, not any business
activity related to it.

Case 3: R.B. Jodhamal Kuthiala v. Commissioner of Income-Tax

Citation: AIR 1972 SC 126
Relevant Sections: Sections 22 and 27 of the Income Tax Act, 1961.

Facts:

• The assessee, R.B. Jodhamal Kuthiala, was a registered firm deriving income
from various sources, including securities, property, and business.

• In 1946, the firm purchased a hotel in Lahore for Rs. 46 lakhs, financing the
purchase with a loan of Rs. 30 lakhs from a bank and Rs. 18 lakhs from one R.

• The loan from the bank was largely repaid, but with R, the firm reached an
agreement where R accepted a half share in the hotel in lieu of the loan
advanced and also one-third of the outstanding liability of the bank.

• Subsequently, the hotel was taken over by the Custodian under the Pakistan
(Administration of Evacuee Property) Ordinance, 1949, due to the partition of
India.
 • The firm claimed that the income from the hotel property should be considered
as income from house property under Section 9 of the Income-tax Act, 1922, and
sought deductions for repairs and maintenance expenses.

Issue:

• Whether the income derived from the hotel property, which was taken over by
the Custodian under the Pakistan (Administration of Evacuee Property)
Ordinance, 1949, can be considered as income from house property under
Section 9 of the Income-tax Act, 1922, and whether the firm is entitled to
deductions for repairs and maintenance expenses.

Court's Reasoning:

• Ownership of Property: The Court examined the concept of ownership under

Section 9 of the Income-tax Act, 1922, and concluded that the firm continued to
be the owner of the property for the purposes of the Act, despite the property
being taken over by the Custodian. The Court emphasized that the term "owner"
in Section 9 refers to a person who is entitled to receive income from property in
his own right. In this case, the firm retained the right to receive income from the
property, and the Custodian's possession was not adverse to the firm's
ownership.

TaxGuru

• Income from House Property: The Court held that the income derived from the
hotel property was indeed income from house property under Section 9 of the
Income-tax Act, 1922. The Court noted that the firm was entitled to receive
income from the property and that the property was not used for business
purposes. Therefore, the income was correctly classified under the head
"Income from house property."

• Deductions for Repairs and Maintenance: The Court considered whether the
firm was entitled to deductions for repairs and maintenance expenses under
Section 9 of the Income-tax Act, 1922. The Court concluded that the firm was
entitled to such deductions, as the expenses were incurred to maintain the
property and were necessary to preserve its income-generating capacity.

Decision:

• The Supreme Court held that the income derived from the hotel property was
income from house property under Section 9 of the Income-tax Act, 1922.

• The Court also held that the firm was entitled to deductions for repairs and
maintenance expenses incurred to maintain the property.
Head D: Profits and Gains of Business or Profession (Sections 28 to 44)
1. Chargeability: Income from any trade, commerce, or manufacturing activity is
taxable under this head.

2. Key Aspects:

o Deductions for business expenditure (Section 37).

o Distinction between business and capital expenditure.

Section 37: General Deduction

• Scope: Allows deduction of any expenditure (not being capital expenditure or

personal expenses of the assessee) laid out or expended wholly and exclusively
for the purposes of the business or profession.

• Key Components:

o Capital vs. Revenue Expenditure: Capital expenditures are not

deductible, while revenue expenditures are, provided they are incurred
wholly and exclusively for business purposes.

o Wholly and Exclusively: The expenditure must be solely for business

purposes without any personal element.

Case 1: B.D. Bharucha v. Commissioner of Income-Tax

Citation: AIR 1967 SC 1505
Relevant Sections: Section 10(2)(xi) of the Income Tax Act, 1922

• Facts:

o B.D. Bharucha, a financier, advanced a sum of ₹40,000 to a film

distribution firm, Tarachand Pictures, between March 3, 1952, and
November 5, 1952.

o The firm failed to repay the amount, leading Bharucha to write off the debt
as irrecoverable in his accounts.

o Bharucha claimed the amount as a bad debt deduction under Section

10(2)(xi) of the Income Tax Act, 1922.
 • Issues:

o Whether the amount of ₹40,000 advanced to Tarachand Pictures was a

revenue loss or a capital loss.

o Whether the loss could be claimed as a deduction under Section 10(2)(xi)

of the Income Tax Act, 1922.

• Contentions:

o Appellant's Argument:

▪ The transaction was a financing activity in the ordinary course of

business, and the loss was a revenue loss eligible for deduction.

o Respondent's Argument:

▪ The advance was a capital investment, and the loss was a capital
loss, not deductible under the provisions for bad debts.

• Ratio Decidendi:

o The Supreme Court examined the nature of the transaction to determine

whether the loss was capital or revenue in nature.

o The Court emphasized that the nature of the transaction, rather than the
form, determines whether a loss is capital or revenue.

o The Court concluded that the advance was made in the ordinary course
of the appellant's financing business, making the loss a revenue loss.

• Decision:

o The Supreme Court held that the loss was a revenue loss and eligible for
deduction under Section 10(2)(xi) of the Income Tax Act, 1922.

Case 2: Commissioner of Income-Tax v. Mysore Sugar Co. Ltd.

Citation: AIR 1967 SC 723
Relevant Sections: Sections 10(2)(xv) and 10(2)(xi) of the Income Tax Act, 1922

Facts:

• The Mysore Sugar Co. Ltd. (the assessee) was a sugar manufacturing company
that advanced funds to sugarcane growers (referred to as "Oppigedars") for the
cultivation of sugarcane.

• In 1948-49, due to a severe drought, the Oppigedars were unable to cultivate and
supply sugarcane, resulting in the non-recovery of advances amounting to
₹2,87,422.
 • In the accounting year ending June 30, 1952, the company waived these
outstanding advances, effectively writing off the amount.

• The company claimed a deduction for this amount under Section 10(2)(xi) of the
Income-tax Act, 1922, as a bad debt.

Issue:

• Whether the amount of ₹2,87,422, advanced to the Oppigedars and

subsequently written off due to non-recovery, qualifies as a bad debt under
Section 10(2)(xi) of the Income-tax Act, 1922, and is deductible from the
company's taxable income.

