Principles of Taxation Law

Introduction to Taxation Law

Definitions

It is the process by which the sovereign, through its law-making body, races revenues use
to defray expenses of government, it is a means of government in increasing its revenue
under the authority of the law, purposely used to promote welfare and protection of its
citizenry. It is the collection of the share of individual and organizational income by a
government under the authority of the law.

‘Taxation’ is the act of a taxing authority actually levying tax, Taxation as a term applies
to all types of taxes, from income to gift to estate taxes. It is usually referred to as an act;
any revenue collected is usually called taxes. ‘Taxation’ is the act of laying a tax, or of
imposing taxes, as on the subjects of a State, by government, or by the proper authority;
the raising of revenue.

The most important source of revenue of the government is taxes. The act of levying
taxes is called taxation. A tax is a compulsory charge or fees imposed by government on
individuals or corporations.

Concepts of Taxation

Involuntary Contribution made by businesses and individuals towards the Government

revenue for economic growth and development

Source of revenue for the government to manage public expenditure

It is a contribution made by the individual and business entities for economic growth
and development.

Involuntary contribution or payment made by individuals and business entities to the

government which decreased their annual income or profit.

There is no return on such contributions adding to their income or profit.

Fairness, transparency, efficacy and effectiveness should be the backbone of the

principles of taxation.

Purpose, Need and Significance of Taxation

Purpose

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 Financing government spending: Taxes are justified as they fund government
expenditure and activities that are necessary and beneficial to society.

Reduce gap between rich and poor: Progressive taxation can be used to reduce
inequality in a society.

Reduction of consumption of demerit goods: Taxes can be used an effective tool to

reduce the consumption of demerit goods like alcohol and tobacco. Higher taxes on these
goods reduce the consumption of cigarettes, etc.

Control of Inflation: One of the causes of inflation is too much money chasing too few
goods' Government can take away the extra disposable income of the people through
higher taxes and thus reduce the Aggregate demand in the economy.

Balance of Payments: Tariffs (taxes) are imposed on imports. Government can correct
an unfavourable balance of payment situation by increasing the tariffs. This will result in
imports becoming expensive and will cause a fall in demand for the imported goods.

Protecting local industries: Government uses taxes as a means to protect local/infant

industries may boost the demand for goods and services produced by domestic industry.

Social and Economic Significance of Taxation

1. Prevention of concentration of wealth
Art. 39(c) of the Constitution states that “the operation of the economic system does not
result in the concentration of wealth and means of production to the common detriment.”
Prof. Musgrave provided the following devices to prevent the concentration of wealth.

a. A tax-transfer scheme, combining progressive income taxation of high income

households with a subsidy to low income households.

b. A combination of taxes on goods purchased largely by high income consumers and

subsidies to other goods which are used chiefly by low income consumers.

2. To secure economic stability

The tool of taxation may be used to secure economic stability or to remove economic
fluctuations. The economic fluctuations may be due to changes in the overall level of
employment, prices and aggregate demand. The measures are:

a. If involuntary unemployment prevails, the level of taxation should be reduced.

b. If inflation prevails, the level of taxation should be increased.

c. If full employment and price stability prevail, then, there is no need to change the
present level of taxation.

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 3. To secure adjustment in allocation of resources

All wants cannot be satisfied through the market. Public Sector is used to make provision
of social wants or collective wants, i.e., defence, justice, railways and roads, social and
cultural welfare, etc. As social life became more complex and the civil sense of the
people developed, the State found it necessary and possible to take upon itself some
further obligations, such as those of protection against internal disorders, regulation of
trade and commerce, etc. To meet the expenditure, for these functions, revenue is to be
raised through taxes.

4. To accelerate economic growth

For the purpose of promoting a country's economic development, taxation may be used
to achieve the following objectives:

a. to curtail consumption and, thus, transfer resources from consumption to investment.

b. to increase the incentives to save and invest.

c. to transfer the resources from the hands of the public to the hands of the government
in order to make public investment possible.

d. to modify the pattern of investment into socially desirable manner.

e. to reduce economic inequalities, and to make equitable distribution and wealth in

society.

5. An instrument of social control

Taxation is a recognised instrument of social control and not merely a source of raising
revenue. In fact, an argument that the taxes can be raised only for the purpose of revenue
and not for any other purpose was raised before the Supreme Court in the case of RMDC
(Mysore) P. Ltd. v. State of Mysore. It was submitted before the Court that the real object
was the control of betting and gambling and, therefore, the enactment was a colourable
piece of legislation. The court held that taxation was in the power of the legislature and
that the motives which propelled it were irrelevant. H.M. Seervai has commented on it by
highlighting the well-accepted principle that tax is a recognised instrument of social
control and that any assumption that a tax cannot be used for purposes other than revenue
is ill-founded.

Non-Revenue Objectives
1. to strengthen anaemic enterprises by granting them tax exemptions or other conditions or
incentives for growth;

2. to protect local industries against foreign competition by increasing local import taxes,

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 3. as a bargaining tool in trade negotiations with other countries;

4. to counter the effects of inflation or depression;

5. to promote science and invention, finance educational activities or maintain and improve
the efficiency of administration;

6. to implement police power and promote general welfare.

Effect of Taxes
The most important objective of taxation is to raise required revenues to meet expenditures.
Apart from raising revenue, taxes are considered as instruments of control and regulation with
the aim of influencing the pattern of consumption, production and distribution. Taxes thus
affect an economy in various ways, although the effects of taxes may not necessarily be good.
There are same bad effects of taxes too. Economic effects of taxation can be studied under the
following headings:

1. Effects of Taxation on Production:

Taxation can influence production and growth. Such effects on production are analyzed
under three heads:

a. effects on the ability to work, save and invest

b. effects on the will to work, save and invest

c. effects on the allocation of resources.

