TAX LAWS - I

DIRECT TAXES

BASIC CONCEPTS
 BASIC CONCEPTS

Why Taxes - basic source of revenue for government

thru’ which expenses of Govt. are defrayed.

Two types – Direct & Indirect taxes.

 Contribution to Government revenues .
India’s Tax Revenue - Comparative Status

Total Tax Revenue as % of GDP

50
45
40
35
30
25
20
15
10
5
0
k n e a y y a a d an rica tes dia ina and
ar ium de anc stri Ital an dom ad rali lan p
nm elg e Fr u rm ng Can ust zer Ja Af Sta In Ch ail
w A Th
De B S Ge d Ki A
w
it uth ed
i te S So nit
U
Un

Source : Index of Economic Freedom, Heritage Foundation.

 India has a low tax to GDP ratio. It means
that

1) only those people who can afford to pay

taxes contribute towards it, which in turn
leads to low tax collection

2) wealthy people who are obligated to pay a

high amount of taxes resort to avoidance
Question is - what is income-tax

To understand this - one must know the basic

concepts of Taxation –such as
 Assessee means: [Section 2(7)]
Any person who is liable to pay income-tax or any other sum
of money under the Income Tax Act, 1961, and includes

(a) Every person in respect (b)Every person who is

of whom any proceedings
has been taken for the
assessment of his income or
of the income of any other
person. loss sustained by him
or other person, refund due
to him or such other person.
deemed to be an assessee
under the Act.
(c) Every person who is
deemed to be an assessee in
default under the Act.
Inclusive definition:

Since the above definition of “person” is inclusive one and not exhaustive, there
may be cases, when an entity not falling in the above seven categories may still
be treated as “person” inviting the provisions of the Act.
Illustrations : DSNLU – AJP, DCM Ltd – C.
Visakhapatnam Municipal Corporation - LA
Taxmann Publication (P) Ltd – C
Reliance Industries Ltd.- C
Legal heirs to receive property of late Shri Nusserwanji - BOI
ABC group housing co-operative society/BCCI - AOP
Firm of X & Y – F
A joint family of X - HUF
X and Y who are legal heirs of Z , carried on business after death of Z without entering to partnership.- AOP
 In an assessment year, income of the
assesse during the previous year is taxed at the
rates prescribed by the relevant Finance Act. It is
therefore, also called as the “Tax Year”
Other aspects of previous year –
Common previous year for all source of income.

A person may earn income from more than one sources but previous
year will always be common for all the sources of income

This will be so even if a person maintains records or books

of accounts separately for different sources of income.

Thus, for levy of tax - Total income of a person from all the sources of
income will be taken together and considered in the previous year
immediately preceding the assessment year.
Ashok receives in the 2015-16, income as salary of Rs
10,00,000 from A Limited. He also receives income of Rs
1,00,000 as dividend and interest from his investments in
shares and fixed deposits. Further, Ashok also runs a personal
business, from which he receives Rs 5,00,000 as income.

A’s aggregate income of Rs 16,00,000 from all the

above sources i.e (Rs 10,00,000+1,00,000 + 5,00,000)
will have a common previous year 2015-16 and taxed
in the assessment year 2016-17.
 However, Previous Year for
newly established business –
From the date of setting up
of the business to the end of
the Financial year in which
business was set up.
Example : X Ltd.
Started business on
1.11.11. So for X Ltd.
Previous year will be
considered as 1.11.11 to
31.3.12.
Ramesh sets up business in
Jan 2012. Thus the 3 months It is immaterial that
beginning on 1st Jan 2012
and ending on 31st March
the previous year is of a
2012 will be the previous period less than 12
year 2012 and taxed in the months.
assesment year 2012-13
EXCEPTIONS - Previous Year & Assessment Year will be same in the
following cases:

1. Shipping business of nonresident [Section 172]

2. Persons leaving India [Section 174]

3. AOP or BOI or Artificial Juridical Person formed for a particular event or
purpose [Sec. 174A]

4. Persons likely to transfer property to avoid tax [Section 175]

5. Discontinued business [Section 176]

Total Income – Sec 2(45)

The total income of an assessee is gross total income as reduced by the amount
permissible as deductions under Sec 80 C to 80 U. This is also referred to as the “Net
Income” or “Taxable Income” (Real Income) & finally tax liability is calculated.

I. steps involved for calculation of Taxable Income

II. steps involved for calculation of tax liability :

Burden of proof –

Section 4 of the Act imposes a general liability to tax upon all

income. But the Act does not provide that whatever is received by
a person must be regarded as income liable to tax.

However, the burden of proving that the income is not

taxable because it falls within an exemption provided by the
Act, lies upon the assessee.
 Income Sec 2(24)-
The definition starts with the word includes and therefore the list enumerated under the word income is inclusive and not exhaustive.
The value of any benefit or perquisite, whether convertible
into money or not obtained from a company either by a
director or by a person who has a substantial interest in the
company.
any winnings from lotteries,
crossword puzzles, races any sum received under a
including horse races, card Keyman insurance policy
games and other games of including the sum allocated
any sort or from gambling by way of bonus on such
or betting of any form or policy.
nature whatsoever
• CIT v G.R Karthikeyan (1993) 201 ITR 866 (SC)

• The assessee participated in an All India Highway Motor

Car Rally and on being declared a winner, received an
amount of Rs. 22,000 as prize money.

• The Income-tax officer included the prize money in his

income for the relevant assessment year relying upon
the definition of ‘income’ in clause (24) of Section 2 of
Income Tax Act.
• On an appeal preferred by the respondent-assessee
the Appellate Assistant Commissioner held that as the
Rally was not a race, the prize money cannot be
treated as income within the meaning of section
2(24).

• The revenue went in appeal. The Tribunal held that

the Rally was not a race and as it was a test of skill
and endurance, it was not a ‘game’ within the
meaning of Sec. 2 (24).
• As the prize money received was casual in nature
it fell outside the provision of the Act.

• The High Court on a reference upheld the findings

of the Tribunal, and observed that the expression
‘winnings’ connotes money won by betting or
gambling and therefore the prize money did not
represent ‘winnings’.
• In as much as the amount in question was obtained by
participating in a rally which involved skill in
driving the vehicle, it cannot he included in the
assessee’s income, also because it fell outside the
preview of s.10 (3).
 
• The revenue went in appeal to the Supreme Court
• Judgement:
• The expression ‘income’ must be construed in its
widest sense. The definition of ‘income’ is an
inclusive one.

• Even if a receipt does not fall within sub-clause (ix)

or any of the sub-clauses of Sec.2(24) of the Act it
may yet constitute income.
• Hence the prize-money received by the
respondent assessee constitutes ‘income’ as defined
in clause (24) of Section 2 of the Act.

• The High Court erred in reading several sub-clauses

in Sec. 2(24) as exhaustive when the statute
expressly says that the definition is inclusive.
• Even if a receipt does not fall within the ambit of any
of the sub-clauses in Sec. 2(24) it may still be income
if it partakes of the nature of income.

• The idea behind providing inclusive definition in

Sec. 2(24) is not to limit its meaning but to widen
its net.

• The word ‘income’ is of widest amplitude and that it

must he given its natural and grammatical meaning.
 • CAPITAL EXPENDITURE

• Expenditure made for benefits over a long period

and related to any fixed asset

• are called capital expenditure.

• Examples
• Acquiring of fixed assets

• Expenses on expansion modification and improvement of

fixed assets.

• On acquiring the right to carry business e.g. purchase of

patent, goodwill
• REVENUE EXPENDITURE
• Incurred for the operation of business

• Benefits of these for the current year

• For smooth running of business

• Examples
• Incured for the operation of business - wages,
salary administrative exp.

• On ordinary repairs of fixed assets to maintain the

capacity

• For production of goods-cost of raw material

• Renovation in Hotels Replacement of machinery

• Capital receipts
• Refer to incoming cash flows (receipts)
originating from one of the following three
sources:
• Cash from the sale of fixed assets (either tangible
or intangible) - Can also include a payment
associated with an insurance claim from a
damaged fixed asset
• Cash from the sale of shares in the business
• The sale of a fixed asset or shares in a business
arises on only an occasional basis.

• Thus, they do not arise from the operating

activities of a business.

• A capital receipt tends to be of a non-continuing

nature.
• Examples
• Amount received from fixed assets or investment.

• Amount received by company from issue of shares.

• Amount received as loan

• Amount received as compensation from damage of

assets
• Revenue Receipt:

• Receipts which are recurring (received again and

again) by nature and

• which are available for meeting all day to day

expenses of business concern
• Examples

• Amount received from sale of goods

• Fees received from the services provided by the
business
• Interest and dividend received on investment
• Rent received
• Subsidy from Government.
Capital and Revenue receipts:

●
Capital receipts are those which are exempt
from tax unless they are expressly taxable.
●
Eg Capital gains are specifically taxable
under sec 45 of IT Act, even though they are
capital receipts.

●
On the other hand revenue receipts
are those which are taxable unless
specifically exempt.
●
Eg. Income exempt under Sec 10
• Taxable income vis-a-vis Subsidies.

• Subsidies – If the purpose is to help the assessee to set up

its business the money must be treated as having been
received for capital purpose.

• But if the money is given to the assessee for assisting him in

carrying on business operation and is given only after the
commencement of production such subsidy must be treated
as a revenue receipt.
.
..
• Commr. Hindu Religious Endowments v Sri
Laksmindra Thirtha Swamiar of Sri Shirur Mutt AIR
1954 SC 282.
• Facts:
• The Madras Hindu Religious and Charitable
Endowments Act, 1951 was enacted by the Madras
Legislature.
• State Legislature is competent to enact laws on the
subject of religious and charitable endowments
-entry 28 of List III in Schedule VII of the
Constitution.
• Object of the legislation : to amend and
consolidate the law relating to the administration
and governance of Hindu religious, charitable
endowments in the State of Madras

• Controversy was the Constitutional validity of s.

76 of the The Madras Hindu Religious and Charitable
Endowments Act, 1951, which reads as follows:
• “76. (1) In respect of the services rendered by the
Government and their officers, every religious
institution shall, from the income derived by it,
pay (contribute) to the Government annually such
contribution not exceeding five percentum of its
income as may be prescribed.
• The annual payments shall be made,
notwithstanding anything to the contrary
contained in any scheme under this Act for the
religious institution concerned.
• Thus the section authorizes the levy of an annual
contribution on all religious institutions, the
maximum of which is fixed at 5 per cent of the
income derived by them.

• and expressly states that the levy is in respect of the

services rendered by the Government and its
officers.
• Relevant Issue/s
• The validity of the provision – which is attacked on a
two-fold ground:

• i) that the levy of contribution is really a tax and

as such it was beyond the legislative competence of
the State Legislature to enact such provision. -  
• ii) The other is, that the contribution being a tax
or imposition, the proceeds of which are specifically
appropriated for the maintenance of a particular
religion or religious denomination,

• it comes within the mischief of art. 27 of the

Constitution and is hence void.
• If the contribution payable under s. 76 of the Act is a
“fee”, it may come under entry 47 of the
Concurrent List which deals with “fees” in respect
of any of the matters included in that list.

• On the other hand, if it is a tax, as this particular tax

has not been provided for in any specific entry in any
of the three lists, it could come only under entry 97
of List I or art. 248(1) of the Constitution
• and in either view the Union Legislature alone
would be competent to legislate upon it.
• CONTENTIONS:
• On behalf of the appellant, the contention raised is
that the contribution levied is a fee and not a tax.

• However, the point is certainly not free from doubt as

- Art. 277 also mentions taxes, cesses and fees
separately.

• So – the question consideration really is what are the

indicia or special characteristics that distinguish a tax
proper from other aspects -
•A neat definition of what “tax” means has been given
by Latham C.J. of the High Court of Australia, in
Matthews v. Chicory Marketing Board, 60 C.L.R. 263

A tax, according to the learned Chief Justice, “is a

compulsory exaction of money by public authority for
public purposes enforceable by law and is not payment
for services rendered.”
• i) It is said that the essence of taxation is
compulsion, that is to say, it is imposed under
statutory power without the taxpayer’s consent
and the payment is enforced by law.

• ii) The second characteristic of tax is that it is an

imposition made for public purpose without
reference to any special benefit to be conferred on
the payer of the tax
• iii) Another feature of taxation it; that as it is a part of
the common burden, the quantum of imposition
upon the taxpayer depends generally upon his
capacity to pay.

• As the object of a tax is not to confer any special

benefit upon any particular individual, there is,
no element of quid pro quo between the taxpayer
and the public authority.
• On behalf of the respondent it was contended that –
• a ‘fee’ is generally defined to be a charge for a
special service rendered to individuals by some
governmental agency.

it is something voluntary which a person has got to

pay if he wants certain services from the
Government;
• but there is no obligation on his part to seek such
services and if he does not want the services, he can
avoid the obligation.