Court's Reasoning:

• Nature of the Advances: The Court examined the nature of the advances made
by the company to the Oppigedars. These advances were provided to facilitate
the cultivation of sugarcane, a necessary input for the company's manufacturing
process. The Court noted that such advances were integral to the company's
business operations and were not made as investments.

• Bad Debt Deduction: The Court considered whether the written-off amount
could be classified as a bad debt under Section 10(2)(xi). It was observed that
the advances were made in the ordinary course of business, and the inability to
recover them was due to circumstances beyond the company's control, such as
the drought. Therefore, the Court concluded that the amount written off was a
business loss and eligible for deduction under the relevant provisions.

Decision:

• The Supreme Court held that the amount of ₹2,87,422, advanced to the
Oppigedars and subsequently written off, was a business loss arising from the
company's regular business activities. As such, it was deductible under Section
10(2)(xi) of the Income-tax Act, 1922.

Case 1: C.I.T. v. Travancore Sugar & Chemicals Ltd.

Citation: AIR 1973 SC 982
Relevant Sections: Section 37(1) of the Income Tax Act, 1961

Facts:

• The assessee, Travancore Sugar & Chemicals Ltd., was a company engaged in
the manufacture of sugar.
 • In 1949, the company entered into an agreement with the Government of
Travancore, under which the government agreed to sell its sugar manufacturing
units to the company.

• As part of the agreement, the company was obligated to pay the government
10% of its annual net profits.

• The company claimed this annual payment as a deductible expense under

Section 10(2)(xv) of the Income-tax Act, 1922, which allows deductions for
expenses "wholly and exclusively laid out or expended for the purposes of such
business."

Issue:

• Whether the annual payment of 10% of net profits to the government, as

stipulated in the agreement, qualifies as a deductible business expense under
Section 10(2)(xv) of the Income-tax Act, 1922.

Court's Reasoning:

• Nature of the Payment: The Supreme Court examined the nature of the 10%
annual payment to the government. The Court noted that this payment was a
recurring obligation arising from the agreement and was directly linked to the
company's business operations. The Court emphasized that such payments,
being regular and integral to the company's business activities, were of a revenue
nature.

Indian Kanoon

• Capital vs. Revenue Expenditure: The Court distinguished between capital and
revenue expenditures. It held that while capital expenditures are incurred for
acquiring or improving fixed assets, revenue expenditures are incurred for the
day-to-day functioning of the business. In this case, the annual payment was
considered a revenue expenditure because it was a recurring cost necessary for
the company's ongoing operations.

Indian Kanoon

• Deductibility Under Section 10(2)(xv): The Court concluded that the annual
payment to the government was "wholly and exclusively laid out or expended for
the purposes of such business," as required under Section 10(2)(xv). Therefore, it
was eligible for deduction while computing the company's taxable income.
Decision:

• The Supreme Court held that the annual payment of 10% of net profits to the
government was a revenue expenditure and was deductible under Section
10(2)(xv) of the Income-tax Act, 1922.

Case 2: Empire Jute Co. Ltd. v. C.I.T.

Citation: AIR 1980 SC 1946
Relevant Sections: Section 37(1) of the Income Tax Act, 1961

• Facts:

o Empire Jute Co. Ltd. purchased loom hours from other jute mills to meet
its production requirements.

o The company claimed the payments for purchasing loom hours as

revenue deductions under Section 37(1).

• Issues:

o Whether the payments for purchasing loom hours were revenue

expenditures deductible under Section 37(1).

• Contentions:

o Appellant's Argument:

▪ The payments were made in the ordinary course of business to

meet immediate production needs, qualifying them as revenue
expenditures.

o Respondent's Argument:

▪ The payments were for acquiring an enduring benefit, making them

capital expenditures.

• Ratio Decidendi:

o The Supreme Court examined the nature of the payments to determine if

they were capital or revenue in nature.

o The Court concluded that the payments were made to meet immediate
production needs and did not result in the acquisition of a capital asset.

• Decision:

o The Supreme Court held that the payments were revenue expenditures
and deductible under Section 37(1) of the Income Tax Act, 1961.
Case 3: L.B. Sugar Factory & Oil Mills (P.) Ltd. v. C.I.T.
Citation: AIR 1981 SC 395
Relevant Sections: Section 37(1) of the Income Tax Act, 1961

Facts:

• The assessee, L.B. Sugar Factory & Oil Mills (P.) Ltd., was a sugar manufacturing
company located in Pilibhit, Uttar Pradesh.

• In the accounting year ending September 30, 1955, the company incurred two
specific expenditures:

1. A contribution of ₹22,332 towards the construction of the Deoni Dam and

the Deoni Dam-Majhala Road.

2. A contribution of ₹50,000 towards the construction of roads in the area

around its factory under the Sugarcane Development Scheme promoted
by the Uttar Pradesh Government.

• The company claimed these amounts as deductible business expenses under

Section 10(2)(xv) of the Income-tax Act, 1922, which allows deductions for
expenses "wholly and exclusively laid out or expended for the purposes of such
business."

Issue:

• Whether the contributions of ₹22,332 and ₹50,000 qualify as deductible

business expenses under Section 10(2)(xv) of the Income-tax Act, 1922.

Court's Reasoning:

• Contribution Towards Deoni Dam and Road:

o The Court noted that the contribution of ₹22,332 was made after the
construction of the Deoni Dam and the Deoni Dam-Majhala Road had
been completed.

o There was no evidence to suggest that this contribution had any direct
connection to the company's business operations.

o The Court concluded that this expenditure was made voluntarily, without
any legal obligation, and was not incurred "wholly and exclusively" for the
purpose of the company's business.

o Therefore, it was not deductible under Section 10(2)(xv).