2. Effects on the ability to work save

a. Imposing taxes results in reduction of disposable income, which reduces their

expenditure on necessaries required for the sake of improving efficiency. As
efficiency suffers ability to work declines. This ultimately adversely affects savings
and investment. However, this happens in the case of poor persons.

b. Taxation on rich persons has the least effect on the efficiency and ability to work.

c. Not all taxes, however, have adverse effects on the ability to work. There are some
harmful goods, such as cigarettes, whose consumption has to be reduced to increase
ability to work. That is why high rate of taxes are often imposed on such harmful
goods to curb their consumption.

d. But all taxes adversely affect ability to save. Since rich people save more than the
poor, progressive rate of taxation reduces savings potentiality. This means low level
of investment. Lower rate of investment has a dampening effect on economic growth

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 of a country. Thus, on the whole, taxes have the disincentive effect on the ability to
work, save and invest.

3. Effect on the will to work, save and invest

a. Partly the result of money burden of tax and partly the result of psychological
burden of tax.

b. Taxes imposed temporarily in Emergencies or on windfall gain (lottery, etc.) do not

have adverse effects, but if taxes are expected to continue in future, it will reduce the
willingness to work and save of the taxpayers.

c. The psychological state of mind of taxpayers is that every tax is a burden and it
produces a disincentive effect on willingness to work. They feel that it is not worth
taking extra responsibility or putting in more hours because so much of their extra
income would be taken away by the government in the form of taxes.

d. However, if taxpayers wish to maintain their existing standard of living amidst taxes,
they will put in extra efforts.

e. It is suggested that effects of taxes upon the willingness to work, save and invest
depends on the income elasticity of demand.

f. If the income demand of an individual taxpayer is inelastic, a cut in income

consequent upon the imposition of taxes will induce him to work more and to save
more so that the lost income is at least partially recovered. On the other hand, the
desire to work and save of those people whose demand for income is elastic will be
affected adversely.

4. Effect on allocation of resources

a. By diverting resources to the desired directions, taxation can influence the volume or
the size of production as well as the pattern of production in the economy.

b. High taxation on harmful drugs and commodities will reduce their consumption,
discouraging production of such commodities. Thus, taxation may promote regional
balanced development by allocating resources in the backward regions.

c. There are some taxes which may produce some unfavourable effects on production.
Taxes imposed on certain useful products may divert resources from one region to
another. Such unhealthy diversion may cause reduction of consumption and
production of these products.

5. Effects of taxation on income distribution

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 a. Taxation has both favourable and unfavourable effects on the distribution of income
and wealth. Whether taxes reduce or increase income inequality depends on the
nature of taxes. A steeply progressive taxation system tends to reduce income
inequality since the burden of such taxes falls heavily on the richer persons. But a
regressive tax system increases the inequality of income.

b. Taxes imposed heavily on luxuries and nonessential goods tend to have a favourable
impact on income distribution. But taxes imposed on necessary articles may have
regressive effect on income distribution.

c. However, we often find some conflicting role of taxes on output and distribution. A
progressive system of taxation has favourable effect on income distribution but it has
disincentive effects on output.

d. A high dose of income tax will reduce inequalities but such will produce some
unfavourable effects on the ability to work, save, investment and, finally, output.

e. Both the goals—the equitable income distribution and larger output—cannot be

attained simultaneously.

6. Other Effects of Taxation

a. If taxes produce favourable effects on the ability and the desire to work, save and
invest, there will be a favourable effect on the employment situation of a country.

b. Further, if resources collected via taxes are utilized for development projects, it will
increase employment in the economy. If taxes affect the volume of savings and
investment badly then recession and unemployment problem will be aggravated.

c. Again, effect of taxes on the price level may be favourable and unfavourable.
Sometimes, taxes are imposed to curb inflation.

d. Again, as an imposition of commodity taxes lead to rising costs of production, taxes

aggravate the problem of inflation.

e. Thus, taxation creates both favourable and unfavourable effects on various

parameters. Unfavourable effects of taxes can be wiped out by the judicious use of
progressive taxation.

Canons of Taxation
Canons of Taxation are the main basic principles (i.e., rules) set to build “good tax system”.
Canons of Taxation were first originally laid down by economist Adam Smith in his famous
book “The Wealth of Nations”. In this book, Adam Smith only gave four canons of taxation in
1776. These original four canons are now known as the “Original or Main Canons of

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 Taxation”. As times changed, governance expanded and became much more complex than
what it was in Adam Smith's time. Modern economists felt the need to expand on Smith’s
principles and they put forth additional modern canons of taxation.

Adam Smith’s Canons of Taxation

A good tax system is one which is designed on the basis of an appropriate set of principles
(rules). The tax system should strike a balance between the interest of the taxpayer and that of
tax authorities. Adam Smith was the first economist to develop a list of Canons of Taxation.
These canons are still regarded as characteristics or features of a good tax system.

1. Canon of Certainty
According to Adam Smith, the tax which an individual has to pay should be certain, not
arbitrary. The tax payer should know in advance how much tax he has to pay, at what
time he has to pay the tax, and in what form the tax is to be paid to the government. In
other words, every tax should satisfy the canon of certainty. At the same time a good tax
system also ensures that the government is also certain about the amount that will be
collected by way of tax.
In other words, we can say, individual who is paying tax, it has to pay the same, in a
complicated manner, shall restrain him in doing so because of the hardship and problems
that he has to face while paying tax. Also, if an individual is unaware of the amount of
tax to be deducted from his income in advance then he may get demotivated to do
investment bearing high risk if he is a businessman. Therefore, the tax system must be
certain and not arbitrary. Uncertainty along with arbitrariness would defeat the very
purpose of the tax system.