• The example given is of a licence fee. If a man wants

a licence that is entirely his own choice and then only
he has to pay the fees, but not otherwise.
•Judgment
•The element of compulsion or coerciveness is present
in all kinds of imposition though in different degrees
and that it is not totally absent in fees.

•This, therefore, cannot be made the sole or even a

material criterion for distinguishing a tax from fees.
• Compulsion lies in the fact that payment is
enforceable by law against a man in spite of his
unwillingness or want of consent; and this element is
present in taxes as well as in fees.

• If a fee is regarded as a sort of return or

consideration for services rendered,
•it is absolutely necessary that the levy of fees should, on the
face of the legislative provision, be co-related to the expenses
incurred by Government in rendering the services.

•S. 76 of the Madras Act speaks definitely of the contribution

being levied in respect rendered by the Government; so far it
has the appearance of fees.

•It is true that religious institutions do not want these services to be

rendered to them.
• It may be noticed, however, that the contribution that
has been levied under s. 76 of the Act has been made
to depend upon the capacity of the payer and

• not upon the quantum of benefit that is supposed

to be conferred on any particular religious
institution.
• Further the institutions,
• which come under the lower income group and have
income less than Rs. 1,000 annually, are excluded
from the liability to pay the additional charges under
cl. (2) of the section.
• These are undoubtedly some of the
characteristics of a ‘tax’ and the imposition
bears a close analogy to income-tax.
• But the material fact which negatives the theory of
fees in the present case is that the money raised by
levy of the contribution

• is not ear-marked or specified for defraying the

expenses that the Government has to incur in
performing the services.
• All the collections go to the consolidated fund of the
State and all the expenses have to be met not out of
these collections

• but out of the general revenues by a proper

method of appropriation as is done in case of other
Government expenses.
• That in itself might not be conclusive,

• but in this case there is total absence of any

co-relation between the expenses incurred by the
Government and the amount raised by contribution
under the provision of s. 76

• and in these circumstances the theory of a return or

counter-payment or quid pro quo cannot have any
possible application to this case.
• In our opinion, therefore, the High Court was
right in holding that the contribution levied under
s. 76 is a tax and not a fee

• and consequently it was beyond the power of the

State Legislature to enact this provision.
•In view of our decision on this point, the other ground
hardly requires consideration.... What is forbidden by
the article

•is the specific appropriation of the proceeds of any tax in

payment of expenses for the promotion or maintenance
of any particular religion or religious denomination.
• Because-
• Ours being a secular State and there being freedom
of religion guaranteed by the Constitution, it is
against the policy of the, Constitution

• to pay out of public funds any money for the

promotion or maintenance of any particular religion
or religious denomination
• But the object of the contribution under s. 76 of the
Madras Act is not the fostering or preservation of the
Hindu religion or any denomination within it.
 
• The legislature seeks to control and to ensure that the
object, as enunciated in the endowment Act is given
effect to i.e endowments are properly administered
and their income is duly appropriated for the
purposes for which they were founded or exist.
• There is no question of favouring any particular
religion or religious denomination in such cases,
hence Art. 27 of the Constitution is not attracted to
the facts of the present case.

• The result, therefore, is that in our opinion section

Sec 76(1) is void as beyond the legislative
competence of the Madras State Legislature.
• Thus, the appeal will stand dismissed with costs to
the respondent. 
Basis of Charge:
Learning Objective

Income Tax is levied on taxable income of every

person.

what is the basis on which Income Tax is charged

Iii)income sought to be taxed is of the previous year
and not of the assessment year.

Iv) levy of tax on the assessee is on his taxable or

net income.

The assessment should in every case be made in accordance

with provisions of law in force in the relevant assessment
year - and not law applicable to the previous year.
• Thus for making assessment, the general rule is
income of the previous year alone should be taxed in
the immediately following assessment year.
• The statute should clearly and unambiguously convey the
three components of the tax law i.e., the subject of the
tax, the person who is liable to pay the tax and the
rate at which the tax is to be paid.
• If there is any ambiguity regarding any of these
ingredients in a taxation statute then there is no tax in law.
Then it is for the Legislature to do the needful in the
matter - Mathuram Agrawal v. State of Madhya
Pradesh [1999] 8 SCC 667.
However, there are five exceptions to the rule:

i) Assessment of non-residents in respect of their income

from shipping business

Ii)Assessment of persons leaving India

Iii) Assessment of association of persons or body of individuals or artificial
juridical person formed for a particular event or purpose.

Iv) assessment of persons trying to alienate their

assests with the object of avoiding tax liability

V) Assessment of Income from discontinued

business.
 •
CONCEPT OF INCOME

•Income as generally understood for tax purposes - Entry 82

of List I of the Seventh Schedule to the Constitution empowers
Parliament to levy “taxes on income other than agricultural
income”.

•Entries in the Lists in the Seventh Schedule to the Constitution

should not be read in a narrow or restricted sense—Bhagwan
Dass Jain v. Union of India [1981] 5 Taxman 7 (SC).
• It, therefore, follows that in addition to receipts
mentioned in section 2(24) (which does not define the
term “income” but merely describes the various receipts
as income), any other receipt is taxable under the Act, if it
comes within the general and natural meaning of the term
“income”.
• According to the Shorter Oxford English Dictionary,
“income” means “that which comes in as the periodical
product of one’s work, business, lands, or investments
(commonly expressed in terms of money) ; annual or
periodical receipts accruing to a person or a corporation”.
 CIT v. Shaw Wallace & Co. [1932] 6 ITC 178 (PC)

The assesses (respondents) carry on business in Calcutta as agents and

merchants of various companies, and have branch offices in different
parts of India. For a number of years prior to 1928 they acted as
distributing agents in India of the Burma Oil Company and the
Anglo-Persian Oil Company, but had no formal agreement with
either company.

In or about the year 1927 the two companies combined and

decided to make other arrangements for the distribution of their
products. The respondents’ agency of the Burma Company
was accordingly terminated on 31st December 1927, and
that of the Anglo-Persian Company on 30th June following.
Some time in the early part of 1928 the Burma Company paid to the
respondents a sum of Rs. 12,00,000 “as full compensation for
cessation of the agency,” and in August of the same year the Anglo-
Persian Company paid them, another sum of Rs. 3,25,000 as
“compensation for the loss of your office as agents to the Company.”

The quotations are from letters by which the payments

were recorded, and are accepted on both sides as
correctly expressing the nature of the transactions.
The income-tax officer, in computing the assessable income of the
respondents for the relevant year, took these two receipts into account
as profits or gains of their business in the year ending 31st
December 1928, but allowed certain deductions there from in
respect of compensation paid by the respondents to various
employees,

leaving a balance of Rupees 9,83,361 which he

included in the total income of the respondents
found assessable for the year 1929-30.
The respondents objected to the assessment, and
appealed to the Assistant Commissioner, who
confirmed the assessment.

Thereafter, on the requisition of the respondents, the

the questions of law were referred to the High
Court –
• The questions formulated were as follows:
• (a)Was not the sum of Rs.9,83,361 which, had been
included in the total income of the assessees for purposes
of assessment for 1929-30,

• not income, (profits or gains) within the meaning of the

Income-tax Act?

• (b) If it could be said to be income, (profits or gains)

within the meaning of the Act, was it liable to be assessed
to tax - under either of Ss. 10 of the Act,
• inasmuch as (1) it was not the profits, or gains of any business
carried on by the assesses within the meaning of S. 10 of the
Act,

• nor (2) income, profits or gains from other sources within the
meaning of S. 12 of the Act?

• (c) In the alternative, was not the payment of Rs.

9,83,361 an ex gratia payment in the nature of a present from the
oil companies in question and was it not therefore exempt under S.
(4) 3 (vii) of the Act ? –
• High Court answered in favour of the assesee.
• Under S. 10 the tax is to be payable by an assesses
under the head business “in respect of the profits
or gains of any business carried on by him.”

• it is to be the profit earned by a process of

production
Revenue went in appeal to Privy Council –
The object of the Indian Act is to tax “income,” a
term which it does not define. It is expanded, no
doubt, into “income, profits and gains,” but the
expansion is more a matter of words than of
substance.
Income, in this Act connotes a periodical
monetary return “coming in” with some sort of
regularity, or expected regularity, from definite
sources.
The source is not necessarily one which is: expected
to be continuously productive, but it must be one
whose object is the production of a definite return,
excluding anything in the nature of a mere windfall.

Thus income has been likened pictorially to the fruit

of a tree, or the crop of a field. It is essentially the
produce of something.
Thus any of these sums, apart from their exemption,
could be regarded in any scheme of taxation as
income,.

They cannot construe it as enlarging the word

“income” so as to include receipts of any kind
which are not specifically exempted..
Following the line of reasoning above indicated, the
sums which the appellant seeks to charge can, only be
taxable

if they are the produce, or the result, of carrying

on the agencies of the oil companies in the year in
which they were received by the respondents.
But when once it is admitted that they were sums
received, not for carrying on this business, but as
some sort of solatium for its-compulsory cessation,
the answer seems fairly plain.

If the business had been sold-even as the

“goodwill” had been assigned to the employing
companies, as the High Court seems to have
thought it had-it is conceded that the price paid
would not have been taxable.
For the reasons given the question (a) was rightly
answered by the High Court in favour of the
assessee.
The reasoning of this judgment would apply
equally if the appellant based his claim on head
(vi) “other sources” and the corresponding
provisions of S. 12. – APPEAL DISMISSED
Other attributes of Income -

Ii) Receipt basis / Accrual basis

Income on accrual basis is received without actual

receipt. – It accrues on the basis of right to receive.
Iii) Legal or Illegal source – IT does not make a
distinction between a legal and an illegal income.
smuggling activity.

Income includes loss - Income includes loss. While income

and profits and gains represent “plus income” losses
represent “minus income”. Loss is a negative income and
in calculation of total income of an assessee both negative
and positive income should be taken into account.
vi) Temporary or Permanent Income – No
distinction - Both are taxable.
There is a thin dividing line between diversion of
income and application of income.
‘Diversion of Income’ is where by an obligation,
income is diverted to some other person. When an
assesssee on behalf other person receives income
and later on it is diverted to such person-----
it is known as diversion of income and
consequently not chargeable to tax.
• Salary retained by employer for being credited to
a compulsory deposit fund is ……...

• The sum credited by employer to employee’s

account of Provident Fund Scheme is …………
 CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC).

The assessee, Sitaldas Tirathdas has many sources of

income, property, bank deposits and share in a firm known
as Messrs. Sitaldas Tirathdas. For the assessment years
1953-54 and 1954- 55, his total income was respectively
computed at Rs. 50,375 and Rs. 55,160.

This computation was not disputed by him, but he sought to

deduct there from a sum of Rs. 1,350 in the first assessment year
and a sum of Rs. 18,000 in the second assessment year on the
ground that under a decree he was required to pay these sums as
maintenance to his wife, Bai Deviben and his children.
This contention of the assesses was disallowed by the
Income-tax Officer, whose decision was affirmed
on appeal by the Appellate Assistant Commissioner. On
further appeal, the Tribunal observed:

“This is a case, pure and simple, where a assessee is compelled

to apply a portion of his income for the maintenance of persons
whom he is under a personal and legal obligation to maintain.
The Income-tax Act does not permit of any deduction from the
total income in such circumstances.”
The assessee put his contention in the following
words:

“I claim a deduction of this amount from my total income because my real total
income is whatever that is computed, which I do not dispute, less the
maintenance amount paid under the decree.”
The Tribunal, however, referred the above question
for the opinion of the High Court.

The High Court held in favour of assessee. The

department went in appeal to Supreme Court.
“In our opinion, the true test is whether the amount
sought to be deducted, in truth, never reaches the
assessee as his income. Obligations, no doubt, there are
in every case, but it is the nature of the obligation which
is the decisive fact.

There is a difference between an amount which a

person is obliged to apply out of his income and an
amount which by the nature of the obligation cannot
be said to be a part of the income of the assessee.
Where by the obligation income is diverted before
it reaches the assessee, it is deductible.
but where the income is required to be applied to
discharge an obligation after such income reaches
the assessee, the same consequence, in law, does
not follow.
The second payment is merely an obligation to pay
another a portion of one’s own income, which has
been received and is since applied.
In our opinion, the present case is one in which the wife and
children of the assessee who continued to be members of the
family received a portion of the income of the assessee, after
the assessee had received the income as his own.