• Contribution Towards Road Construction Under Sugarcane Development

Scheme:
 o The Court observed that the ₹50,000 contribution was made under a
government scheme aimed at developing infrastructure beneficial to
sugarcane cultivation and transportation.

o The construction of roads in the vicinity of the factory would facilitate the
transport of sugarcane to the factory and the distribution of manufactured
sugar, thereby directly benefiting the company's business operations.

o The Court held that this expenditure was incurred "wholly and exclusively"
for the purpose of the company's business and was of a revenue nature.

o Therefore, it was deductible under Section 10(2)(xv).

Decision:

• The Supreme Court held that the ₹22,332 contribution towards the Deoni Dam
and road construction was not a deductible business expense.

• Conversely, the ₹50,000 contribution towards road construction under the

Sugarcane Development Scheme was a deductible business expense.

Case 4: C.I.T. v. Jalan Trading Co. (Pvt.) Ltd.

Citation: (1985) 155 ITR 536 (SC)
Relevant Sections: Section 37(1) of the Income Tax Act, 1961

Facts:

• The assessee, Jalan Trading Co. (Pvt.) Ltd., was a newly incorporated company
with no prior business operations.

• The company entered into an agreement with a manufacturing company to act

as its sole selling agent.

• As per the agreement, the assessee was required to pay 75% of its annual net
profits to the manufacturing company.

• The assessee claimed this payment as a deductible business expense under

Section 37 of the Income-tax Act, 1961.

Issue:

• Whether the payment of 75% of annual net profits to the manufacturing

company qualifies as a deductible business expense under Section 37 of the
Income-tax Act, 1961.

Court's Reasoning:

• Nature of the Payment:

 o The Supreme Court examined the nature of the payment, noting that it
was a recurring obligation arising from the agreement between the
assessee and the manufacturing company.

o The Court emphasized that such payments, being regular and integral to
the company's business operations, were of a revenue nature.

• Capital vs. Revenue Expenditure:

o The Court distinguished between capital and revenue expenditures.

o It held that while capital expenditures are incurred for acquiring or

improving fixed assets, revenue expenditures are incurred for the day-to-
day functioning of the business.

o In this case, the payment was considered a revenue expenditure because

it was a recurring cost necessary for the company's ongoing operations.

• Deductibility Under Section 37:

o The Court concluded that the payment was incurred "wholly and
exclusively" for the purpose of the company's business and was of a
revenue nature.

o Therefore, it was eligible for deduction under Section 37 of the Income-tax

Act, 1961.

Decision:

• The Supreme Court held that the payment of 75% of annual net profits to the
manufacturing company was a revenue expenditure and was deductible under
Section 37 of the Income-tax Act, 1961.

Case 5: Bikaner Gypsums Ltd. v. C.I.T.

Citation: AIR 1991 SC 227
Relevant Sections: Section 37(1) of the Income Tax Act, 1961

Facts:

• Bikaner Gypsums Ltd. was engaged in the mining of gypsum.

• The company had a mining lease over certain land, but a railway line constructed
by the Railways obstructed mining operations.

• To facilitate mining, the company paid ₹3 lakhs to the Railways for shifting the
railway line.

• The company claimed this payment as a revenue expenditure under Section

37(1) of the Income Tax Act.
Issues:

• Whether the payment of ₹3 lakhs to the Railways for shifting the railway line was
a capital or revenue expenditure.

• Whether such a payment is deductible under Section 37(1) as a revenue

expenditure.

Judgment:

• The Supreme Court examined the nature of the payment made by the company.

• The Court noted that the payment was made to remove an obstruction hindering
the company's existing business operations.

• The Court referred to its earlier decision in Dalmia Investment Co. Ltd. v. CIT
(AIR 1964 SC 1464), where it was held that expenditure incurred to remove an
obstruction to the existing business is a revenue expenditure.

• The Court also considered the judgment in Empire Jute Co. Ltd. v. CIT (AIR 1980
SC 1946), which distinguished between capital and revenue expenditures based
on the nature of the advantage obtained.

Ratio Decidendi:

• The Supreme Court concluded that the payment made to the Railways was a
revenue expenditure.

• The Court emphasized that the payment was made to remove an obstacle to the
company's existing business operations and did not result in the acquisition of a
capital asset or an advantage of enduring nature.

Decision:

• The Supreme Court ruled in favor of the assessee, allowing the deduction of ₹3
lakhs as a revenue expenditure under Section 37(1).

Case 3: C.I.T. v. General Insurance Corporation

Citation: 2007 (1) SCJ 800
Relevant Sections: Section 37(1) of the Income Tax Act, 1961

Facts:

• The General Insurance Corporation (GIC) is a public sector insurance company.

• GIC incurred expenses related to the issue of bonus shares, including stamp
duty and registration fees.

• The company claimed these expenses as revenue deductions under Section

37(1) of the Income Tax Act.
Issues:

• Whether the expenses incurred for the issue of bonus shares are capital or
revenue in nature.

• Whether such expenses are deductible under Section 37(1) as revenue

expenditure.

Contentions:

• Assessee's Argument: The expenses were incurred in the ordinary course of

business and should be treated as revenue expenditures.

• Revenue's Argument: The expenses were capital in nature, as they related to the
issue of bonus shares, which affects the capital structure of the company.

Judgment:

• The Supreme Court examined the nature of expenses incurred for the issue of
bonus shares.

• The Court noted that the issue of bonus shares does not involve the inflow of
fresh funds; it is a capitalization of reserves, leading to a reallocation of existing
funds.

• The Court referred to its earlier decision in Dalmia Investment Co. Ltd. v. CIT
(AIR 1964 SC 1464), where it was held that expenses related to the issue of
bonus shares are revenue in nature.

• The Court also considered the judgment in Wood Craft Products Ltd. v. CIT
(1993) 204 ITR 545 (Cal.), which distinguished between the issue of fresh capital
and the issue of bonus shares, treating the latter as revenue expenditure.

Ratio Decidendi:

• The Supreme Court concluded that expenses incurred for the issue of bonus
shares are revenue expenditures and are deductible under Section 37(1) of the
Income Tax Act.

• The Court emphasized that such expenses do not result in the creation of a
capital asset or an advantage of enduring nature.