2. Canon of Convenience

The mode and timing of tax payment should be as far as possible, convenient to the tax
payers. For example, land revenue is collected at time of harvest income tax is deducted
at source. Convenient tax system will encourage people to pay tax and will increase tax
revenue.
“Every tax ought to be levied at the time, or in the manner, in which it is most likely to
be convenient for the contributor to pay it”. The payment and manner of payment of
taxable amount must be convenient to the person paying the same. If the tax collection
mechanism is complex, it would lead to frustration and dissatisfaction to the contributor.
A good taxation system is one, which is convenient to the contributor. Income tax is
always collected on the preceding year of the assessment year.

3. Canon of Economy

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 This principle states that there should be economy in tax administration. The cost of tax
collection should be lower than the amount of tax collected. It may not serve any
purpose, if the taxes imposed are widespread but are difficult to administer. Therefore, it
would make no sense to impose certain taxes, if it is difficult to administer.
“Every tax ought to be contrived as both to take out and keep out of pockets of the people
as little as possible over and above what it brings, into the public treasury of the State”.
Therefore, this canon of taxation is significant in adopting the method of collection. As
stated earlier, due to technological advancement payment of tax has become an easy task.
From the point of the government, technology has reduced the expenses that would be
incurred in case of absentia. Without technological advancement in a tax system, we
cannot imagine how much hefty amount may government has incurred in the collection
of tax.

4. Canon of Equality/Equity
The principle aims at providing economic and social justice to the people. According to
this principle, every person should pay to the government depending upon his ability to
pay. The rich class people should pay higher taxes to the government, because without
the protection of the government authorities (Police, Defence, etc.) they could not have
earned and enjoyed their income. Adam Smith argued that the taxes should be
proportional to income, i.e., citizens should pay the taxes in proportion to the revenue
which they respectively enjoy under the protection of the state.
In simple word, we can say that taxing the individual according to his ability to pay
results into the equal distribution of wealth in the economy. Because of this principle of
Adam Smith, the government has made the different tax slabs so that the sacrifice made
by the individual in a monetary term shall be equal.

Additional Modern Canons of Taxation (by Charles F. Bastable)

1. Canon of Elasticity

Bastable laid stress on the principle of elasticity, i.e., the yield of the taxes may be
increased or decreased according to the needs of the Government. Taxes on property and
commodities are not so elastic as income tax.

2. Canon of Diversity
There should be all types of taxes, direct and indirect, so that every class of citizens may
be called upon to contribute something towards the State Revenue. The burden of
taxation should be widely distributed on the entire economy without causing much harm
to anyone.

3. Canon of Productivity

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 The productivity of a tax may be observed in two ways. In the first place, a tax should
yield a satisfactory amount for the maintenance of a Government Secondly, the taxes
should not obstruct and discourage production in the short as well as in the long run.

4. Canon of Simplicity

It means that a tax should easily be understood by the tax-payer, i.e. its nature, its aim,
time of payment, method and basis of estimation should all easily followed by each
taxpayer Obviously the canon may remove several difficulties of the tax-payer, and,
therefore, it is in the interest of his convenience.

5. Canon of Neutrality
The taxes should be neutral in the sense that they should not have adverse effect on
production or distribution.

6. Canon of Expediency
It implies that the possibility of imposing a tax should be taken into account from
different angles, i.e., its reaction upon the tax payers. Sometimes, it is seen that a tax may
be desirable and may have most of the characteristic of a good tax but the government
may not find it expedient to impose it. For example, progressive agricultural income tax
is very much desirable in India, but it has not been imposed so far in the manner it should
have been imposed. Hence, this canon is of vital importance in democratic countries.

7. Canon of Economic Stabilization

It may be interpreted, as to promote full employment and if possible stable financial
level. The stabilization of the balance of payments may be subsidiary objective of a well-
organized tax system.

8. Canon of Co-ordination
In democratic countries taxes are imposed by Federal and Local Governments. It is,
therefore, very much desirable that there must be coordination between the different
taxes that are imposed by different tax authorities.

Tax Planning, Tax Avoidance, Tax Evasion and Tax

Management
Tax Planning

Legitimate arrangement of financial affairs to reduce tax liability.

Tax planning can be defined as an arrangement of one's financial and economic affairs by
taking complete legitimate benefit of all deductions, exemptions, allowances and rebates

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 so that tax liability reduces to minimum. The benefits arising from tax planning are
substantial particularly in the long run.

It is a way to reduce tax liability by applying script and moral of law.

It is the scientific planning so as to attract minimum tax liability or postponement of tax

liability for the subsequent period by availing incentives, concessions, allowance, rebate
and relief.

Tax Avoidance

Legally permissible ways to reduce or negate tax liability.

This refers to the use of loopholes in the tax laws to get exemptions over and above what
is legally prescribed, usually by the means of conducting transactions in a particular
manner. Thus, even though tax avoidance lowers the tax liability, it is not against the law.

OECD: “an arrangement of taxpayer’s affairs that is intended to reduce his liability and
that although the arrangement could be strictly legal is usually in contradiction with the
intention of law it purports to follow.”

Also called “tax hedging”.