The case is one of application of a portion of the income to discharge

an obligation and not a case in which by an overriding charge the
assessee became only a collector of another’s income.
The matter in the present case would have been different, if such an
overriding charge had existed either upon the property or upon its
income, which is not the case.
Precedent followed - P. C. Mullick v. Commissioner
of Income-tax, Bengal (1938) 6 I.T.R. 206 1938
Ind law PC 1

For these reasons, the question ought to have been

answered in the negative. The appeal is thus allowed
with costs.
• DOUBLE TAXATION
• Question of double taxation must be decided having
regard to who the assessee is; if the assessee is different,
the question of double taxation would not arise-
ITO v. S. Radha Krishnan [2002] 122 Taxman 715 (SC).
• Additional income-tax on undistributed profits of certain
companies - Assessment year 1972-73 - The fact that
company has been made liable to tax on the amount of
dividend does not mean that said amount, when paid
as income to shareholder, could not be taxed as income
in hands of shareholders and since assessees are
different, question of double taxation would not arise -
• Provat Kumar Mitter v CIT [1961] 41 ITR 624
(SC). FACTS
• The assessee was a registered holder of 500 shares of
a company.
• By a written instrument, dated 19-1-1953 he
assigned to his wife, the right, title and interest
• to all dividends and sums of money which might
be declared or might become due on account or in
respect of those shares for the term of her natural
life.
• However, under the terms of the instrument, the
shares themselves remained the property of the
assessee and it was only the income arising there
from which was sought to be settled or assigned to
his wife.
• During relevant previous year assessee’s wife
received dividends on those shares. In course of
assessment, the ITO included dividend amount in the
total income of assessee.
• Against the said inclusion, the assessee contended
that since the settlement was for the lifetime of his
wife,

• the dividend which his wife received could not be

deemed to be his income under the relevant
provisions of Income Tax Act, 1961.
• The AAC dismissed the appeal. On further appeal, the
Tribunal held that the deed being an unregistered
instrument did not operate as a valid transfer of the
dividend income in favour of the assessee’s wife.
• The High Court on reference, held that the payment
of dividend income to the assessee’s wife under the
covenant in the deed of assignment was merely a case
of application of the assessee’s income.
• On appeal to the Supreme Court:
• HELD 
• A transfer of property may take place not only in the
present, but also in future; but the property must be in
existence. The instrument of 19-1-1953, was not a
transfer of any existing property of the assessee.
• It was in its true nature a contract to transfer or
make over in future, every dividend and sum of
money which may be declared or become due and
payable
• on account or in respect of the shares held by the
assessee, to his wife during her lifetime; the other
covenants were ancillary in nature and subserved this
main object of the contract.

• The assessee did not assign the shares and,

therefore, retained the right to participate in the
profits of the company; he did not part with that
right.
• What the contract provided for was merely that the
beneficiary was given the right to receive from the
assessee every dividend and other sum of money
which may be declared or become due and payable in
respect of the shares.

• The High Court rightly pointed out that the company

paying the dividend could pay it only to the registered
shareholder or under his orders;
• and the income continued to accrue to the assessee,
but was thereafter paid over to his wife under the
terms of the contract..
• The income was, therefore, assessable in the hands of
the assessee, because it was part of his income though
applied subsequently towards payment to the wife
under the terms of the contract.
• The income from the shares would first accrue to the
settlor before the beneficiary can get it. Such income
will undoubtedly be assessable in the hands of the
settlor despite the contract.

• If a person has alienated or assigned the source of

his income so that it is no longer his, he may not be
taxed upon the income arising after the
assignment of the source,
• But if the assessee merely applies the income so that
it passes through him and goes on to an ultimate
purpose, even though he may have entered into a
legal obligation to apply it in that way, it remains his
income only..
• This was exactly what had happened in the present
case. The High Court correctly answered the question
referred to it. The appeal failed and is dismissed.
 Understanding the residential
status of the person for tax
RESIDENTIAL purpose is important
STATUS because –
Learning Objective the basis for determination of
residential status varies
‘person’ wise.
 To Concept of
determine
Eg: A converse
residential person
income status is
ly a
BASIC taxable in who is a foreigner
nothing to
India of a citizen of
PRINCI do with can be
person.---- India can
PLES – Residential
nationality resident
or
be a non-
Sec 6 status of resident of India
the person domestic
status of a for IT for tax
has to be
known. person. purpose. purpose.
●
Total income of a person cannot be computed unless
residential status of a person in a previous year is known.

●
Therefore, the determination of the residence status of a person
is very significant - in order to find out his tax liability.

●
Broadly a assessee can be a i) Resident or Ii) Non-resident
-However, individual and HUF cannot be simply called resident in India. If
individual or HUF -is a resident in India, they will be either;

●
i) Resident and Ordinarily resident in India (ROR) or
Ii) Resident and not Ordinarily resident in India (NROR)-
 To be An individual
will be a
Resident determin ascertained
resident in
Residenti whether he
or Non- e the India in any
al status is resident previous
Resident residenti
of or a non – year, if he
al status satisfies at
individua (NR) resident
of an during the
least one of
l: -Section the following
individua previous TWO basic
6(1): l, it is to year. conditions—
i. An Indian citizen leaves India during the previous year
for the purpose of taking up employment outside India.
OR as a member of the crew of an Indian ship OR .

ii.
An Indian citizen or a person of Indian origin
comes on visit to India during the previous year.

For above purpose, a person is said to be of Indian

origin if either he or any of his parents or any of his
grandparents was born in undivided India.
In both the above cases, an individual needs to be
present in India for a minimum of 182 days or
more to become resident in India instead of 60
days.

So ….. If an individual satisfies any of the two conditions, he

is a resident in India and if he does not satisfy any of the
conditions, he is a nonresident during that particular
assessment year. (In other words such a Non-resident Indian
will not lose his NRI status even if he visits India and stays
upto 181 days in a previous year)
• No technical meaning is intended for the word
‘employment’ used in the Explanation.

• Going abroad for the purpose of employment only

means that the visit and stay abroad should not be
for other purposes such as a tourist, or for medical
treatment or for studies or the like.
• Going abroad for the purpose of employment,
therefore, means going abroad
• to take up employment or any avocation referred
to in the circular, which takes in self-employment
like business or profession.
• So much so, taking up own business by the
assessee abroad satisfies the condition of going
abroad for the purpose of employment
Resident and Ordinarily Resident [R & O R ]

Additional Conditions for a person to be Resident and Ordinary

Resident (ROR) An individual may become a resident and ordinarily
resident in India if he has satisfy both the following conditions below
- besides satisfying any one of the above mentioned conditions:

(i) he is a resident in at least any 2 out of the 10 previous years

immediately preceding the relevant previous year, and
(ii) he has been in India for 730 days or more during the seven
previous years immediately preceding the relevant previous year.
Resident and not Ordinarily Resident [R & N O R ]

An individual would be an RNOR in India in any previous year

if he has been a non-resident in India in 9 out of the 10 previous
years preceding the relevant year, or

has been in India for a total period of 729 days or less during
the 7 previous years preceding the relevant year (hereinafter
referred to as “the 729 days test”.)
Non Resident

An individual is a non-resident in India if he

satisfies none of the basic conditions given in
Sec 6(1) of the Income Tax Act 1961.
Venkat was in India for 271 dys in 2013-14 (April 2013:
30 dys. May 2013 : 31 dys; June 2013: 30 dys and ; July
2013: 31 dys; Aug 2013 31 dys; Sep 2013 30 dys; Oct
2013 31; Nov 2013 30 dys; Dec 2013 27 dys )
A is a Resident in India as he satisfies both basic
conditions by staying in India..

Proposition-
Since A had never been out of India before
27th December, 2013, he would be satisfying both the
additional conditions as follows :
Hence Venkat is Resident and Ordinarily Resident. (ROR)
Chappell, an Australian Citizen comes to India as the Coach of Indian
Cricket team. During the previous year 2009-10, he stayed in India for
95 days. Before that he was in India for more than 365 days during the 4
years prior to 2009-10.

What will be his residential status for the assessment year 2011-12?

Chappell satisfies the second basic condition of stay of 365 days or more
during the four years preceding the previous year 2009-10, and he was
in India for more than 60 days during the financial year 2009-10. He
will be Resident of India.
• The mere fact that the family has a house in India,
where some of its members reside or the karta is in
India in the previous year,
• does not constitute that place as the seat of control
and management of the affairs of the family unless
the decisions concerning the affairs of the family are
taken at that place.
A HUF can be Resident and Ordinarily Resident if its
Karta satisfies both the conditions given in section
6(6)

that is the Karta has been present in India:- in at least 2

out of 10 previous years according to the basic condition
mentioned immediately preceding the relevant previous
year and for a period of 730 days or more during 7 years
immediately preceding the previous year
 Non-Resident
A HUF will be non-
resident in India if
control and management
of its affairs is situated
wholly outside India.
• Illustration:
• Determine the residential status of HUF whose control
and management are partly in India and the Karta stays in
India for the period of 360 days during the period of 7
years?
• The place of control and management of affairs of HUF is
partly in India and hence, HUF is resident. In order to
determine whether HUF is ROR or NOR, there is a need
to satisfy the respective conditions. In this case. Karta
stays in India only for a period of 360 days in the 7 years
and therefore, HUF is ‘not-ordinary resident’.
Resident –S 6(2)

Residence of a firm, an Association of Persons (AOP),

or a Body of Individuals (BOI) will depend upon the
place of control and management.
Thus, any such person will be Resident in India if control and management
of its affairs is wholly or partly situated in India and conversely, it will be
non- resident in India if control and management of its affairs is situated
wholly outside India.
• A firm or an association of persons cannot be
ordinarily or not ordinarily resident. The residential
status of the partners/members of the firms/
association are not relevant in determining the status
of the firm/ association.

• While in the case of a firm, control and management

is vested in partners, in case of an association of
persons it is vested in the principal officer.
Control and management means de facto (actual) control or
manage but not merely the right to control or manage.
Control and management is situated at a place where the
head, the seat and the directing power are situated.

Non Resident AOP, BOI and firms will be

non-resident in India if control and
management of its affairs is situated wholly outside
India.
•Residential Status of a Company –Section 6(3) –
Earlier Position:
• The earlier provisions of section 6 of the Act provides
for the conditions under which a person, being a
company can be said to be resident in India if—
•(i) it is an Indian company; or
•(ii) during that year, the control and management of its
affairs is situated wholly in India.
•Due to the requirement that whole of control and
management should be situated in India and that too for
whole of the year, the condition has been rendered to be
practically inapplicable.

•A company can easily avoid becoming a resident by

simply holding a board meeting outside India. This
facilitates creation of shell companies which are
incorporated outside but controlled from India.
Residential Status of a Company –Amendment - From A.Y 2017-18

A person being a company shall be said to be resident in India in any

previous year, if—

(i)It is an Indian Company

ii) Its place of effective management, (POEM) that year, is in India

Place of effective management means a place where key management and commercial decisions
that are necessary for the conduct of the business of an entity as a whole are, in substance made.
• Why is POEM important?
• Because if a company’s place of effective
management is India, it will be treated as a local
resident and its global income will be taxable in the
country.
• An Indian company is always resident in India.
• A foreign company is resident in India only if during
the previous year, place of effective management  is
situated wholly in India.
• Conversely, a foreign company is treated as
non-resident if during the previous year, place of
effective management is either is wholly or partly
situated out of India.
• In case of a foreign company even the slightest place of
effective management is exercised from outside India,
it would be treated as a non-resident.

•  
• OECD sets out the following principles on POEM

• The place of effective management will ordinarily be

the place where the most senior person or group of
persons (for example a board of directors) makes its
decisions,
• the place where the actions to be taken by the entity
as a whole are determined.
• However, no definitive rule can be given and all
relevant facts and circumstances must be examined to
determine the place of effective management.

• An entity may have more than one place of

management, but it can have only one place of
effective management at any one time.
 Taxation under Constitution –
Scope of Taxing Powers-Authorizing the Levy and
Collection of Tax
Authority to levy a tax is derived from the Constitution
of India which allocates the power to levy various taxes
between the Centre and the State.

Restriction Article 265 of the Constitution which states

that No tax shall be levied or collected except by the
authority of law.
Therefore each tax levied or collected has to be
backed by an accompanying law, passed either by the
Parliament or the State Legislature.

The Constitution of India is the supreme law. All other

laws emanate from the Constitution. It provides for the
distribution of taxation powers between the Union and
the States.
`
• Illustrations:
 In Manipur, a village custom is there by which all the
villagers were required to pay Rs 50 to the headman.
This custom was continuing for ages. ---- Tangkhul v
Simirei Shailei.
 The govt had started an export promotion scheme
under which sugar manufacturers had to meet some
export targets. If they fall short of the export targets,
an additional excise duty of would be levied on the
shortfall ----
•
As per Art. 246(3), State Government has exclusive powers
to make laws for state with respect to any matter enumerated

--- in List II of the Seventh Schedule of the Constitution i.e

State List.
List III of the Seventh Schedule i.e Concurrent list contains
entries where both Union and State Government can exercise
powers.