Decision:

• The Supreme Court ruled in favor of the assessee, allowing the deduction of
expenses incurred for the issue of bonus shares as revenue expenditure under
Section 37(1).
Head E: Capital Gains (Sections 45 to 55)
1. Definition: Income from the transfer of a capital asset is taxable under this head.

2. Key Provisions:

o Short-term and long-term capital gains depend on the holding period.

o Computation: Sale consideration minus cost of acquisition/improvement

and transfer expenses.

Section 45: Capital Gains

• Scope: Charges to tax any profits or gains arising from the transfer of a capital
asset effected in the previous year.

• Key Components:

o Capital Asset: Defined under Section 2(14) and includes property of any
kind held by an assessee, whether or not connected with his business or
profession, but excludes certain specified assets like stock-in-trade,
personal effects, agricultural land in rural areas, etc.

o Transfer: Includes sale, exchange, relinquishment of the asset, or

extinguishment of any rights therein.

Section 48: Mode of Computation

• Scope: Provides the method for computing capital gains by deducting from the
full value of consideration received or accruing as a result of the transfer:

o Expenditure incurred wholly and exclusively in connection with such

transfer.

o The cost of acquisition of the asset and the cost of any improvement
thereto.

• Key Components:

o Indexed Cost of Acquisition/Improvement: Adjustments made to the

cost based on the Cost Inflation Index to account for inflation.
Case 5: N. Bagavathy Ammal v. CIT, Madurai (2003)
Facts:

• The assessee, N. Bagavathy Ammal, was a shareholder in Palkulam Estates

(Private) Limited, a company that went into liquidation.

• During the liquidation, the company distributed assets to its shareholders,

including agricultural land.

• The Income Tax Officer (ITO) assessed the value of the agricultural land received
by the assessee as capital gains under Section 46(2) of the Income Tax Act.

Issues:

• Whether the agricultural land received by the assessee during the liquidation of
the company is subject to capital gains tax under Section 46(2) of the Income Tax
Act.

Judgment:

• The Supreme Court examined the scope of Section 46(2), which deals with
capital gains arising from the distribution of assets by a company in liquidation.

• The Court noted that Section 46(2) does not specify that the assets received
must be capital assets as defined under Section 2(14) of the Income Tax Act.

• The Court observed that the term "assets" in Section 46(2) is not limited to
capital assets and can include other types of assets, such as agricultural land.

• The Court referred to its earlier decision in R.M. Amin v. CIT (1977) 106 ITR 368
(SC), where it was held that the term "assets" in Section 46(2) is not confined to
capital assets.

Ratio Decidendi:

• The Supreme Court concluded that the agricultural land received by the
assessee during the liquidation of the company is subject to capital gains tax
under Section 46(2) of the Income Tax Act.

• The Court emphasized that the term "assets" in Section 46(2) is not restricted to
capital assets and includes all types of assets received by a shareholder during
liquidation.

Decision:

• The Supreme Court upheld the assessment of capital gains on the agricultural
land received by the assessee during the liquidation of the company.
Head F: Income from Other Sources (Sections 56 to 59)
1. Scope: Includes income not covered under any other head.

2. Examples:

o Interest, dividends, lottery winnings.

o Gifts exceeding ₹50,000.

Section 56: Income from Other Sources

• Scope: Charges to tax income of every kind which is not to be excluded from the
total income under this Act and which is not chargeable to income-tax under any
of the heads specified in Section 14, items A to E.

• Key Components:

o Inclusions: Dividends, winnings from lotteries, interest on securities, gifts

exceeding specified limits, and more.

o Deductions: Expenses incurred wholly and exclusively for the purpose of

earning such income are allowable.

Section 57: Deductions

• Scope: Specifies the deductions allowable in computing the income chargeable

under the head "Income from Other Sources."

• Key Components:

o Allowable Deductions:

▪ Commission or remuneration for realizing dividend or interest.

▪ Repairs, insurance, and depreciation of plant, machinery, or

furniture.

▪ Any other expenditure laid out or expended wholly and exclusively

for the purpose of making or earning such income.
Case 6: CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC)
Facts:

• The assessee, Rajendra Prasad Moody, was a shareholder in a company that had
substantial investments in shares and securities.

• The company had incurred interest expenses on loans taken to finance these
investments.

• The company did not receive any dividend income during the relevant
assessment year.

• The assessee claimed a deduction for the interest expenses under Section 57(iii)
of the Income Tax Act, which allows deductions for expenses incurred wholly and
exclusively for the purpose of earning income.

Issues:

• Whether the interest expenses incurred on loans taken to finance investments in

shares and securities are deductible under Section 57(iii) of the Income Tax Act,
even when no dividend income is received during the relevant assessment year.

Judgment:

• The Supreme Court examined the scope of Section 57(iii), which permits
deductions for expenses incurred wholly and exclusively for the purpose of
earning income.

• The Court noted that the language of Section 57(iii) does not require that income
must have been actually earned during the relevant assessment year for the
expenditure to be deductible.

• The Court referred to its earlier decision in Eastern Investments Ltd. v.

Commissioner of Income-tax, West Bengal (1951) 20 ITR 1 (SC), where it was
held that interest paid on money borrowed for the purpose of investment in
shares is deductible, even if no dividend income is received.

• The Court emphasized that the test to apply is whether the expenditure was
incurred with the intention of earning income, irrespective of whether such
income was actually received during the relevant assessment year.

Ratio Decidendi:

• The Supreme Court concluded that the interest expenses incurred on loans
taken to finance investments in shares and securities are deductible under
Section 57(iii), even if no dividend income is received during the relevant
assessment year.
 • The Court emphasized that the intention behind the expenditure is crucial, and if
the expenditure was incurred with the purpose of earning income, it qualifies for
deduction under Section 57(iii).

Decision:

• The Supreme Court ruled in favor of the assessee, allowing the deduction of
interest expenses under Section 57(iii).
Topic 5: Income of Other Persons Included in Assessee’s Total
Income (Sections 60 to 64)

Concept of Clubbing of Income: The clubbing of income provisions ensure that

income earned or transferred by an individual to another person (family members or
others) is included in the original individual's income under certain circumstances. This
prevents tax evasion by shifting income to lower-taxed persons and ensures fair taxation
of income.