For example, S.80C of the Income Tax Act, 1961 prescribes several tax exempt saving
instruments as discussed hereinabove. However, a maximum limit of Rs.1.5 lacs is
prescribed to the benefits of such investments. Nevertheless, a person may transfer some
money to his non-earning wife or minor child and invest in the S.80C prescribed
instruments on their behalf. The transfer to such relations is free from gift tax and this
effectively allows the person to seek exemption of taxes to the total extent of Rs. 4.5 lacs
as compared to the individual limit of Rs.1.5 lacs

Tax Evasion

The term Tax Evasion is usually used to mean any illegal arrangement where tax liability
is hidden or ignores, i.e., the tax payer knowingly pays less tax than what he is legally
obligated to pay, either by hiding income or information from tax authorities or by
simply not paying the requisite taxes to the authorities within stipulated time.

OECD: “A term that is difficult to define but which is generally used to mean illegal
arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax
than he is legally obligated to pay by hiding income or information from the tax
authorities.”

Thus, it refers to the reduction of tax liability by illegal or fraudulent means. In case of
tax evasion, there generally exists an intention, or a presumed intention, on part of the
taxpayer to not pay the requisite taxes. The Indian tax system is based on voluntary

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 disclosure and compliance and as such, the simplest way of tax evasion is simply not
paying the taxes as per the law within the due date of payment of obligations. Many
people get away with this since it is not possible for tax authorities to scrutinize every
earning individual in the country.

Structure and Types of Taxation

Four major types of taxation

1. Proportional Taxes

A tax that takes the same percentage of income from all income groups. Since
proportional tax is charged at a flat rate for everyone, whether earning higher income or
lower income, it is also called flat tax. Proportional tax is based on the theory that since
everybody is equal, taxes should also be charged the same way. The sales tax is an
example of a proportional tax.

2. Progressive Taxes
A tax that takes a larger percentage of income from high-income groups than from low-
income groups. Here individual who get high income pay higher proportion of their
income as tax. Thus, Income Tax on interest earned, rental earnings, etc are example of
progressive tax.

3. Regressive Taxes
A tax that takes a larger percentage of income from low-income groups than from high-
income groups. In other words, Regressive Taxes is a tax in which people with higher
incomes pay a smaller share of their income in tax.

4. Degressive Taxes

In digressive taxation, a tax may be progressive up to a certain limit but after that it may
be charged at a flat rate. In other words, degressive tax is a mix of between the
progressive tax and proportional tax. In the case of degressive tax, the tax rate is
increased firstly with increase in income and then, the rate remains flat or constant with
further increase in income. This type of tax rate is usually applied in income tax.

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 The proportional tax rate has a constant slope, graphically, while the progressive tax rate has a
rising positive slope. The steeper the slope of the tax line, the progressive the tax regime. The
regressive tax rate line has a declining negative slope. The steeper the negative slope of the
tax line, the more regressive the taxation. The degressive tax rate line has a rising slope
initially, but it becomes constant after a point.

Indian Tax System

Direct Taxes

Direct Tax: is directly paid to the government, and it is related to the income and
property of that individual. – income tax, expenditure tax and interest tax – budget
and income tax act determine the taxation of direct tax. - Is that tax whose burden is
borne by the same person (legal) on whom it is levied – ultimate liability on whom
tax is levied

Direct tax is a type of tax where the incidence and impact of taxation fall on the
same entity.
In the case of direct tax, the burden can't be shifted by the taxpayer to someone else.
These are largely taxes on income or wealth. Income tax, corporation tax, property
tax, inheritance tax and gift tax are examples of direct tax.

A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid
directly to the government by the person (juristic or natural) on whom it is imposed.
A direct tax is one that cannot be shifted by the taxpayer to someone else. Atkinson
states that “direct taxes may be adjusted to the individual characteristics of the
taxpayer."

The most common form of direct tax is income-tax, which has to be paid by the
individuals; Hindu Undivided Families (HUF), cooperative societies and trusts on
the total income they earn. This can include income from salary, income from house

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 property, business and professional income, capital gains and income from other
sources such as interest. The tax liability depends on the residential status and gender
of the person being taxed. Companies are also taxed on the income they earn. The
onus of declaring income for the purpose of calculating direct tax liability is on
every taxpayer.

Salary, income from property, income from business, capital gains, income from
other sources, capital value tax

Merits:

Economy. —The administrative cost of collecting these taxes is low because the
same officers who assess small income or properties can assess larger incomes
and properties. Moreover, the taxpayers make the payment of these taxes direct
to the State and, therefore, every paise that is taken out of the pocket of the
taxpayer is deposited in the State treasury.

Certainty. —These taxes also satisfy the canon of certainty. I he tax payer is
certain as to how much he is expected to pay, and similarly, the State is certain
as to how it has to receive income from direct taxes.

Equity. —Direct taxes are considered to be just and equitable, because they are
generally based on the principle of progression. Therefore, they fall more
heavily on the rich than on the poor.

Reduction in Inequalities. —As the direct taxes are progressive, rich people are
subjected to higher rates of taxation. These taxes help to reduce inequalities in
incomes.

Elasticity. —The taxes also satisfy the canon of elasticity as the government
revenue may be increased simply by raising the rate of taxation Moreover, the
Income from direct taxes will also increase with the increase in income of the
people

Demerits:

Inconvenience. -These taxes are also inconvenient in nature because tax-payer

has to submit the statement of his total income along with the source of income
from which it is derived, which is generally subject to complications. Moreover,
the payment of these taxes in lump sum is not as convenient to the tax-payer as
the frequent payment of small amounts of indirect taxes.