Thus the Seventh Schedule referred to in Art. 246 indicates

bifurcation of powers to make laws between Union Govt.
and State Govt.
• The Constitution of India vests the Parliament with
plenary legislative powers to impose taxes on
matters specifically enumerated in the Union List
and

• all the power of making any law imposing a tax not

mentioned in Concurrent or State Lists, as provided
by Article 248(2).
• Asst Commissioner of Urban Land Tax v
Buckingham Carnatic Co Ltd AIR 1970 SC 169.

• R.K Garg v Union of India (1982) 133 ITR 239 SC

• Madras Bar Association v Union of India and

another–(2014) 368 ITR page 42 (SC)

• Moopil Nair v State of Kerala AIR 1961 552 (SC)

• Asst Commissioner of Urban Land Tax v
Buckingham Carnatic Co Ltd AIR 1970 SC 169.
• Background :
• The Taxation Enquiry Commission and the Planning
Commission were suggesting the need for imposing
a suitable levy on lands put to nonagricultural use
in urban areas.
• In 1963 the Madras Legislature enacted the Madras
Urban Land Tax Act, 1963.
• FACTS:
• By Sec 3 of the Madras Urban Land Tax Act, 1963
the State Government, decided to levy a tax on urban
land on the basis of market value of the land at the
rate of 0.4% of the average market value of the
urban land in a sub-zone as determined.
• The vires of the Act was challenged by a
writ petition and the impugned Act was struck
down on the ground that Art. 14 of the Constitution
was violated,
• because the charging section of the Act levied the
tax on urban land not on the basis of market value of
such urban land but on the average value of the
lands in the locality known as a sub-zone.

• Thereafter the State Legislature passed the Madras

Urban Land Tax Act, 1966 which omitted the
provisions relating to fixation of average market
value in the sub-zone, and
• instead provided in s. 5 for the levy of a tax on
urban land from the owner at the rate of 0.4% of
the market value of such urban land. The validity
of the new Act was again challenged in a group of
writ petitions before the High Court.
• Issues:
• it was contended, interalia,on behalf of the petitioners
(1) that the impugned Act fell under Entry 86, List I
and not under Entry 49 of List 2, so the State
Legislature was incompetent to pass the Act;
• (ii)that the machinery was provided for determining
the market value and the matter having been
left to the arbitrary determination of the
Assistant Commissioner, the provisions of the new
Act were violative of Art. 14 of the Constitution

• - furthermore as Entry 49, List 2 provides for

taxes on land and buildings, the impugned Act
which imposed tax on land alone could not be
held to fall under the Entry.
• (iii) that the Act was an unreasonable restriction on
the right to acquire, hold and dispose of property and
as such was violativeof Art. 19(1)(f) of the
Constitution;

• Iv) furthermore together with the existing

property tax under Sec. 100 of the City
Municipality Corporation Act the tax under the
impugned Act exhausted an unreasonably high
proportion of income and
v)it was also contended that the giving of
retrospective operation to the Act from July, 1963
made it unreasonable.

A Full Bench of five Judges overruled all the

contentions of the petitioners with regard to the
legislative competence of the Madras Legislature
to enact the new Act.
• Judgement-The Court held :
• (i) In pith and substance the new Act in imposing a
tax on urban land at a percentage of the market
value is entirely within the ambit of Entry 49 of
List II and within the competence of the State
Legislature,
• There was no conflict between Entry 86 of List I and
Entry 49 of List II.
• The tax under Entry 86 proceeds on the principle of
aggregation and is imposed on the totality of the net
value of an assets.

• Entry 49 of List II, contemplates a levy of tax on

lands and buildings or both as units; it is not
concerned with the division of interest or ownership
in the units of land or buildings which are brought
to tax. Hence state legislature competent pass the
impugned Act.
• INTERPRETATION
• The legislative entries must be given a large and
liberal interpretation, the reason being that the
allocation of the subjects to the Lists is not by way
of scientific or logical definition but by way of a
mere simple enumeration of broad categories.
• On the other hand Entry 49 “Taxes on lands and
buildings” should be construed as taxes on land and
taxes on buildings and there is no reason for
restricting the amplitude of the language used in the
Entry.
• Ii)The provisions of the new Act were not violative
of Art. 14 of the Constitution.

• Having regard to the language and context of the new

Act, the opinion which the Assistant Commissioner
has to form under that section is not subjective.
• but should be reached objectively upon the relevant
evidence after following the requisite formalities laid
down the new Act.

• The proceeding before the Assistant Commissioner is

judicial in character and his opinion regarding the
market value is reached objectively on all the
materials produced before him.
•Iii) The new Act was also not violative of Art. 19(1) (f) of
the Constitution. It is not possible to put the test of
reasonablenes into the straight jacket of a narrow formula.
•The, objects to be taxed,
•the quantum of tax to be levied;
•the conditions subject to which it is levied
•and the social and economic policies which a tax is
designed to subserve
•are all matters of political character and these matters
have been entrusted to the Legislature and not to the
Courts.
• In applying the test of reasonableness it is also
essential to notice that the power of taxation is
generally regarded as an essential attribute of
sovereignty and

• constitutional provisions relating to the power of

taxation are regarded not as grant of power but
as limitation upon the power which would
otherwise be practically without limit
• Iv) The charge under the City Municipality
Corporation Act was a tax., on the annual letting
value whereas the charge under the Act of 1966
was on the market value of the urban land.
• The basis of the two taxes being different, it was
not permissible to club the two together and
complain of the cumulative burden.
• As a general rule, so long as a tax retains its
character as a tax and is not confiscatory or
extortionate, the reasonableness of the tax cannot
be questioned.
• In so far as the new Act of 1966 was concerned, it
could not be said that the levy at 0.4% of the market
value of the urban land was confiscatory in effect.

• (v) In view of the legislative background of the new

Act of 1966, which replaced the earlier Act of 1963, it
could not be said that the imposition of the tax
retrospectively from July, 1963, was an unreasonable
restriction
• “It is not right to say as a general proposition that the
imposition of tax with retrospective effect perse
renders the law unconstitutional.

• In applying the test of reasonableness to a taxing

statute it is of course a relevant consideration that
the tax is being enforced with retrospective effect
but that is not conclusive in itself.”
 Charles B. Hochman, The Supreme Court and
Constitutionality of Retroactive Legislation
Volume 73 Harvard Law Review 692 (1960) which
suggested that -

• “it is necessary that the legislature should be able to

cure inadvertent defects in statutes or their
administration by making what has been aptly called
small repairs
• not only because of the paramount governmental
interest in obtaining adequate revenues,

• but also because taxes are not in the nature of a

penalty or a contractual obligation, but rather a
means of apportioning the costs of government
among those who benefit from it”.
• Clearly what the Court had in mind were cases where,
on account of bad drafting or introducing some
feature in the tax law that made it unconstitutional,

• In such a situation the legislature could legitimately

make a retrospective amendment and also introduce a
validating clause.
• We are of opinion that the imposition of the tax
retrospectively from 1st July, 1963 cannot be said to
be an unreasonable restriction.

• Thus, the Madras Urban Land Tax Act, 1966 must

be upheld as constitutionally valid.
• Madras Bar Association v Union of India and
another– (2014) 368 ITR page 42 (SC) – 5 Judge
Constitution Bench
• Background :
• More than three decades back, the Chokshi
Committee suggested the setting up of the
‘Central Tax Court’.
• Several years later, Mr. V. P. Singh, the then
Finance Minister had proposed the setting up
of a National Court of Direct Taxes, which
would function on a par with the High
• On 15 July, 2003, the then FM while addressing the
19th all-India conference of Chief Commissioners
and DGIT’s made an announcement

• aiming to reduce the litigation and ensure speedy

disposal of pending cases by way of setting up of a
National Tax Tribunal (NTT).
• In October 2003, the President of India promulgated
the National Tax Tribunal (NTT) Ordinance, 2003 to
set up a NTT under Article 323 B of the Constitution
of India.

• However, tax professionals across the country had

expressed reservations on the move to set up NTT
and had urged the Government to drop the
proposal on several grounds including
constitutional validity, lack of necessary
infrastructure etc.
• On such appeals, various High Courts, stayed the
operation of the Ordinance. Subsequently, the
Ordinance lapsed following the dissolution of the
13th Lok Sabha.

• On 6 December, 2004, the NTT Bill, 2004 was

introduced in the Parliament, inter-alia, to overcome
the pendency of a large number of cases before the
High Courts.
• The Bill provided for the adjudication by the NTT of
disputes with respect to levy, assessment, collection
and enforcement of direct taxes as well as customs
duties, central excise tax and service tax.

• One of the reasons behind setting up the NTT was

several instances where High Courts in different
States had taken contrary views on similar issues.
• The Income-tax Act being Central legislation ought to
have been interpreted and implemented in a uniform
manner throughout the country.

• Speedy disposal, reduction of huge arrears and

uniformity in the interpretation of tax laws were key
reasons that motivated set-up of the NTT.
• It was also provided that all matters and
proceedings pending before any High Court would
be transferred to the NTT on establishment of the
NTT.

• The appeal against the decision of the NTT would lie

before the Supreme Court.
• Subsequently, the NTT Act was passed in 2005.

• Before the NTT could be set up and become

operational, the first petition on the issue was filed in
2006 when the Madras Bar Association challenged the
setting up of the NTT.

• The petitioners, including several bar associations in

the country, had also challenged Article 323B of the
Constitution.
It was contended by the petitioner the NTT, a
quasi-judicial appellate tribunal empowered to
adjudicate the appeals arising from the Appellate
Tribunals constituted under the Income Tax Act,
the Customs Act, 1962, and the Central Excise Act,
1944,
undermined the process of independence and
fairness
as it intends to substitute High Court’s power of
judicial review by the extra-judicial body.
• The court held that the Parliament has the power to
enact legislation, and to vest adjudicatory functions,
earlier vested in the High Court, with an alternative
court/tribunal and that the exercise of such power
by the Parliament would not per se violate the
basic structure of the Constitution.
• However, the basic structure of the Constitution
will stand violated, if while enacting legislation
pertaining to transfer of judicial power,
Parliament does not ensure,
• that the newly created court/tribunal conforms with
the salient characteristics and standards, of the court
sought to be substituted.

• A jurisdiction to decide substantial questions of

law vests under only with the High Courts and the
Supreme Court, and cannot be vested in any other
body as a core constitutional value would be
impaired thereby.
• The decision quashed sections 5, 6, 7, 8 and 13 of
the NTT Act as the same were held to be
unconstitutional.

• Since these provisions constituted edifice of the NTT

Act and without the same remaining provisions
would be rendered ineffective and inconsequential,
the entire enactment is declared unconstitutional.
•Justice R.F. Nariman, while passing concurring judgement agreed
with the majority view and also observed that the NTT Act is
departure made by the Parliament to the extent that it allows
tribunals to decide questions of law which hitherto were
decided by the superior constitutional courts.

•The NTT Act takes away the power of judicial review of the
High Court under articles 226 and 227, as it provides an
appeal directly to the Supreme Court against an NTT order.
•
 
• It was concluded that the National Tax Tribunals
Act was unconstitutional, being the ultimate
encroachment on the exclusive domain of the
superior Courts of Record in India,

• Thus the majority opined that Parliament could not

take away the power of a court and vest the power in
something that is not a court by nature.
 IMPLICATIONS  
•i) This ruling disposes the efforts of the Government to bring
on fast track the disposal of tax disputes and thereby reduce tax
arrears.

•ii) The Government may have to find alternative ways of ensuring

the speedier disposal of appeals.

•iii) The Government in consultation with the CBDT, needs to

ensure that an alternate dispute resolution process is legislated
early to achieve its objective of disposing of the backlog of cases in
the High Court and to increase the confidence of tax payers.
 • Moopil Nair v State of Kerala 1961 AIR 552.