Key Sections with Essential Ingredients:

Section 60: Transfer of Income without Transfer of Asset

• Essential Ingredient: If an individual transfers income-generating assets to

another person but retains the right to the income from those assets, the income
continues to be included in the transferor's income.

• Application: This prevents situations where income is diverted while the

ownership of the asset is transferred, but the income remains with the original
owner.

Section 61: Revocable Transfer of Asset

• Essential Ingredient: If a transfer of asset is made revocable, meaning the

transferor retains the power to revoke the transfer, the income from the
transferred asset is clubbed with the transferor’s income.

• Application: Ensures that any transfer made with the intention to still benefit
from the income from the asset is treated as a revocable transfer, thus
maintaining the original owner’s liability for the income tax.

Section 62: Transfer of Income to Spouse, Minor Child, etc.

• Essential Ingredient: Income transferred to a spouse, minor child, or a person

to whom the transferor is legally obligated to provide support is included in the
transferor's income.
 • Application: This provision is aimed at preventing individuals from transferring
income-generating assets to family members to take advantage of lower tax
rates.

Section 64(1)(iv): Income of Spouse and Minor Child

• Essential Ingredient: If an individual transfers assets to their spouse or minor

child (other than a minor married daughter), the income arising from the asset
will be clubbed with the individual’s income.

• Application: The section specifically focuses on the income arising from

property transferred without adequate consideration to family members (e.g.,
spouse or minor child).

Section 64(2): Throwing Separate Property into Joint Hindu Family and Subsequent
Partition

• Essential Ingredient: If a person throws their separate property into the

common stock of a Hindu Undivided Family (HUF), the income from such
property will be treated as the HUF’s income. However, upon partition of the
HUF, the person who threw in the property will continue to be entitled to the
income from that property.

• Application: This provision ensures that the income from property contributed
to a Joint Hindu Family is taxed as the family’s income and remains as such even
after partition, provided the property was originally separate.

Section 64(3): Income of Minor Child

• Essential Ingredient: The income of a minor child, including income from

property, will be clubbed with the total income of the father (or mother, if the
father is not alive). However, if the minor child earns income through skills or
manual labor, it is not clubbed.

• Application: This section aims to prevent the evasion of tax by transferring

income-generating assets to a minor child, while allowing for legitimate income
from skills or labor.
Justifiability of Clubbing of Income:
1. Prevention of Tax Evasion:

o Key Purpose: To stop individuals from diverting their income to others in

lower tax brackets (e.g., transferring income to a spouse or minor child)
and thereby avoiding their tax liability.

o Justification: The law ensures that the income is taxed with the person
who has control over it, preventing any deliberate attempts to split
income among family members for tax avoidance.

2. Equity and Fairness:

o Key Principle: Fairness in taxation is ensured by taxing income where it is

earned or where the person has the actual control over the asset.

o Justification: The provisions uphold the principle that the taxpayer who
controls the asset and its income should bear the tax burden on that
income.

3. Family Arrangements:

o Key Focus: While transfers within family members (spouses, minor

children) are allowed, the provisions restrict attempts to split income
among family members merely for tax reduction.

o Justification: The law recognizes genuine family arrangements while

preventing the manipulation of tax liabilities.

Throwing Separate Property into Joint Hindu Family and Subsequent Partition
(Section 64(2)):

1. Hindu Undivided Family (HUF) Concept:

o Key Focus: Section 64(2) ensures that if an individual throws separate

property into the joint stock of the HUF, the income from that property
continues to be treated as HUF income.

o Justification: This provision is critical for maintaining the character of

joint property and ensures the income remains linked to the HUF even
after partition.

2. Subsequent Partition:

o Key Issue: The income from the property thrown into the common pool
continues to be recognized as the income of the HUF, even after the
 partition, ensuring that the member who contributed the property retains
the right to its income post-partition.

o Justification: The law ensures that a member’s contribution to the HUF,

particularly in the case of separate property, continues to generate
income for the member after the family is partitioned.

Conclusion:

The provisions under Sections 60 to 64 are designed to ensure that income from
transferred assets, income of family members (spouse, minor children), and income
from assets thrown into the common stock of a Joint Hindu Family are included in the
income of the transferor or the HUF to prevent tax avoidance. These provisions ensure
fairness in the tax system by preventing the shifting of income to family members and
other persons without substantial consideration.

Philip John Plasket Thomas v. Commissioner of Income Tax,

Facts:

• The assessee, Philip John Plasket Thomas, held 750 shares of 'A' class in J.
Thomas & Co., Ltd., Calcutta.

• The assessee entered into an engagement with Mrs. Judith Knight, who was a
divorcee. Their engagement was publicly announced.

• On December 10, 1947, both executed a deed of settlement, under which 750
'A' shares were transferred to Mrs. Judith Knight, with the provision that the
income from the shares would be paid to Philip during his lifetime.

• After Philip's death, the shares were to revert to him.

Issue:

• Whether the income derived from the shares transferred to Mrs. Judith Knight
should be included in the assessee's total income under Section 16(3)(a)(iii) of
the Income Tax Act, 1922, which deals with income clubbing provisions in case
of transfers to a spouse.

Court's Reasoning:

• The court observed that the transfer of shares, though it appeared to be a gift,
was structured such that the income from those shares continued to benefit
 Philip during his lifetime. The Court examined whether the transaction had the
effect of transferring not just the asset but also the income derived from it.

• It was highlighted that the provision of income to Philip during his lifetime
indicated that the transfer was not an outright transfer of capital; instead, it was
a transfer of income.

• The Court concluded that the transfer of income without transfer of the asset
was a primary reason why the income generated from the shares should be
included in the assessee's total income under Section 16(3)(a)(iii).

Decision:

• The Supreme Court held that the income from the transferred shares should
indeed be included in the assessee's total income.