Possibility of Injustice. —In practice, it is difficult to assess the income of all

classes accurately. Hence, the direct taxes may not fall with equal weight on all

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 classes. Moreover, the rates of direct taxes are arbitrarily fixed by the
Government and they may not be on the basis of ability to pay.

Possibility of Evasion. —A direct tax is said to be a tax on honesty, it is not

evaded only when the tax-payer is honest, otherwise it can be evaded through
fraudulent practices. The progressiveness of direct taxes induces the tax-payer to
evade the payment of taxes.

Exemption of Low-Income Group. —If only direct taxation is resorted, the low-
income group people cannot be approached by direct taxes, as they are normally
exempted from such taxes based on ability or equality.

Indirect Taxes

tax which is passed or shifted and is charged by the government on sales of goods
and services. – GST Act, 2017, Customs Act, Central Excise Act, 1974, VAT and
Sales Tax – that tax which is initially paid by one individual but the burden of which
is passed over to some other person who ultimately bears it. – levied on the
expenditure of a person

Indirect tax is a type of tax where the incidence and impact of taxation does not fall
on the same entity.

Excise and Customs Export, CGST, SGST, IGST

In the case of indirect tax, the burden of tax can be shifted by the taxpayer to
someone else. Indirect tax has the effect to raising the price of the products on which
they are imposed. Customs duty, central excise, service tax and value added tax are
examples of indirect tax. An indirect tax is a tax levied by the Government and
collected by an intermediary (such as a retail stores) from the person who bears the
ultimate economic burden of the tax (such as the customer).

Sometimes an indirect tax may be represented separately from the price of the item
or may be shown together with the cost of the product itself For example, the service
tax paid on a food bill is shown separately, but tax paid on fuel is included in the
product price.

Merits:

Convenient. —They are imposed at the time of purchase of a commodity or the

enjoyment of a service so that the taxpayer does not feel the burden of the tax as
it is hidden in the price of the commodity bought They are also convenient
because they are paid in small amounts and in intemrals and not in one lump
sum

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 Difficult to Evade. - Indirect taxes are generally included in the price of
commodities purchased. Evasion of an indirect tax will mean giving np the
satisfaction of a given want

Elastic. —Taxes imposed on commodities with inelastic demand are elastic

Equitable, Indirect taxes enable everyone, even the poorest citizens to contribute
towards the expenses of the State. Since direct taxes leave lower Income groups
from their scope, indirect taxes make them share in the financial burden of the
State.

Can be progressive. —Indirect taxes can be made progressive by imposing

heavy taxes on luxuries and exempting articles of common consumption.

Productive. —The income from indirect taxes can be made highly productive,
by imposing few taxes each yielding a substantial amount of revenue.

Wide Coverage. —Through indirect taxes every member of the community can
be taxed, so that everyone may provide something to the government to finance
the services of public utilities.

Social Welfare. —Heavy taxation on articles which are injurious to the health
and efficiency of the people may restrict their consumption.

Demerits:

Regressive. —The indirect taxes are generally regressive m nature as they fall
more heavily
upon the poor than upon the rich.

Administrative Cost—The administrative cost of collecting such taxes is

generally heavy,
because they have to be collected from millions of individuals in small amounts.
Hence, they
are un-economical.

Reduction in savings. —Indirect taxes discourage savings because they are

included in price
and people have to spend more on essential commodities and left less to save.

Uncertainty —The income from indirect taxes is said to be uncertain, because

the taxing
authority cannot accurately estimate the total revenue from indirect taxes.

No civil consciousness. —Indirect taxes are collected through middle-men like

traders and hence they have no direct impact.

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 Finance Act and Taxation
A Finance Act is the fiscal legislation enacted by the Indian Parliament to give effect to the
financial proposals of the Central Government. It is enacted once a year and contains
provisions relating to income taxes, customs, excise, Central and Integrated GST and other
cess, exemptions, and reliefs. It may also contain provisions to amend other acts as the
Government to effect its fiscal policy. The bill is usually termed the budget and it is
introduced in Parliament by the Finance Minister.

The Finance Minister of India presents a Finance Bill every year that proposes amendments
to the direct and indirect taxes. When both the houses of the Parliament passes the bill, it
receives consent from the President of India and becomes the Finance Act. Such amendments
will become a part of the Income Tax Act and will be implemented from the first day of the
next financial year usually.
Every year the Finance Minister of the Government of India introduces the Finance Bill in the
Parliament's Budget Session. When the Finance Bill is passed by both the houses of the
Parliament and gets the assent of the President, it becomes the Finance Act. New provisions
are inserted; existing provisions are substituted or amended every year in the Income Tax Act,
1961 and other tax laws by the Finance Act.
The First Schedule to the Finance Act contains four parts which specify the rates of tax — In
addition, the Finance Act consists of four parts:

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 Part I: It specifies the rate at which income tax is levied for various income categories
applicable to the current Assessment Year.
Part II: It specifies the rates at which tax is deductible at source for the current Financial
Year.
Part III: It states the changes in income tax rates in specific cases, i.e. the rate for income
chargeable under salary head and rate for computing advance tax for a financial year.

Part IV: It explains the rules for calculating agricultural income in this part.

Revenue Receipts
Money earned by a business through its day-to-day operational activities.

Recurring in nature and directly affects the profit and loss of the business

Disclosure of revenue receipts is required to be made in the income statement of the

company/organization

Revenue receipts do not create any liability for the business nor does it reduce assets; it
simply suggests that goods or services have been delivered to the clients and in return,
income has been received

It is a source of cash inflow which leads to an increase in the total revenue of company

Eg. - Rent received, discounts from suppliers, recovery of bad debts, money received for
services provided to consumers

Benefits from revenue receipts can be taken for a short period of time i.e. one accounting
or financial year

As benefits from revenue receipts are for a short period of time, it is recurring in nature

Revenue receipts come directly from the operational activities of a business

As when revenue is received by a company it will either increase the profit or will
contribute towards loss.