• The Travancore-Cochin Land Tax Act, 1955 was

passed by the legislature of the State of
Travancore-Cochin.
• By Sec 4 - all lands in the State of whatever
description and held under whatever tenure were to
be charged and levied a uniform rate of tax to be
called the basic tax.
• Section 7 gave power to the Government to exempt from the
operation of the Act such lands or class of lands which the
Government may, by notification, decide.
• Section 5A enabled the Government to make a provisional
assessment of the basic tax in respect of the lands which
had not been surveyed by the Government and
• provided that the Government after conducting the survey
shall make a regular assessment and make the necessary
adjustments in respect of the amounts paid already. There
was, however, no time fixed for the conduct of the survey.
• The petitioners who owned forest in the State,
challenged the constitutional validity of the Act on
the grounds that the provisions of the Act
contravened Arts. 14, 19(i)(f) and 31(1) of the
Constitution of India inasmuch as
• (1) the Act did not have any regard to the quality of
the land or its productive capacity and the levy of a
tax at a flat rate of Rs. 2 per acre imposed very
unreasonable restrictions on the right to hold
property,
• (2) the. Act did not lay down any provision calling
for a return from the assessee for an enquiry or
investigation of facts before the provisional
assessment was made or any right of appeal to any
higher authority and, in fact, did not make any
provision for hearing the assessee at any stage,
• (3) S. 7 gave arbitrary power to the Government to
pick and choose in the matter of grant of total or
partial exemption from the provisions of the Act,
and
• (4) the tax proposed to be levied had absolutely no
relation to the production capacity of the land sought to
be taxed or to the income they could derive, and
therefore the Act had been conceived with a view to
confiscating private property, there being no question
of any compensation being paid to those who may be
expropriated as a result of the working of the Act.
• The petitioners also challenged the legislative
competence of the legislature of the State to levy a tax
on lands on which forests stood.
• The case on behalf of the State of Kerala, inter alia,
was that the Act had its justification in Art. 265 Of
the Constitution of India,

• which was not subject to the provisions of Part III

of the Constitution and that, therefore, Arts. 14, 19
and 31 could not be pressed in aid of the
petitioners.
• Held, Per Sinha C.J (Majority) - that the Travancore-
Cochin Land Tax Act, 1955, infringed the provisions
of Art. 14 Of the Constitution of India.

• The Act obliged every person who held land to pay

the tax at the flat rate prescribed, whether or not he
made any income out of the property, or whether or
not the property was capable of yielding any income.
• Consequently, there was no attempt at classification
in the provisions of the Act and it was one of those
cases where the lack of classification created
inequality.

• It was therefore hit by the prohibition to deny

equality before the law contained in Art. 14.
• Section 5 A of the Act which enabled the Government
to make a provisional assessment of the basic tax
payable by the holder of unsurveyed land imposed
unreasonable restrictions on the rights to hold
property safeguarded by Art. 19(1)(f) of the
Constitution,
• in as much as (1) the Act did not impose an obligation
on the Government to undertake survey proceedings
within any prescribed or ascertainable period,
• with the result that a landholder might be subjected to
repeated annual provisional assessments on more or
less conjectural basis and liable to pay the tax
assessed,
• and (2) the Act being silent as to the machinery and
procedure to be followed in making the assessment
left it to the Executive,
• completely ignoring the legal position that the
assessment of a tax on a person or property was at
least of a quasi judicial character.
• Section 7 of the Act which vested the Government
with the power wholly or partially to exempt any land
from the provisions of the Act

• did not lay down any principle or policy for the

guidance of the exercise of discretion by the
Government in respect of the selection contemplated
by the section, and was, therefore, discriminatory in
effect and offended Art. 14.
• The section was not severable from the rest of the Act
as both the charging sections,

• Sec 4 and Sec 7, authorising the Government to grant

exemptions from the provisions of the Act were the
main provisions of the statute.
• The Act was also confiscatory in character in as much
as the provisions of the Act had the effect of
eliminating the private owners through the machinery
of the Act,
• without proposing to acquire the privately owned
forests in the State after satisfying the conditions laid
down in Art. 31 of the Constitution.
• Hence held as unconstitutional.
• Per Sarkar J: (Dissenting)
• Article 265 of the Constitution which provided that
the State shall not levy or collect a tax except by
authority of law referred to a valid law, and

• in order that the law might be valid, the tax proposed

to be levied must be within the legislative
competence of the Legislature imposing a tax and
authorising the collection thereof and,
• secondly, the tax must be subject to the conditions
laid down in Art. 13, by which all laws inconsistent
with or in derogation of the fundamental rights in Part
III shall be void.

• (1) The object of the Act was to tax land in the State
for raising revenues by providing for a low and
uniform rate of basic tax replacing all other dues
payable to the Government and the tax payers were
classified according to the area of lands held by them.
• Such a classification had an intelligible basis and had
a rational relation to the object of the Act.
• As tax was to be levied not because the land was
productive but because the land was held in the State,
the classification did not offend Art. 14 of the
Constitution, even though it might impose unequal
burden of the tax on the owners of land on account of
owners of less productive land being put on a larger
burden.
• (2)Section 5 A did not offend Art. 14 and in the
absence of express provisions laying down the
procedure according to which the provisional
assessment was to be made, the Act could not be held
invalid on the ground that it was against the rules of
natural justice.
• (3)Section 7, even if it were considered invalid on the
ground that it gave arbitrary power to the
Government and offended Art. 14, was severable
from the rest of the Act and would not affect the other
provisions of the Act.
• (4)The Act did not infringe the fundamental rights in
Art. 19(1)(f) as the rate of tax fixed by the Act was a
very low rate and the restrictions on those rights were
reasonable.
• (5) The Act was not in its nature expropriatary and
did not offend Art. 31.
• As there was no want of legislative competence, the
Act could not be assailed as a piece of colourable
legislation on the ground that
• though in form a taxing statute it, in effect, was
intended to expropriate lands by imposing a tax too
heavy for the land to bear.
• (6)The word ‘land’ in Entry 49 of List II, Sch. 7, of
the Constitution, included ‘land on which a forest
stands’ and, therefore, under that Entry taxation on
land on which forests stood was permissible and legal.
• The Act, therefore, could not be challenged as being
beyond the legislative competence of the State
Legislature. Hence the petitions are dismissed.
 R.K Garg v Union of India (1982) 133 ITR 239 SC
• The Special Bearer Bonds the Special Bearer Bonds
(Immunities and Exemptions) Ordinance, 1981 was
repealed and replaced by, The Special Bearer Bonds
the Special Bearer Bonds (Immunities and
Exemptions) Act, 1981.
• The Act provided for certain immunities to holders of
Special Bearer Bonds, 1981, and for certain
exemptions from direct taxes in relation to such
Bonds and for matters connected therewith.
• The object and purpose for which the Act was passed
was to canalize for productive purposes, black money
which had become a serious threat to the national
economy and

• to provide for certain immunities and exemptions to

render it possible for persons in possession of black
money to invest the same in the said Bonds.
• Section 3 of the Act provided for certain immunities
to a person who had subscribed to or otherwise
acquired Special Bearer Bonds.
• In their writ petitions to this Court attacking the
constitutional validity of the ordinance and the Act, it
was contended interalia on behalf of the petitioners
that: (I) since the ordinance had the effect of
amending the tax laws it was outside the competence
of the President under Article 123, as that the subject
matter of the ordinance was in the nature of a Money
Bill, because
• it could be introduced only in the House of the People
and passed according to the procedure provided in
Articles 109 and 110.
• As such, the President had no power under Article
123 to issue the ordinance bypassing the special
procedure provided in Articles 109 and 110 for the
passing of a Money Bill and
• (2) that the provisions of the Act were violative of
Article 14 of the Constitution.
• Held
• [Per majority Chandrachud, C. J., Bhagwati, Fazal Ali
& Amarendra Nath Sen, J.J.] [Gupta, J, dissenting]

• None of the provisions of The Special Bearer Bonds

(Immunities and Exemption) Act, 1981 is violative of
Article 14 and its constitutional validity must be
upheld.
• (i). There is no substance in the contention that the
President has no power under Article 123 to issue an
ordinance amending or altering the tax laws and that
the ordinance was outside the legislative power of the
President under that Article.

• (ii). Under Article 123 legislative power is conferred

on the President exercisable when both Houses of
Parliament are not in session.
• Article 123, therefore, confers powers on the President to
promulgate a law by issuing an ordinance to enable the
executive to deal with the emergent situation which might
well include a situation created by a law being declared
void by a Court of law.
• It is possible that when neither House of Parliament is in
session, a situation may arise which needs to be dealt with
immediately and for which there is no adequate provision
in the existing law and emergent legislation may be
necessary to enable the executive to cope with the
situation.
• The legislative power conferred on the President
under the Article is not a parallel power of
legislation.

• This power is the clearest indication that the President

is invested with this legislative power only in order to
enable the executive to tide over an emergent
situation which may arise whilst the Houses of
Parliament are not in session.
• The power is in conformity to the democratic process
–as the executive is clearly answerable to the
legislature and if the President, on the aid and advice
of the executive, promulgates an ordinance in misuse
or abuse of this power,
• The legislature can not only pass a resolution
disapproving the ordinance but can also pass a vote of
no confidence in the executive. This is in the theory
of Constitutional Law complete control of the
legislature over the executive.
• Certain well established principles have been evolved
by Courts as rules of guidance in discharge of their
constitutional function of judicial review.

• The first rule is that there is always a presumption in

favour of the constitutionality of a statute and the
burden is upon him who attacks it to show that there
has been a clear transgression of the constitutional
principles.
• Another rule of equal importance is that laws relating
to economic activities should be viewed with greater
latitude than laws touching civil rights such as
freedom of speech, religion etc.

• The court should feel more inclined to give judicial

deference to legislative judgment in the field of
economic regulation than in other areas where
fundamental human rights are involved.
• It is clear that Article 14 does not forbid reasonable
classification of persons, objects and transactions by
the legislature for the purpose of attaining specific
ends.
• What is necessary in order to pass the test of
permissible classification under Article 14 is that the
classification must not be arbitrary, artificial or
evasive
• but must be based on some real and substantial
distinction bearing a just and reasonable relation to
the object sought to be achieved by the legislature.
• 3(ii). The validity of a classification has to be judged
with reference to the object of the legislation and if
that is done,

• there can be no doubt that the classification made by

the Act is rational and intelligible and the operation of
the provisions of the Act is rightly confined to
persons in possession of black money.
• The whole object of the impugned Act is to induce
those having black money to convert it into white
money by making it available to the State for
productive purposes,

• without granting in return any immunity in respect of

such black money if it could be detected through the
ordinary processes of taxation laws without taking
into account the fact of purchase of Special Bearer
Bonds.
It is true that one or the other of the immunities or
exemptions granted under the provisions of the Act
may be taken advantage of by resourceful persons by
adopting ingenious methods and devices with a view
to avoiding or saving tax.

But that cannot be helped because human ingenuity is

so great when it comes to tax avoidance that it would
be almost impossible to frame tax legislation which
cannot be abused.
If it is found that any immunity or exemption granted
under the Act is being utilised for tax evasion or
avoidance not intended by the legislature, the Act can
always be amended and the abuse terminated.

We are accordingly of of the view that none of the

provisions of the Act is violative of Article 14 and its
constitutional validity must be upheld.
• Incomes which do not form
part of the total income.
• Income from property held for charitable purpose Sec
2(15) - defines the expression “charitable purpose” in - an
inclusive manner

• to include, - (i) relief of the poor,

• (ii) education,
• (iii) medical relief, and
• (iv) any other object of general public utility.
• The aforesaid definition is not exhaustive and,
therefore,
• purposes similar to the purposes mentioned in the
aforesaid definition will also constitute charitable
purposes.

• Further, the words “any other object of general

public utility” are of wide import.
Inclusive Definition
The statutory definition is not exhaustive or exclusive.
Even if the object or purpose may not be regarded as
charitable in its popular signification as not tending to
give relief to the poor or for advancement of education
or medical relief,
it would still be included in the expression “charitable
purpose” if it advances an object of general public
utility.
CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC).
The assessee-company was incorporated whose purpose was : (1)
to promote and protect trade, commerce and industries of India
(2) to aid, stimulate and promote the development of trade,
commerce and industries in India
(3) to watch over and protect the general commercial interests of
India and
(4) to do all such other things as may be conducive to the
preservation and extension of trade, commerce, industries and
manufactures or incidental to the attainment of the above objects.
• In the year 1944, the assessee purchased a building
and made substantial alterations, additions and
improvements therein. The assessee then moved its
offices into that building and let out to tenants the
portion not required for its use.

• The income of the assessee was obtained from

subscriptions and donations collected from its
members and rent received from the building.
• For the assessment years 1948-49 to 1954-55, the
assessee claimed that the annual value of the building
was not assessable in its hands as the assessee was a
charitable institution within the meaning of section
4(3)(i) of 1922 Act.
• In the alternative, it was contended that the excess of
expenditure over income should be set off against
such income if the annual value is held assessable.
• The ITO rejected the contentions of the assessee and
assessed its income from property on the basis of the
net annual value without debiting the expenditure in
excess of income against the net annual value.

• On second appeal the Tribunal held that the assessee

was not exempt within the meaning of section 4(3)(i)
of 1922 Act from liability to pay income-tax, because
• the activities of the assessee were intended for the
benefit primarily of its members and ‘embraced only
collective action on behalf of all its constituent
members’ which ‘could not be said to be the result of
any trade or business or vocation carried on by it.’