• The Court emphasized the intent of the transfer, which was to retain the income
in Philip’s hands, and ruled that the transfer was essentially an arrangement to
keep the income within his control.

Batta Kalyani v. Commissioner of Income Tax, (1985)

Facts:

• The assessee, Smt. Batta Kalyani, was engaged in operating hardware and paint
shops.

• She employed her husband, B. Venkataramaiah, to manage the business and

draw a salary. The business profits were reported under her name, and the
income from the business was declared in her return.

• The assessing officer argued that since the husband managed the business, the
income generated should be considered as attributable to his efforts.

Issue:

• Whether the income from the business managed by the husband,

Venkataramaiah, should be included in the wife's total income under the
Income Tax Act, 1961.

Court's Reasoning:

• The court considered the issue of income attribution and the applicability of
provisions related to the inclusion of a spouse's income. It analyzed whether the
income generated by the business was genuinely the wife’s income or whether
 the husband's managerial efforts warranted the inclusion of that income in his
return.

• The court emphasized that in family-owned businesses, income derived from

the business where the husband was involved in active management can be
treated as belonging to the husband, especially when there was no clear
distinction in business operations and income flow between the spouses.

• The Andhra Pradesh High Court held that even though the business was legally in
the wife's name, the income generated due to the husband's active involvement
in managing the business was attributable to him. This would justify the
inclusion of the income in the wife's total income as per the principles of
clubbing income under Section 64.

Decision:

• The Court upheld the assessment and included the income in the wife's total
income, noting that the business management efforts by the husband
contributed directly to the business's success, justifying the attribution of the
income to her.

J.M. Mokashi v. Commissioner of Income Tax, (1994)

Facts:

• The assessee, Dr. J.M. Mokashi, was a well-established physician in Mumbai.

• His wife, Smt. Jayashree J. Mokashi, was employed as a receptionist and

accountant in his medical practice.

• During the accounting year relevant to the assessment year 1978-79, Dr.
Mokashi paid a salary of ₹8,100 to his wife, Smt. Jayashree.

• The Income Tax Officer (ITO) sought to include the salary paid to her in Dr.
Mokashi's income, under Section 64(1)(ii) of the Income Tax Act, 1961, which
allows for the inclusion of a spouse's income in the husband's income if the
spouse is employed in the business or profession of the husband.

Issue:

• Whether the income of the assessee's wife, Smt. Jayashree, should be included
in the husband's income under Section 64(1)(ii) of the Income Tax Act, 1961.

Court's Reasoning:

• The Bombay High Court examined Section 64(1)(ii), which provides that if a
spouse is employed in a business or profession carried on by the other spouse,
 the income from such employment is deemed to be part of the other spouse's
income.

• The court relied on the expansive interpretation of the term "concern," which in
this context, includes both business and professional activities. This
interpretation has been extended to encompass professions, not just
businesses.

• The wife was employed in the professional capacity in Dr. Mokashi's medical
practice, rendering her salary a part of his taxable income.

• The court also emphasized that the salary paid was not an arbitrary sum but was
commensurate with the services rendered, thereby justifying the inclusion of her
income under Section 64(1)(ii).

Decision:

• The Bombay High Court held that the salary paid to the wife, Smt. Jayashree, was
correctly included in the husband's total income under Section 64(1)(ii) of the
Income Tax Act, 1961.

• The judgment clarified that income derived from services rendered by a spouse
in the business or profession of the other spouse falls within the purview of
Section 64(1)(ii), regardless of whether the spouse’s role is formal or informal in
nature.

Mohini Thapar v. Commissioner of Income Tax, (1972)

Facts:

• Karam Chand Thapar, the assessee's husband, had gifted certain sums of money
to his wife, Mohini Thapar, during the relevant years.

• Using the gifted amounts, Mohini purchased shares and made investments that
yielded income.

• The Income-tax Officer sought to include the income from these investments in
the total income of the husband, Karam Chand Thapar, under Section 16(3)(a)(iii)
of the Income Tax Act, 1922, which allows for the income of the spouse to be
clubbed with the income of the husband if assets are transferred to the spouse
without adequate consideration.

Issue:

• Whether the income generated from the investments made by the wife, using the
gifted amount, should be included in the husband's total income under Section
16(3)(a)(iii) of the Income Tax Act, 1922.
Court's Reasoning:

• The Supreme Court examined the provisions of Section 16(3)(a)(iii), which states
that if assets are transferred to the spouse without adequate consideration, the
income from such assets is to be included in the transferor's total income.

• The Court focused on the fact that the gifts made by the husband to the wife
were without consideration, and therefore, the income derived from the assets
purchased with those gifted amounts would naturally be attributed to the
husband.

• The Court stressed that the provisions of the section aim to prevent income
splitting through the transfer of assets to a spouse without adequate
consideration, thus ensuring that the transferor does not evade tax on the
income generated from those assets.

• The reasoning was based on the principle that the income derived from the gifted
property was, in substance, attributable to the husband, even though the legal
ownership had been transferred to the wife.

Decision:

• The Supreme Court ruled that the income from the investments made by the
wife, using the gifted amounts, should be included in the husband's total income
under Section 16(3)(a)(iii) of the Income Tax Act, 1922.

• The Court upheld the Income-tax Officer's assessment and emphasized that the
primary purpose of Section 16(3)(a)(iii) is to prevent income from being diverted
in such a way as to reduce the overall tax liability.
Topic 6: Assessment - Best Judgment Assessment; Income Escaping Assessment
(Sections 139, 142, 143, 144, 145(2), 147, 148, 149, 150, 151, and 153)

Key Sections and Relevant Provisions:

1. Section 139: Filing of Return of Income

o Key Ingredients: This section mandates every person to file a return of

income for the relevant assessment year, either by due date or if required
by the Income Tax authorities. Failure to file the return can result in
penalties.

o Important Aspects:

▪ Section 139(1) prescribes the deadline for filing the return.

▪ Section 139(4) allows for filing the return after the due date if the
individual has not received notice under Section 142 or 148.

▪ Section 139(9) deals with defective returns and clarifies the

procedures if a return is filed incompletely.