Disclosure is made under Trading and Profit or Loss account and not in the Balance
Sheet.

Capital Receipts
Cash in flow in business arising from financial (capital) activities and not the operating
activities of the business.

Receipts from activities that are occasional and of routine nature

Principles of Taxation Law 17

 Not a regular or main source of income, it either creates a liability or reduces the assets
for the business

Shown in the Balance Sheet and not the Profit and Loss account

Recorded on an accrual basis, i.e., recording an income a person has the right to receive
but for which the actual receipt has not yet occurred).

Non-recurring in nature, they cannot be used for distribution of profit, unlike revenue
receipts

Eg. - borrowings, recovery of loans

Tax Base
The tax base is like the starting point for calculating how much tax you owe to the
government. It is the total value of everything the government can tax you on.

For example, if you own a property, the assessed value of that property is what the
government uses as the tax base for property taxes. And when it comes to income tax,
your taxable income is the money you make after deducting certain expenses is the tax
base.

In simpler terms, the tax base includes all the money you earn or assets you own that the
government can charge taxes on. It's like the pool of resources the government looks at
when determining how much tax you need to pay.

The tax base is like the foundation for how much tax a government can collect from its
citizens and businesses.

Knowing the tax base helps both the government and taxpayers understand how much
money is available for taxes.

Concept of Income
S. 14 provides for heads of income, which shall be sued for the purposes of charge of income
tax and computation of total income:

a. Salaries (Ss. 15-17)

b. Income from house property (Ss. 22-27)

c. Profits and gains of business or profession (Ss. 28-44DB)

d. Capital gains (Ss. 45-55A)

e. Income from other sources (Ss. 56-59)

Principles of Taxation Law 18

 Types of Income

Gross Total Income (S. 80B(5))

Sum of all incomes computed under the five heads of income

Aggregate of all the income earned by an individual during a financial year before
claiming any deductions, exemptions or allowances

Tax is not levied on this

Agricultural income is not included in gross total income

Total Income (S. 2(45))

Income arrived at after claiming all allowable deductions from the Gross Total
Income

TI = GTI - Deductions

Tax is levied on this income

Agricultural Income (S. 2(1A))

Rent or revenue derived from land which is situated in India and is used for
agricultural purposes

Income from agricultural operations

Income from farmhouse/building which is in immediate vicinity to the agricultural

land

Exempt u/s 10(1)

For agricultural income:

rent/revenue must be derived from land

land must be used for agricultural purposes

land must be in India

income from agricultural operations

income from farmhouse

Casual Income

A receipt of income which is non-recurring in nature is called casual income. This is

the nature of unexpected receipt.

Principles of Taxation Law 19

 The receipt of casual income is accidental and without any conditions and in the
nature of a windfall.

This income is also known as residuary income. For example - winning from
lotteries, crossword puzzles, card games, race horses or other sorts of games like
betting or gambling.

Casual Income is chargeable under the head 'Income from Other Sources' and
subject to tax @30% without any expense allowance u/s 115BB

Does not include capital gain, receipt from business or exercise of a profession or
occupation, receipt by way of addition to renumeration of an employee, voluntary
payment received in exercise of an occupation, maintenance allowance

Non-agricultural
Sr. No. Particular Agricultural Income
income

Growing and
1. manufacturing tea in 40% 60%
India

2. Rubber 35% 65%

Sale of coffee grown

3. 25% 75%
and cured by seller

Sale of coffee, grown,

cured, roasted and
4. grounded by seller in 40% 60%
India without mixing
flavour

Income u/s 2(24)

profits and gains,

dividend

voluntary contributions received by a trust created wholly or partly for charitable or

religious purposes or by an institution established wholly or partly for such purposes (or
by an association or institution referred to in clause (21) or clause (23), or by a fund or
trust or institution referred to in subclause (iv) or subclause (v) of clause (23C) of
section 10J.

value of any prerequisite or profit in lieu of salary taxable under S. 17(2), (3)

any special allowance or benefit, other than perquisite included under (iii),
specifically granted to the assessee to meet expenses wholly, necessarily and

Principles of Taxation Law 20

 exclusively for the performance of the duties of an office or employment of profit

any allowance granted to the assessee either to meet his personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by him or
at a place where he ordinarily resides or to compensate him for the increased cost of
living;

the value of any benefit or perquisite, whether convertible into money or not, obtained
from a company either by a director or by a person who has a substantial interest in the
company, or by a relative of the director or such person, and any sum paid by any such
company in respect of any obligation which, but for such payment, would have been
payable by the director or other person aforesaid;

the value of any benefit or perquisite, whether convertible into money or not,
obtained by any representative assessee mentioned in S. 160(1)(iii), (iv) or by any
person on whose behalf or for whose benefit any income is receivable by the
representative assessee (such person being hereafter in this sub-clause referred to as
the “beneficiary”) and any sum paid by the representative assessee in respect of any
obligation_ which, but for such payment, would have been payable by the
beneficiary;

any sum chargeable to income-tax under S. 28(ii), (iii) or section 41 or section 59;

any sum chargeable to income-tax under S. 28(iiia)

any sum chargeable to income-tax under S. 28(iiib)

any sum chargeable to income tax under S. 28(iiic)

value of any benefit or prerequisite taxable under S. 28(iv)

any sum chargeable to income tax under S. 28(v)

any capital gains chargeable under S. 45

the profits and gains of any business of insurance carried on by a mutual insurance
company or by a co-operative society, computed in accordance with S. 44 or any surplus
taken to be such profits and gains by virtue of provisions contained in the First Schedule

any sum received by the assessee from his employees as contributions to any provident
fund or superannuation fund or any fund set up under the provisions of the Employees’
State Insurance Act, 1948, or any other fund for the welfare of s uch employees; interest
in the company or a relative of the director or the other person.