• However, on reference, the High Court held that

income from property owned by the assessee was
exempt under section 4(3)(i) of the 1922 Act.
• On appeal :
• HELD
• Income from property qualifies for exemption under
section 4(3)(i ) of 1922 Act if two conditions co-exist; (i)
the property is held under trust or other legal obligation;
and (ii) it is so held wholly or in part for religious or
charitable purposes.
• The building which the assessee owns is by virtue of
clause 4 of the memorandum of association held under a
legal obligation to apply its income to purposes specified
in the memorandum of association.
• It was not the case of the assessee that the objects of
incorporation were relief of the poor, education or
medical relief.

• The principal objects of the assessee were to promote

and protect trade, commerce and industries and to aid,
stimulate and promote the development of trade,
commerce and industries in India or any part thereof.
• By the achievement of these objects, it was not
intended to serve merely the interests of the members
of the assessee.

• Advancement or promotion of trade, commerce and

industry leading to economic prosperity enures for
the benefit of the entire community.
• That prosperity would be shared also by those who
engage in trade, commerce and industry but on that
account the purpose was not rendered any the less an
object of general public utility.
• It may be remembered that promotion and protection
of trade, commerce and industry could not be equated
with promotion and protection of activities and
interests merely of persons engaged in trade,
commerce and industry.
• In the promotion of trade, commerce and industries of
India the public interest is of the essence and if by the
activities of the assessee that object is achieved, it would
be within the meaning of section 4(3)(i) of the 1922 Act
an advancement of an object of general public utility.
• In enacting the last paragraph of section 4(3) of the 1922
Act the legislature has used language of great amplitude.
‘Charitable purpose’ includes not only relief of the poor,
education and medical relief alone, but advancement of
other objects of general public utility as well.
•The clause is intended to serve as a special definition of the
expression ‘charitable purpose’ for the Act; it is again
inclusive and not exhaustive or exclusive. Even if the object
or purpose may not be regarded as charitable in its popular
significance, as not tending to give relief to the poor or for
advancement of education or medical relief,
•it would still be included in the expression ‘charitable
purpose’ if it advances an object of general public utility.
The expression ‘object of general public utility’, however, is
not restricted to objects beneficial to the whole of mankind.
• An object beneficial to a section of the public is an
object of general public utility. To serve a charitable
purpose, it is not necessary that the object should be
to benefit the whole or mankind or even all persons
living in a particular country or province.

• It is sufficient if the intention to benefit a section of

the public as distinguished from specified individuals.
• It was true that in the instant case there was in fact no
trust in respect of the income derived from the building
owned by the assessee.
• But the property and the income there from was held
under a legal obligation and by the express terms of
clause 4 of the memorandum of association, the property
and its income were liable to be utilized solely for the
purposes set out in the memorandum of association.
• The primary objects of the assessee were to promote
and protect trade, commerce and industries and to aid,
stimulate and promote the development of trade,
commerce and industries and to watch over and
protect the general commercial interests of India or
any part thereof.

• These objects were not vague or indefinite as objects

of general public utility.
• An object of general public utility such as promotion,
protection, aiding and stimulation of trade, commerce
and industries need not, to be valid, specify the
modus or the steps by which the objects may be
achieved or secure.
• It could not be said the court would decline to give
effect, merely on the ground that the method by
which trade, commerce or industry is to be promoted
or protected, aided or stimulated or the general
commercial interests of India are to be protected are
not specified.
• In the instant case the primary purpose of the assessee
was not to urge or oppose legislative and other
measures affecting trade, commerce or manufactures.
• The primary purpose of the assessee was, to promote
and protect trade, commerce and industries, to aid,
stimulate and promote the development of trade,
commerce and industries and to watch over and
protect the general commercial interests of India or
any part thereof.
• It was only for the purpose of securing these primary
aims that it was one of the objects mentioned in the
memorandum of association that the assessee may
take steps to urge or oppose legislative or other
measures affecting trade, commerce or manufactures.
Such an object must be regarded as purely ancillary
or subsidiary and not the primary object.
• The appeal was dismissed accordingly.
 Concept of charity
The very concept of ‘charity’ denotes altruistic thought
and action. Its object must necessarily be to benefit
others rather than one’s self.

The action which flows from charitable thinking is

always directed at benefiting others.
It is this direction of thought and effort and not the
result of what is done in terms of financially
measurable gain which determines that it is
charitable.
• Primary or dominant object - Where primary or
dominant purpose of ‘institution’ is charitable and
other objects which, by themselves, may not be
charitable, but are merely ancillary or incidental
to primary or dominant object, same would not
prevent ‘institution’ from validly being recognized
as a charity
 Relief for the poor
The relief in order to be charitable must, in every case, be to such
section of the community, which may be well defined and
identified by some common quality of public nature. If the
class were vague and ill defined, the institution would not be a
valid charitable trust.

The object need not be to benefit all persons living in a particular

country or province. It is sufficient if the object is to benefit a
section of the public as distinguished from specified individuals.
• Political connection is no deterrent - If an
association is set on foot by a political organisation
and is connected with it but still has for its real object
the relief of poverty,

• its connection with the political organisation will not

make its real object any the less charitable-
Benefit should not exclusively be for family members - A
trust, the object and scope of which is limited to the
education of the members of a family would not come
within the definition of a charitable purpose contained in the
Income-tax Act.
ICAI - Since dominant objective of ICAI was to regulate
profession of Chartered Accountancy in India, it is a
charitable institution; conducting coaching classes and
campus placements for a fee could not be held as business as
per section 2(15)-
• Entire mankind need not be benefited - An object
beneficial to a section of the public is an object of
general public utility.

• To serve a charitable purpose, it is not necessary that

the object should be to benefit the whole of mankind
or all persons in a particular country or State.
• It is sufficient if the intention to benefit a section of
the public as distinguished from a specified
individual is present.

• However, the section of the community sought to be

benefited must be sufficiently defined and identifiable
by some common quality of a public or impersonal
nature - 
• Ahmedabad Rana Caste Association v. CIT [1971]
82 ITR 704 (SC).
• FACTS
• For the assessment years 1960-61 to 1962-63, the
assessee, an AOP, held various properties for various
purposes including the management of the movable
and immovable properties of the Rana community of
the city of Ahmedabad, doing acts to improve the
education of the community to give medical help to
the community, etc.
• The ITO took the view that the objects being not
charitable, the assessee was not entitled to the
exemption under section 4(3)(1) of the 1922 Act.

• On second appeal, the Tribunal held that the

beneficiaries as found in the constitution were the
Rana community meaning thereby the natives of
Ahmedabad only and other community members
accepted by the community as per old rules of the
community and staying in Ahmedabad.
• This was a well-defined cross-section of the public of
Ahmedabad, certain and ascertainable, and there
being no vagueness about the beneficiaries or of their
public character, the assessee was a charitable trust,
eligible for exemption.
• On reference, the High Court observed that the class
of beneficiaries consisted of two sections, one
comprising members of the Rana sect who were
natives of Ahmedabad and
•the other comprising members of the Rana sect who were
residing in Ahmedabad and who had been accepted by the
community according to the old usage of the caste and that
this class of beneficiaries could not be said to constitute a
well-defined section of the public connected together by a
common quality or characteristic.
•On appeal before the Supreme Court :
•HELD
•Under the Act of 1922, a trust for the benefit of any particular
religious community or caste was entitled to exemption but
under the Act of 1961,
• a charitable trust which is created for such benefit on
or after 1-4-1962, would be disentitled to the
exemption.

• In the instant case the trust was created prior to

1-4-1962, and, therefore, no question arose of its
not being entitled to the exemption if other conditions
were satisfied even though it was created for the
benefit of the Rana caste of Ahmedabad.
• It is well-settled by now that an object beneficial to a
section of the public is an object of general public
utility. To serve a charitable purpose it is not
necessary that the object should be to benefit the
whole of mankind or all persons in a particular
country or State.
• It is sufficient if the intention to benefit a section of
the public as distinguished from a special individual
is present.
• In the instant case, what had to be seen was whether
the members of the Rana caste who were not natives
of Ahmedabad but who came to reside there and were
accepted as members of that caste according to its
usage and custom could be said to have a relationship
which was an impersonal one dependent on their
condition as members of the Rana community.
• Such members of the Rana caste could not be
regarded as having been introduced into that caste by
consideration of their personal status as individuals.
• As a matter of fact that predominant contention and
requirement of the clause defining ‘beneficiaries’ in
the constitution of the assessee was the factum of
their belonging to the Rana community of
Ahmedabad.
• The common quality, therefore, uniting the potential
beneficiaries into the class consisted of being
members of the Rana caste or community of
Ahmedabad whether as natives or as being admitted
to that caste or community under custom or usage.
• The mere fact that a person of the Rana community
who was not an original native of Ahmedabad had to
prove his credentials according to the customs and
usage of that community to get admitted into that
community could not introduce a personal element.

• As regards the acceptance of such persons as

members of the community or caste, according to
custom and usage,
• It is well-known that whether a question arises
whether a person belongs to a particular community
or caste, the customs or usage prevailing in that
community must play a decisive and vital part.
• That cannot be regarded as an element which would
detract from the impersonal nature of the common
quality.
• The appeals were accordingly allowed.
 According to Section 2(15) of the Income Tax Act, 1961
‘charitable purpose’, includes relief of the poor, education,
medical relief, and the advancement of any other object
of general public utility.
Amendment made in A.Y. 2009-10-Proviso added
“Provided that the advancement of any other object of
general public utility shall not be a charitable
purpose,
if it involves the carrying on of any activity in the
nature of trade, commerce or business,
• or any activity of rendering any service in relation to
any trade, commerce or any business,

• for a cess or fee or any other consideration,

irrespective of the nature of use or application, or
retention, of the income from such activity”
• Proviso to section 2(15) - First proviso to section
2(15) as amended by Finance (No. 2) Act, 2009 is
applicable in cases of carrying on charitable purpose
covered by residuary clause, i.e., ‘advancement of
any other object of public utility’, -
• and not to charitable purposes like relief to poor,
education, medical relief, etc. -
• DIT v. Ahmedabad Management Association [2014]
47 taxmann.com Taxman 223 (Guj.).
• FACTS
• The assessee, a public charitable trust, was dedicated
to pursue the objects of continuing education, training
and research on various facets of management and
related areas.
• It claimed exemption under section 11 on ground that
it undertook multifaceted activities
• comprising of conducting various continuing
education diploma and certificate programmes,
management development programmes, public talks,
seminars, workshops and conferences.■ 

• The Assessing Officer observed that considering the

nature of courses, its durations and resultant surplus
from each activity, the activity of the assessee is
not educational in nature.
• The Assessing Officer held that activities of assessee fell
within scope of amendment of ‘advancement of any other
object of general public utility and any other activity’ of
section 2(15) and, since the aggregate value of receipts were
more than Rs. 10 lakhs, proviso to section 2(15) was
applicable and the assessee was not entitled for
exemption under section 11.
• The CIT(A) confirmed the said order.
• The Tribunal had held that the activities of the assessee
were in the field of education and, therefore, the assessee
was eligible for exemption under section 11. 
• On further appeal:
• HELD
• It is required to be noted that all throughout for the
previous years, right from the A.Y 1995-96 till
2008-09 the revenue has considered the activities of
the assessee as educational activity and has granted
the benefit under section 11.
• However, subsequently and with effect from
assessment year 2009-10, proviso to section 2(15) has
been added and section 2(15) has been amended
• by adding the proviso which states that the
‘advancement of any other object of general public
utility’ shall not be a charitable purpose if it involves
the carrying on of
• (a) any activity in the nature of trade, commerce or
business; or (b) any activity of rendering any service
in relation to any trade, commerce or business --------.
•The revenue has denied the exemption claimed by the
assessee under section 11 mainly relying upon the
amended section 2(15) by submitting that

•the case of the assessee would fall under the fourth

limb of the definition of ‘charitable
purpose’ i.e. advancement of any other object of
general public utility and, therefore, the assessee shall
not be entitled to exemption from tax under section 11.
• The activities of the assessee such as continuing
education diploma and certificate programme;
management development programme; public talks
and seminars and workshops and conferences etc., is
educational activities and/or is in the field of
education.
• So far as the amendment in section 2(15) is concerned,
the same has been explained vide Circular No. 11/2008
dated 19-12-2008.
• It is clarified that where industries or trade
association claim both to be charitable institutions as
well as mutual organizations
• and their activities are restricted to contributions from
and participation of only their members, these would
not fall under the purview of proviso to section 2(15)
owing to the principles of mutuality.
•From Circular No. 11/2008 dated 19-12-2008 it appears
that the newly inserted proviso to section 2(15) will
apply to entities