2. Section 142: Inquiry before Assessment

o Key Ingredients: This section empowers the Income Tax Officer (ITO) to
issue notices for obtaining information and documents from the taxpayer
to aid in the proper assessment of income. It grants powers to make
inquiries, summon witnesses, and conduct a full investigation into the
taxpayer's financial affairs.

o Important Aspects:

▪ The ITO can direct a person to provide accounts, documents, and

other records that can help in determining the taxable income.

▪ If a return has not been filed, the ITO can direct a person to file a
return.

3. Section 143: Assessment

o Key Ingredients: This section details the procedures for assessing

income and determining the tax liability. It includes both Regular
Assessment and Best Judgment Assessment.

o Important Aspects:

▪ Section 143(1): A provisional assessment based on the return filed.

 ▪ Section 143(2): Scrutiny assessment, where the assessing officer
can examine the return filed.

▪ Section 143(3): Best Judgment Assessment, which applies when

the taxpayer does not comply with notices or submits insufficient
information.

4. Section 144: Best Judgment Assessment

o Key Ingredients: This section authorizes the Assessing Officer (AO) to

make an assessment to the best of his judgment when a taxpayer fails to
file a return, fails to respond to the notices under Section 142, or if the
return is not credible.

o Important Aspects:

▪ If the taxpayer fails to comply, the AO can estimate the income

based on the available information.

▪ The AO should consider the best available evidence, but the

discretion exercised must be reasonable and not arbitrary.

5. Section 145(2): Method of Accounting

o Key Ingredients: This section allows the ITO to prescribe the method of
accounting if the taxpayer's accounting method is inconsistent or does
not follow accounting standards.

o Important Aspects:

▪ The ITO may direct the taxpayer to follow an accrual-based

accounting method if the existing method is deemed improper or
inadequate.

▪ Section 145(2) ensures that the income and expenditure are

properly accounted for to reflect an accurate tax liability.

6. Section 147: Income Escaping Assessment

o Key Ingredients: This section authorizes the AO to reassess income if

they have reason to believe that any income chargeable to tax has
escaped assessment.

o Important Aspects:

▪ The AO can issue a notice to reassess within four years from the
end of the relevant assessment year.
 ▪ The AO must have "reason to believe" that income has escaped
assessment, typically based on new information or evidence.

7. Section 148: Issue of Notice for Reassessment

o Key Ingredients: This section specifies the procedure for issuing a notice
to the taxpayer if the AO believes income has escaped assessment.

o Important Aspects:

▪ A notice under Section 148 must be issued to the taxpayer before

initiating reassessment proceedings.

▪ The notice must be issued within four years from the end of the
relevant assessment year, unless there is evidence of fraud, willful
neglect, or concealment, in which case the time limit is extended
to six years.

8. Section 149: Time Limit for Reassessment

o Key Ingredients: Section 149 lays down the time limits for issuing
reassessment notices.

o Important Aspects:

▪ No reassessment can be done after four years from the end of the
relevant assessment year unless there is a case of fraud or wilful
neglect.

▪ In cases of concealed income or fraud, the notice can be issued

within six years.

9. Section 150: Transfer of Proceedings for Reassessment

o Key Ingredients: This section provides the procedure for transferring

reassessment proceedings from one officer to another.

o Important Aspects:

▪ If the original officer is transferred, the proceedings can be

continued by the new officer.

▪ It ensures that reassessment proceedings are not delayed or

disrupted due to the officer's transfer.

10. Section 151: Sanction for Reassessment

o Key Ingredients: Section 151 mandates that a reassessment notice can

only be issued with prior approval from the higher authorities.
 o Important Aspects:

▪ Reassessment can only be initiated with the sanction of the

Principal Commissioner or Commissioner.

▪ This provision aims to prevent arbitrary or excessive

reassessments by requiring additional scrutiny.

11. Section 153: Time Limit for Completion of Assessment and Reassessment

o Key Ingredients: Section 153 prescribes the time limits for completing
assessments and reassessments.

o Important Aspects:

▪ The assessment or reassessment must be completed within one

year from the end of the financial year in which the notice under
Section 148 was issued.

▪ In case of a scrutiny assessment, the time limit is within two years

from the end of the relevant assessment year.

Key Takeaways:

• Best Judgment Assessment is invoked when a taxpayer does not cooperate

with the tax authorities or fails to file returns.

• Income Escaping Assessment is a tool used by the authorities when they have
reason to believe that income has escaped assessment, often due to
concealment or fraud.

• Section 151 introduces safeguards by requiring prior sanction from higher

authorities before initiating reassessment.

• The time limits under Section 149 and Section 153 ensure that assessments
are completed within reasonable periods.

These sections and cases ensure that the Income Tax authorities can assess and
reassess income fairly while safeguarding against arbitrary action.
State of Kerala v. C. Velukutty (1966)
Facts:

• The assessee, C. Velukutty, was a dealer in rubber.

• The Sales Tax Officer (STO) rejected the books of accounts maintained by the
assessee, citing discrepancies and non-compliance with the provisions of the
Kerala General Sales Tax Act.

• Consequently, the STO resorted to a best judgment assessment to determine the

taxable turnover.

Issue:

• Whether the Sales Tax Officer was justified in rejecting the books of accounts
and resorting to a best judgment assessment under the Kerala General Sales Tax
Act.

Court's Reasoning:

• The Supreme Court examined the scope of "best judgment assessment" under
the Kerala General Sales Tax Act.

• The Court emphasized that while the assessing authority has the power to make
an assessment to the best of its judgment, this power must be exercised
judiciously and based on available material.

• The Court observed that the assessing authority should not act arbitrarily or
capriciously.

• The Court further stated that the assessing authority must have a reasonable
basis for its judgment and should not resort to guesswork.

Decision:

• The Supreme Court held that the Sales Tax Officer was justified in rejecting the
books of accounts due to discrepancies and non-compliance.