“Income” is of the widest amplitude and must be given its natural and grammatical
meaning. S. 2(24) is inclusive in nature - Kamakshya Narayan Singh v. CIT

Principles of Taxation Law 21

 Sources of Income and Basis of Charge of Income Tax, Deemed Income
Basis of Charge (Receipt, Accrual and Arisal)
S.4: Charge of Income Tax
Basic Principles:

a. Annual tax: Income tax is an annual tax on income.

b. Tax rates for assessment year: Income tax is charged for any assessment year at any
rate or rates for that year in respect of total income of the previous year of every person.
This rule is, however, subject to some exceptions.

c. Rates fixed by the Finance Act: The tax rates are fixed by the annual Finance Act. Total
income is calculated in accordance with the provisions of the Income-tax Act, as they
stand on the first day of April of the assessment year. For example, for calculating
income for the assessment year 2015-16, the provisions of the Income tax Act as on
April, 2015 are applicable.

d. Tax on person: Tax is charged on every person who has taxable income.

e. Tax rates on total income: The tax is charged on total income of every person in
accordance with the provisions of the Act.

f. TDS or Advance Tax: Income is deducted at source or paid in advance, where it is so

deductible or payable under the provisions of the Act.

S. 5: Scope of total income

The total income of any previous year of a person who

is a resident includes all income from whatever source derived which:

is received or is deemed to be received in India in such year by or on behalf such

person;

accrues or arises or is deemed to accrue or arise to him in India during such year;

accrues or arises to him outside India during such year:

Provided that in the case of a person not ordinarily resident in India within the meaning of S.
6(6), the income which accrues or arises to him outside India shall not be so included unless it
is derived from a business controlled in or a profession set up in India

the total income of any previous year of a person

who is non-resident includes all income from whatever source derived which:

is received or is deemed to be received in India in such year by or on behalf of such

person;

Principles of Taxation Law 22

 accrues or arises or is deemed to accrue or arise to him in India during such year

Explanation 1: Income accruing or arising outside India shall not be deemed to be received
in India within the meaning of this section by reason only of the fact that it is taken into
account in a balance-sheet prepared in India.

Explanation 2: For the removal of doubts, it is hereby declared that income which has been
included in the total income of a person on the basis that it has accrued or arisen or is deemed
to have accrued or arisen shall not again be so included on the basis that it is received or
deemed to be received by him in India.
Basic Principles of Income

The word 'Income' connotes a periodical monetary receipt coming in from some definite
source with some sort of regularity. The source need not be continuously productive one,
but must be one whose object is income.

Income is a periodical yield measurable in terms of money or money's worth and arises
out of use of real or personal property i.e. the income may be received in cash or kind.
Thus, the receipts in kind, which can be measured in terms of money, shall be taxable as
income.

Periodicity or regularity or at least expected regularity is an important element of income.

Regularity does not imply that a single receipt is not income.

Income includes money that has become due though not received.

A receipt which is 'income' will continue to be so even if it is exempted from tax.

Income means real income. Fictional or technical income cannot be termed as income for
the purposes of the Income Tax Act, 1961.

Income must come from outside. Pocket money received by a student from his father
cannot be termed as an income.

Legality or otherwise of Income or source of Income does not dictate whether a receipt
can be termed income. You are required to pay tax on illegally earned income as well.
This, however, does not grant immunity from prosecution.

In C.I.T. v. Shooji Vallabhdas & Co., it was held that when there is neither accrual nor
receipt, an entry in the books is not enough to charge tax. Income-tax is a tax on income. No
doubt the Income-tax Act takes into account two points of time at which the liability to tax is
attracted, namely the accrual of income or its receipt, but the substance of the matter is
income.

Principles of Taxation Law 23

 In C.I.T. v. Hindustan Housing Land Development Trust Ltd., it was held that real and
substantive dispute in a court cannot be included as income on accrual basis.
Cases

Bacha Guzdar v. CIT (1955)

Assessee was SH in 2 companies which grew and manufactured tea. Assessee

received dividends from the companies. He contended that his dividends would be
agricultural income, and should be assessed at 60% AI and 40% NA.

Held: Assessee does not receive dividend from land but by holding shares. To
determine the character of income, immediate and effective source must be
considered. Revenue must be received by direct association with land.

CIT v. Raja Benoy Kumar Saha Roy

Assessee owned 6000 acre of forest of saal and piya.

Held: Subsequent activities don’t constitute agricultural land used for agricultural
purposes in the IT Act, 1961 and do not extend to spontaneous growth in forest. Held
as not agricultural income and only basic operations like tiding of land and sowing
constitute agricultural operations.

Sakarlak Navanlal v. CIT

Assessee obtained galka seeds form abroad and planted them. Galkas were not
indigenous but those grown in Japan etc. Assessee made loofahs after processing
galka but of a smaller size compared to foreign loofahs, which caused loss.

Held that the processes used to make something fit for market, and the ITO
considered such processes as agricultural processes. The HC in appeal held that the
ITO and ITAT considered only the market in India, and that the ITAT has to consider
whether there was market outside India, and that the process done by assessee is not
agricultural process and that the loss faced is a business loss.