•whose purpose is advancement of any other object of

general public utility and hence such entities will not be
eligible for exemption under section 11 or under
section 10(23C) if they carry on commercial activities.
• Thus, on fair reading of section 2(15) the newly
inserted proviso to section 2(15) will not apply in
respect of relief to the poor; education or medical
relief.
• Thus, where the purpose of a trust or institution is
relief of the poor; education or medical relief, it will
constitute ‘charitable purpose’ even if it incidentally
involves the carrying on of the commercial activities.
• Thus, on fair reading of section 2(15) read with
Circular No. 11/2008 dated 19-12-2008 it appears
that if the case of the assessee does not fall within
relief to the poor; education or medical relief and

• if it falls in advancement of any other object of

general public utility and it is found that such activity
of advancement of any other object of general public
utility involves carrying on of
• (a) any activity in the nature of trade, commerce or
business; or (b) any activity of rendering any service
in relation to any trade, commerce or business;
-------------.
• the same shall not be considered for ‘charitable
purpose’ and shall not be entitled to exemption under
section 11.
• In deciding whether any activity is in nature of trade,
commerce or business or is one for rendering any
service in relation to any trade, commerce or business
it has to be examined whether there is an element of
profit making or not.
• Expression ‘charitable purpose’, as defined in section
2(15) cannot be construed literally and in absolute
terms and it has to take colour and be considered in
context of section 10(23C)(iv).
• Correct interpretation of proviso to section 2(15)
would be that it carves out an exception from
charitable purpose of advancement of any other
object of general public utility and

• that exception is limited to activities in nature of

trade, commerce or business ---------------------.
• In the present case, the activities of the assessee
would fall within the definition of ‘charitable
purpose’ as per section 2(15) and, therefore, would be
entitled to exemption under section 11.
• Illustrations:
• Institutions held to be charitable
• Bar Councils
• Association formed to promote, encourage and
protect the interests of the banking.
• An association formed mainly to encourage and
develop the film industry
• An association whose object was to promote and
protect textile industry
• A society whose dominant object was to safeguard
and further the interests of the press in general
• Benefit and welfare of police personnel and their
families.
•  Protecting, safeguarding, guiding and furthering the
interest of bullion merchants, as well as promoting
the standards of their behaviour towards the general
public.
Meditation, preaching and propagation of philosophy
are objects of general public utility
• Imparting training (teaching) in arts and handicrafts
to unemployed men and women, even if it involved
payment to them for work done -
• Institutions held to be not charitable
• An association of hotel proprietors formed for
procuring articles on permit and supplying them to
the members, and for protecting the business interests
of the members
• A race club –
• Delhi stock exchange -
• Providing for constructing colonies for workmen in
general.
• Production of television and radio programmes for
purpose of telecasting and broadcasting through own
network or through network hired by it - 
There are five heads of income :

i) Salaries

Ii) Income from house property

Iii) Profits and gains of business or profession

Iv) Capital Gains

V) Income from other sources

It is therefore, If an income Therefore,
necessary that cannot be placed computation of
an income under any of the income under
belonging to a first four heads, different heads
specific head must it will be taxed provides the
be computed under the head starting point of
under that head “Income from determining the
only. other sources” tax liability.
 Scope of income
with reference to
Basic and Whether heads each one of the
preliminary are mutually above five heads of
issue to be exclusive ? income --
decided: Yes. has to be
understood
distinctly.
●
Illustration :

●
Rent from building property let out is chargeable to tax under the head
‘Income from House Property’

●
However if the property is again sub-let by the tenant

●
Income derived by the tenant from sub-letting ---- is chargeable under the
head ‘Income from Other Sources’

●
Because he is not the owner of the house
Further - Inclusion of Instead of another because each head of
one item of income head of income income
under one head of will lead to a different gives distinct relief
income --- result ---------- and deductions
Illustration :

Claim for depreciation in computing a taxable income in respect

of assets used, is possible -----

---- only under the head profits and gains from business and
profession

and not income from other sources

However, lease of factory after assessee stopped business with no
intention of reviving the business will amount to earning lease rental
which is not in the nature of business income.

In such a case the income is assessable head income from

other sources -
INCOME FROM SALARIES

Among the five heads of income - “Salaries” is the first head

of income.

The concept of “Salaries” is very wide and includes

not only the salary in common parlance but also
various other receipts, gifts, perquisites and benefits.
 For example, Accordingly, fees By contrast a
But receipts services rendered received by them doctor in
for all kinds by professionals will not be employment
like doctors, covered under with a hospital
of services architects, the head
will be a
rendered lawyers etc. to “salaries’
employee and
their clients are but under the
cannot be not as employees head “profits his salary will
taxed as but in the course and gains from be covered
of their business or under this
salary. profession. profession”. head.
Salary is chargeable to tax on DUE OR RECEIPTS
BASIS, WHICHEVER IS EARLIER.

(i) Due basis – when it is earned even if it is not

received in the P.Y. (Accrued)

(ii) Receipt basis – when it is received by the

employee irrespective of the fact whether it is due or
not in the P.Y. (Advance)
• Illustration :
• If salary of 2013-14 is received in advance in
2012-13, it is included in the total income of
the previous year 2012-13 on “receipt’’ basis (as
incidence of tax matures earlier on receipt basis )

• “due” basis is not relevant in this case; therefore,

salary will not be included in the total income of
the previous year 2013-14.
• On the other hand if the salary which has become due
in 2011-12 and received in 2012-13 is included in the
total income of the previous year on due basis (as
incidence of tax matures earlier on “due” basis)

• “receipt” basis is inapplicable; salary will

therefore not be included in the total income of the
previous year 2012-13.
Section 17 of the
Act gives an
inclusive
b. Any Pension
definition of a. Wages;
salary. or Annuity;
Broadly, it
includes:
 d. Any fees,
commission,
c. Any perquisites or e. Any advance
Gratuity; profits in lieu of of salary;
or in addition to
salary or wages;
f. Any g. Annual h. Any amount of
encashment accreditation credit to provident
to PF above fund of employee to
of leave
the extent it is
salary; prescribed
taxable.
limits
• Piyare Lal Adishwar Lal v. CIT [1960] 40 ITR 17
(SC).
• FACTS
• The appellant assessee was a HUF, consisted of ‘S’
and his younger brother. ‘S’ was appointed treasurer
of the bank at Delhi and sixteen other branches of the
bank.
• As treasurer, he furnished security to the bank of
certain properties of the HUF.
• As treasurer, ‘S’ received certain sum from the
bank.
• The income-tax authorities held this sum to be the
income of HUF and taxed it as such. The Tribunal
in upholding this view also held that the
emoluments received by the treasurer were profits
and gains of business and
• it further held that as the security furnished by ‘S’
came out of the joint family properties,

• the emoluments could not be said to have been earned

without detriment to the family property and
therefore were part of the income of the Hindu
undivided family.
• On reference, the High Court held that the
relationship between ‘S’ and the Bank was not one
of master and servant but that of an employer and
independent contractor and therefore, the
emoluments received by ‘S’ as treasurer were not
salary but profits and gains of business.

• The emoluments were the income of the HUF

because ‘S’ was not appointed treasurer on account of
any personal qualification.
• but he was appointed because his father was a treasurer of
the bank before him and he had furnished substantial
security which was part of the property of the HUF.
• On appeal to the Supreme Court :
• HELD
•  The duties of ‘S’ under the agreement were such as were
peculiar to the employment of treasurers. It was true that
as treasurer, ‘S’ had also undertaken to indemnify the
bank not only for his own default but also for the
default of the members of the cash department staff.
• But banks have to deal with monies, valuable
securities, gold and other valuables and must
necessarily employ servants whose honesty is
guaranteed and
• it is necessary for the bank to have some one in its
employment who can perform these duties in a
responsible manner and be answerable to the bank
for negligence and default in the performance of
this class of work.
• In the very nature of things one man cannot do all this
work, not even at one branch, what to say of several
branches;

• other people have therefore to be employed and

although the persons employed in the cash
department are servants of the bank
• they do the work which treasurers ordinarily and
customarily do and

• consequently the treasurer is made responsible for

any damage which the bank suffers due to the default
of the treasurer or of those employed to do the work
of the cash department.
• The treasurer in the instant case must be held to be a
servant of the bank.
• Treasurership employment responsibility, trust and
fidelity and personal integrity and ability, and mere
ability to furnish a substantial security was not the
sole or even the main reason for being appointed
to such a responsible post in a bank.
• On the other hand his previous experience as an
overseer of the bank and his being appointed on
his applying for the post were indicative of
personal fitness for it.

• There was nothing to show that ‘S’ had received any

particular training at the expense of the family funds
or his appointment was the result of any outlay or
expenditure of or detriment to the family property.
• In aforesaid circumstances, the emoluments received
by ‘S’ were in the nature of salary and therefore
assessable under section 7 of the 1922 Act and
• not under section 10 of the 1922 Act as profits and
gains of business and the salary was the income of
the individual, i.e., S and not the income of the
HUF.
• Therefore, instant appeal was allowed and order of
the High Court was set aside.
• Justice Deoki Nandan Agarwala v. Union of
India [1999] 237 ITR 872 (SC).
• FACTS
• The assessee was a Judge of the High Court. He filed
his return for the assessment year 1978-79 on the
basis that the salary that he received as a Judge
was not liable to tax. The contention was rejected by
the income tax authorities.
• On appeal to the Supreme Court :
• HELD 
• Undoubtedly, prior to the amendment of articles
125 and 221 of the Constitution from
1-4-1986, Parliament could not have legislated on
Judges salaries, but it could not be concluded
there from that the salary of Judge was not
taxable under the Act.
• The subject of the salary of a High Court and the
Supreme Court Judges and the subject of tax on
income are altogether different.
• The salary of a Judge of a High Court and the
Supreme Court is income and is taxable by Act of
Parliament in just the same manner as is the income
of any other citizen.

• It is true that High Court and the Supreme Court

Judges have no employer, but that, ipso facto, does
not mean that they do not receive salaries. They
are constitutional functionaries.
• Articles 125 and 221 of the Constitution deal with
the ‘salaries’ of Supreme Court and High Court
Judges respectively and expressly state that what
the Judges receive are ‘salaries’.

• Therefore, it was not possible to hold that what

judges receive are not salaries or that such salaries
are not taxable as income under the head of salary.
• CIT v. Dr. (Mrs.) Usha Verma [2002] 120 Taxman
738 (Punj. & Har.).
• FACTS
• The assessee was a doctor working in a Government
hospital. Doctors working in Government hospitals
used to examine patients at their residence.
• In the year 1971, the Government conveyed its
decision that the private practice in that form
should stop and that paying clinics be started in
various departments
•where the doctors should be allowed to work and to
share income from these clinics, after deducting the
administrative charges, etc. By virtue of her employment
with the Government, the assessee was permitted to
work in the paying clinics run in the medical college.

•Those who chose to work were given a share in the fees. The
permission to work in the paying clinic, the rate of fees, the
share therein was given/prescribed by the Government.
• The assessee claimed deduction of expenses from the
fee received from pay clinic on the ground that
share of fees given to her for working in the pay
clinic was assessable not as salary but as ‘profits
or gains from business or profession’.
• The Assessing Officer disallowed the claim.
However, on appeal, the appellate authority accepted
the assessee’s claim. The Tribunal dismissed the
appeal filed by the revenue.
• On reference :
• HELD
• On a perusal of the pay clinic scheme, it was clear
that the provision for paying clinics was made
within the official premises. The para-medical and
other staff was provided by the employer.
• The rate of fees and the share therein was also
prescribed. It was in the background of this factual
position that the question of treatment of fees was
to be considered.
• In sub-clause (iv ) of section 17(1) of the Act it has
been provided that even fees, commissions, perquisites
or profits which are paid to a person “in lieu of or in
addition to any salary or wages” shall be included in
income taxable under section 15 of the Act.
• What is fee? According to Corpus Juris
Secundum (volume 36 Page 628) ‘fee’ is “in a generic
sense, the word implies compensation or salary; but if
used in its narrow distinctive sense it signifies the
compensation for particular acts or services rendered in
the line of official duties”.
• It has been defined as a “charge fixed by law for the
service of a public officer, or for the use of a privilege
under the control of the Government; a charge for
services; a charge or emoluments. . . .”

• This meaning conforms to the provisions of

section 17 and it is in consonance with the
broad concept of salary as compensation for
services rendered.
• The assessee was serving in the Government
Medical College. By virtue of their employment
with the Government, doctors were permitted to
work in the paying clinics run in the college.

• Those who chose to work were given a share in the

fees. The permission to work in the paying clinic,
the rate of fees, the share therein was
given/prescribed by the Government.
• The doctors got the share by virtue of their being
employed in the hospital. They used the facility and
infrastructure provided by the employer. Their share
of fees was determined by the employer.
• This share as paid by the Government to its
employees would fall within the expression ‘fees
paid in addition to the salary’.
• Thus, it was in addition to their salary for the services
permitted to be rendered by the employer and thus it
would fall within the mischief of section 17(1)(iv).