• The Court upheld the best judgment assessment made by the assessing
authority, emphasizing the need for a reasonable basis and the exercise of
discretion in accordance with the law.
C.I.T. v. Burlop Dealers Ltd. (1971)
Facts:

• Burlop Dealers Ltd., an assessee, was engaged in the business of manufacturing

and selling jute goods.

• The company had a joint venture with another company, and the profits from this
joint venture were shared equally between the two companies.

• The Income Tax Officer (ITO) assessed the total profits of the joint venture and
included the entire amount in the income of Burlop Dealers Ltd., without
considering the share of profits attributable to the other company.

Issue:

• Whether the Income Tax Officer was correct in including the entire profits of the
joint venture in the income of Burlop Dealers Ltd., without considering the share
of profits attributable to the other company.

Court's Reasoning:

• The Supreme Court examined the provisions of the Income Tax Act concerning
the taxation of joint ventures.

• The Court noted that in a joint venture, each party is entitled to its share of the
profits, and the income should be assessed accordingly.

• The Court emphasized that the Income Tax Officer should determine the share of
profits attributable to each party in the joint venture and assess the income of
each company separately.

• The Court observed that the Income Tax Officer's approach of including the
entire profits in the income of Burlop Dealers Ltd. was incorrect and did not align
with the principles of taxation of joint ventures.

Decision:

• The Supreme Court held that the Income Tax Officer was incorrect in including
the entire profits of the joint venture in the income of Burlop Dealers Ltd.

• The Court directed that the profits should be divided between the two
companies in accordance with their respective shares in the joint venture, and
each company's income should be assessed separately.
Gemini Leather Stores v. The Income-tax Officer, AIR 1975
Facts:

• Gemini Leather Stores, a partnership firm, was assessed to income tax for the
assessment year 1956-57 on a turnover of ₹15 lakhs.

• The Income Tax Officer (ITO) did not accept the return filed by the assessee and
the books of account produced, leading to a best judgment assessment.

• The turnover assessed was reduced by the Appellate Assistant Commissioner

and further reduced by the Appellate Tribunal.

• On March 31, 1965, the ITO issued a notice under Section 143 of the Income Tax
Act, 1961, stating that he had reasons to believe that income chargeable to tax
for the assessment year 1956-57 had escaped assessment and directed the
assessee to file a return for reassessment.

Issue:

• Whether the ITO was justified in issuing a notice under Section 143 for
reassessment of income for the assessment year 1956-57, considering the
previous assessments and the time elapsed.

Court's Reasoning:

• The Supreme Court examined the provisions of Section 143 and Section 147 of
the Income Tax Act, 1961, concerning the reopening of assessments.

• The Court emphasized that the ITO must have "reason to believe" that income
has escaped assessment, and this belief must be based on tangible material.

• The Court noted that the ITO had not provided sufficient reasons or material to
justify the reopening of the assessment after such a long period.

• The Court observed that the mere change of opinion by the ITO was not a valid
ground for reopening the assessment.

Decision:

• The Supreme Court held that the ITO was not justified in issuing the notice for
reassessment under Section 143.

• The Court quashed the notice, emphasizing the need for tangible material and
valid reasons for reopening an assessment.
The Income Tax Officer v. Lakhmani Mewal Das (1976)
Facts:

• Lakhmani Mewal Das, the assessee, was a partner in a firm engaged in the
business of money lending.

• The Income Tax Officer (ITO) issued a notice under Section 148 of the Income Tax
Act, 1961, for reassessment of income for the assessment year 1961-62, alleging
that certain income had escaped assessment.

• The ITO relied on information from the Investigation Wing, which indicated that
the assessee had received unaccounted money.

Issue:

• Whether the ITO had valid reasons to believe that income had escaped
assessment, justifying the reopening of the assessment under Section 148.

Court's Reasoning:

• The Supreme Court examined the scope of "reason to believe" under Section
148, emphasizing that the ITO must have a reasonable belief based on tangible
material.

• The Court noted that the information from the Investigation Wing was specific
and related to the assessee, providing a reasonable basis for the ITO's belief.

• The Court observed that the ITO was not required to have conclusive proof at the
stage of issuing the notice; a reasonable belief sufficed.

Decision:

• The Supreme Court upheld the reopening of the assessment under Section 148,
stating that the ITO had valid reasons to believe that income had escaped
assessment.

• The Court emphasized that the sufficiency of the reasons for reopening the
assessment was not justiciable at this stage.
Srikrishna (P) Ltd. v. Income-Tax Officer (1996) 9 SCC 534
Facts:

• Srikrishna (P) Ltd., an assessee, had claimed hundi loans totaling ₹17,00,000 in
its return for the assessment year 1960-61.

• During the assessment proceedings for the subsequent year, the Income Tax
Officer (ITO) discovered that a significant portion of these loans were either
bogus or obtained from close associates of the company's directors and
principal shareholders.

• Consequently, the ITO added ₹11,15,275 to the income of the assessee for the
assessment year 1960-61, treating it as income from undisclosed sources.

• Given the similarities between the loans claimed in both assessment years, the
ITO issued a notice under Section 148 to reopen the assessment for the year
1959-60.

Issue:

• Whether the ITO had valid grounds to issue a notice under Section 148 for
reopening the assessment of the year 1959-60, based on the findings from the
subsequent year's assessment.

Court's Reasoning:

• The Supreme Court examined the provisions of Sections 147 and 148 of the
Income Tax Act, 1961, which govern the reopening of assessments.

• The Court emphasized that the ITO must have "reason to believe" that income
has escaped assessment due to the assessee's omission or failure to disclose
fully and truly all material facts.

• In this case, the ITO had information indicating that the hundi loans claimed in
the earlier assessment year were similarly bogus or obtained from related
parties.

• The Court noted that the ITO had reasonable grounds to believe that income had
escaped assessment in the earlier year, justifying the reopening of the
assessment.

Decision:

• The Supreme Court upheld the validity of the notice issued under Section 148,
allowing the reassessment for the year 1959-60.
• The Court emphasized the importance of full and true disclosure by the assessee
and the ITO's duty to investigate and ensure that income has not escaped
assessment.