• However, in the instant case, the share of fees was

given to the doctors in accordance with the terms laid
down by the employer.
• In the circumstances of the case, it could not be
treated as income from profession.

• In view of the above findings, it was also to be held

that there was a relationship of employee and
employer between those who worked in the paying
clinic run by the Government.
Gratuity (Section 10(10):

Gratuity is a lump-sum payment to reward an employee for his

past services, on his retirement or resigation.

Sec .10 gives tax treatment of gratuity as under-

1) Amount received as gratuity as per service rules is FULLY

EXEMPT in case of employees of Central or State governments or
local authorities .
•Illustrations-
•In the above case, what will be the effect if Ashok was working with ABC
Limited, covered under the Payment of Gratuity Act, 1972?
•Solution:
•Since Ashok is the employee of a private employer XYZ Limited covered
under the Payment of Gratuity Act, 1972, exempt amount will be Rs
-------- being the least of the following and the taxable amount will be
---------.
•I. Actual amount received Rs 15,00,000
•II. Notified amount Rs. 10,00,000
•III Completed year of service X 15 days X Last Drawn Salary /26
•i.e 23x15x40000/26 =5,30,769
•Balance Rs. 9,69,231 will be taxable
• Illustration 2
• Z an employee of Tata Co. receives Rs 78000 as
gratuity. He retires on December 12, 2012 after a
service of 38 years and 4 months. At the time of
retirement his his salary was 3200 per month.
• Solution
• 38 x 15 x 3200/26 =70000
• Since Z is the employee of a private employer Tata
Co covered under the Payment of Gratuity Act,
1972,
• exempted amount will be Rs 70000 being the least
of the following:
• I. Actual amount received Rs 78000
• II. Notified amount Rs. 10,00,000
• III Completed year of service X 15 days X Last
Drawn Salary /26=70000
• And balance amount of Rs 8000 is taxable
• X is an employee of KBC ltd. He is not covered by
the Payment of Gratuity Act, 1972.
• He retires on November 20 2012 after rendering
service of 38 years and 10 months and receives
1,86,000 as gratuity. His salary is Rs 8000 per
month upto July 31, 2012 and Rs 9000 from August
1 2012.
• What amount of gratuity will be exempt from
Tax?
• Solution :
• Computation of average monthly salary
• Salary from January 1, 2012}
• to October 31, 2012} 8000x7+9000x3 =83000
• Average monthly salary 8300
• Out of Rs 186000 received as gratuity, the least
of the following three is exempt from tax-
• a) Rs 10,00,000
• b) Rs 1,61,850 (Half month average salary for each
completed year of service, i.e Rs 8300x1/2x39 or
• c)Rs 1,86,000 (being the amount received as gratuity)

• Rs 1,61,850 being the least, is exempt from tax and

the balance Rs 24,150 is taxable for the assessment
year 2013-2014.
• CIT v. P.M. Mehra [1993] 69 Taxman 110 (Bom.).
• During the previous year relevant to the assessment year
1973-74, the assessee retired from the services of
company C of which he was an employee for 10 years.

• Before joining the aforesaid company, he was in the

employment of another company where he served for 8
years. He, however, did not get any gratuity from the
aforesaid company as he had put in service of less
than 10 years.
• It was an accepted position that he had joined the
new employment on the condition that the new
employer would pay gratuity to him on retirement
by taking into account the total service that he
would have put in under both the companies taken
together.

• On retirement he received gratuity taking into

account the period of service both under the then
employer and the former employer.
•The assessee claimed exemption in respect of the aforesaid
amount under section 10(10) but the ITO confined the
exemption only to the gratuity which related to the
period of service rendered by him to the then existing
employer from whose employment he had retired.

•On appeal, the Tribunal held that the words ‘each

year of completed service’ used in section 10(10) could
not be confined to the completed years of service under
one employer.
• It might be under one employer or more than one
employer, - but the aggregate amount could not
exceed the ceiling mentioned in the Act. The assessee
was, therefore, held to be entitled to the exemption as
claimed.
• On reference :
• HELD
• A plain reading of section 10(10) makes it clear the
calculation regarding the gratuity received by an
employee on his retirement,
• The extent is that it should not exceed one-half
month’s salary for each year of completed service,
calculated on the basis of average salary for the three
years immediately preceding the year in which the
gratuity is paid and that the maximum amount should
not exceed Rs. 24,000 or 15 months salary.
• The lowest of the two is the ceiling.
• It is evident that this clause only restricts the gratuity
exempt from tax to ‘one-half month’s salary for each
year of completed service’.

• It nowhere speaks of service with the same

employer who pays the gratuity. Payment of
gratuity by the employer depends upon the terms
of the employment or the relevant service rules.
• Where a person, who is already employed
somewhere, leaves such service to join a new
employer, it may be agreed under the terms of the
new employment,
• as in the instant case, that the period of service under
the former employer would also be taken into account
in calculating the gratuity due to him on retirement,
etc.
•Once he agrees to do so and takes that period into
consideration, at the time of his retirement for calculation of
gratuity, no limitation can be imposed while granting
relief under section 10(10) in the absence of any specific
limitation contained in that provision itself.

•As already indicated, section 10(10)(iii) does not contain

any such words of limitation. It only refers to ‘completed
years of service’.
• It will be against all canons of interpretation to add to
it the words ‘with the same employer’. Therefore
there is no such limitation under section 10(10).

• The period of employment might be under one

employer or more than one employer. It is the total
period that is material.
•However, if the person concerned has already received
gratuity from the previous employer for any period of
service, such period cannot again be computed for the
purpose of calculating the amount of gratuity for the
purposes of clause (10).

•In the instant case, admittedly, no gratuity was received by the

assessee from his previous employer. The Tribunal was,
therefore, justified in allowing the exemption as claimed by
the assessee.
• CIT v. Smt. Savitaben N. Amin [1986] 157 ITR 135
(Guj.).
• Facts
• The assessee functioned as the managing director of a
company under an agreement, which was to be
operative from 1-1-1966 for a term of five years.
• The agreement, inter alia, provided for payment of
gratuity to the managing director as per the terms of
the agreement at the time of termination of
appointment.
• During the accounting year relevant to the assessment
year 1971-72, after the expiry of the said agreement
on 1-1-1971, the assessee was paid certain gratuity in
accordance with the terms of the agreement.
• Thereafter, the assessee was reappointed as
managing director under a fresh agreement which
also contained a clause as to payment of gratuity.
The assessee claimed that under section 10(10), a
part of the gratuity received was exempt from tax.
The ITO negatived the claim,
• holding that the assessee’s services had not been
terminated, with the result that no gratuity was
due and, consequently, section 10(10) was not
applicable.

• On appeal, the AAC and the Tribunal, however,

allowed the claim of the assessee.
•On reference by Department:

•Held
•When an employee retires and earns gratuity and the
same employer offers such employee a job under a
fresh agreement and the new agreement provides for
the payment of gratuity,

•that would, in no way, militate against the concept of

gratuity if such gratuity is paid on the first retirement.
• Retirement, in the case of a managing director,
would be a matter of contract and the agreement
may provide for payment of gratuity on the expiration
of the term of appointment.

• Therefore, whatever happens to the managing

director thereafter, whether the managing director
is appointed for a fresh term under a fresh
agreement or not, the earlier agreement works
itself out
• and, consequently, when the managing director retires,
he or she would be entitled to whatever gratuity is
contemplated as payable under the agreement.
• The fact that such a person is employed again under a
fresh contract without any break would make no
difference, for it would not alter the character of the
earlier payment made pursuant to the agreement.
• Therefore, in the instant case, section 10(10) was
attracted and the assessee was entitled to the
admissible deduction.
 • PERQUISITES

• Perquisites are described as

• i) any casual emolument or
• Ii)benefit attached to an office or position
• Iii) in addition to salary or wages.

• It denotes some thing that benefits a person by going into his

pocket;
• it does not cover mere reimbursement of necessary
disbursements.
 Taxability of Perquisites

•Perquisites are taxable and included in gross salary only if they are

•(i) allowed by an employer to an employee,

•(ii) Allowed during the continuation of employment,

•(iii) directly dependent on service,

•(iv) resulting in the nature of personal advantage to the employee

and

•v) derived by virtue of employer’s authority.

• Thus, Perquisites are the benefits or amenities
• in cash or in kind,
• provided by the employer to the employee
• whether free of cost or at a concessional rate.
• Their value, to the extent they go to reduce the
expenditure that the employee normally would
have otherwise incurred
• in obtaining these benefits and amenities, is
regarded as part of the taxable salary
• Perquisite is not defined --- But under
• Section 17 (2) of Income Tax Act, 1961 perquisites
include:
• 1. Value of rent free accommodation provided to the
employee by the employer.
• 2. Value of concession in the matter of rent in
respect of accommodation provided to the
employee by his employer.
• 3. Value of any benefit or amenity granted free of
cost or at a concessional rate in any of the following
cases:
• a) by a company to an employee who is a director
• thereof
• b) by a company to an employee who has
substantial interest in the company - A person has
a substantial interest in a company if he is a
beneficial owner of equity shares carrying 20% or
more of the voting power in the company
• .
•c) by any employer to an employee who is neither a
director, nor has substantial interest in the company,
•- but his monetary emoluments under the head
‘Salaries’ exceeds Rs. 50,000.

•4. Any sum paid by the employer towards any

obligation of the employee.

•5. Any sum payable by employer to effect an

assurance on the life of assessee.
• CIT v. Bawa Singh Chauhan [1984] 150 ITR 8 (Delhi).
• Facts
• The assessee, an employee of a company, was
provided, inter alia, with a rent-free house, and
some other perquisites by the company.

• In his return, he did not show any value for these

perquisites on the ground that he had not utilized
them.
• The ITO negatived this contention and included the
estimated value of the perquisites in the taxable
income of the assessee.

• The Tribunal, on second appeal, deleted the addition.

•On reference:

•Held

•Where income has been received and is subsequently given up in

such circumstances that it remains the income of the recipient,
•even though given up, it would still be taxable.

•The real test in each case is whether the income has really
accrued or not.
• In the instant case, by the provision of rent-free
accommodation, income had resulted by accrual
even though the assessee may not have utilized the
rent-free accommodation

• The statute has used the word ‘provided’ which

means making available for the use of the assessee.
• There may be circumstances under which the assessee
may not make use of the rent-free accommodation
provided to him.

• Unless the assessee forgoes his right to the

provision of rent-free accommodation provided to
him by his employer or waives: his right before the
income accrues,
• the notional income has to be brought to charge as
a perquisite equivalent to the value of the rent-free
accommodation.

• The ITO was, therefore, justified in including the

estimated value of the perquisites as the income of
the assessee and the Tribunal was not justified in
deleting the addition.
•For tax purposes,
•perquisites specified under Section 17(2) of the Act may be
classified as follows:

•(1) Perquisites that are taxable in case of every employee,

whether specified or not

•(2) Perquisites that are taxable in case of specified employees

only.

•(3) Perquisites that are exempt from tax for all employees
• (1) Perquisites Taxable in case of All Employees
• The following perquisites are taxable in case of
every employee, whether specified or not:
• 1. Rent free house provided by employer
• 2. House provided at concessional rate
• 3. Any obligation of employee discharged by
employer
• e.g. payment of club or hotel bills of employee,
• salary to domestic servants engaged by employee,
• payment of school fees of employees’ children etc.
•4. Any sum paid by employer in respect of insurance
premia on the life of employee

•(2) Perquisites taxable in case of Specified Employees

only

•The following perquisites are taxable in case of such

employees:

•1. Free supply of gas, electricity or water supply for

household consumption
• 3. Free or concessional transport facilities
• 4. Sweeper, watchman, gardener and personal
attendant
• 5. Any other benefit or amenity
• Specified employee is an employee who is either a
director or ----- ----- ----
• (3) Perquisites which are tax free for all the
employees
• This category includes perquisites which are tax free
for the employees and also
• other perquisites on which employer has to pay a tax
(called Fringe Benefit Tax)
• if they are given to the employees and so are not
taxable for them.
• 1. Medical benefits - subject to limits.
• 2. Value of Leave Travel Concession (LTC) in India.
• 3. Free meals provided to the employees during
working hours.
• 4. Amount spent by the employer as its contribution
to staff welfare schemes.
• 5. Laptops and computers provided for personal use.
• 6. Rent free official accommodation provided to a
Judge of High Court or Supreme Court or an official
of Parliament including Minister and Leader of
Opposition in Parliament.

• 7. Health Insurance Premium of employee or member

of household paid by the employer.