Basic Concepts Under the Income Tax Act, 1961

Person (S. 2(31)): inclusive term, includes:

An individual, e.g. Ramesh, Hari, Sita, etc.

A Hindu Undivided Family,

A Company,

A Firm,

Principles of Taxation Law 24

 An Association of Persons or a body of individuals whether incorporated or not, e.g. co-
operative society,

A Local Authority, e.g. Municipality, District Board, etc.

Every artificial judicial person not falling within any of the categories mentioned above.

Assessment Year (S. 2(9))

The period of 12 months commencing from April 1 of each year and ending on March 31
of the next year

It is the financial year in which the assessment takes place.

An assessee is required to pay tax in the AY on the income that was earned by him in the
previous year according to the rates of tax prescribed by Annual Finance Act.

The current AY is 2024-25 and the assessee is required to pay tax in this AY on the
income earned by him in the previous year, 2023-24.

Previous Year (S. 3)

Income tax is levied on net taxable income of previous year.

A previous year is that year in which the income is earned and received and the year in
which it is taxed is termed as Assessment Year.

As the assessment year starts on 1st April of every year, it is essential to end previous
year prior to 1st April or till 31st March every year.

Previous year is also called ‘Financial Year’ or ‘Accounting Year’.

Previous year is a period maximum twelve months which will certainly end on 31st
March every year (prior to assessment year).

Preceding Financial Year: Financial year immediately preceding the assessment year is
called previous year; for example, Financial Year of 2020- 21 will be previous year for
the assessment year 2021-22.

Previous year for every source of income: Earlier, the assessee had the option to choose
any previous year, i.e. Diwali Year, Dussehra Year, Calendar Year, etc. But at present, no
assessee can choose separate previous year under the Direct Tax Amendment Act, 1987.
Thus, amendment came into force from the assessment year 1989-90. Now for every
source of income, it is essential to have only one previous year (from 1st April to 31 st
March). In brief, the previous year will be uniform for all assesses and for all sources of
income.

Cases where the income of previous year is assessed in the same year:

Principles of Taxation Law 25

 S. 172: non-resident shipping companies

S. 174: persons leaving India

S. 174A: bodies formed for short duration for any specific purpose or event, such as an
AoP, BoI, AJP

S. 175: persons trying to alienate their assets

S. 176(1): discontinued business or profession

Assessee (S. 2(7)): means a person by whom any tax or any other sum payable under this Act.
Includes:

Every person in respect of whom proceedings have been started for the assessment of his
income.

Every person who is assessable in respect of income of any other person.

Every person to whom a refund of tax is due.

Every person who is deemed to be an assessee under this Act.

Every person who is deemed to be an assessee in default under any provision of this Act.

An assessee in default is a person:

Who is liable to deduct tax at source but does not do so,

Who deducts the tax but does not pay it to the Government,

Who fails to pay installments of advance income tax in time.

Types of Assessee

Normal Assessee

An individual who is liable to pay taxes for the income earned during a FY.

Every individual who has earned any income or incurred any loss during the
previous FYs are liable to pay taxes to the government in the current FY.

All individuals who have paid interest or penalty or those who are supposed to
receive a refund from the government are termed as normal assessees.

Representative Assessee

A person who is liable to pay taxes for the income earned or losses incurred by a
third party.

Representative assessees are considered when the person liable to pay taxes is a non-
resident, minor or a lunatic. Essentially, those who cannot file taxes by themselves.

Principles of Taxation Law 26

 Representatives can be guardians or agents.

Deemed Assessee

An individual assigned the responsibility of paying taxes by legal authorities

Eg. - legal heir of a deceased person who has expired without a will, executor of the
property of a deceased person, agent of a non-resident who is receiving income in
India.

Assessee in default

A person who has failed to fulfil his statutory obligations and has not paid taxes or
not filed returns.

For example, an employer is supposed to deduct taxes from the salary of his
employees before disbursing the salary. He is, then, required to pay the deducted
taxes to the government by the specified due date. If the employer fails to deposit the
tax deducted, he will be considered as an assessee-in-default.

Exemptions from Tax

An exemption refers to the deduction allowed by the law to reduce the amount of income
that would otherwise be taxed. It is a legal deduction from the income.

Incomes which do not form part of total income nor is income tax payable on them. They
are called fully exempted incomes.

Incomes which are included in the total income but are exempt from income tax at the
average rate of income tax applicable to the total income. They are called partially
exempted incomes.

Incomes of certain institutions or authorities are exempted subject to fulfilment of the

required conditions.

Gross Total Income - Deductions = Total Income

Absolute Exemptions: S. 10

Specific Exemptions: S. 10A, 10AA, 10B, 10BA, 11, 12, 13, 13A

Exempt Incomes for all Assessees

1. Agricultural Income (S. 10(1))

2. Insurance - mostly 5 types

a. Keyman insurance, ULIP

Principles of Taxation Law 27

 3. Provident Fund, NPS

4. Awards and Rewards

5. Allowances of MPs and MLAs

6. Voluntary Retirement (VRS)

7. Family pensions

8. Compensation from government for victims of Bhopal Gas Tragedy

9. Relief Amount

10. Sukanya Samridhi Account

11. Gratuity

12. HRA to employees

13. Income of municipality and Panchayat work

14. Income of news agency

15. Scientific research institutions

16. Income of khadi and village industries board

Agricultural Income
Agricultural income as defined under Section 2(1A) means any rent or revenue derived from
land which is situated in India and is used for agricultural purposes. The definition makes it
very clear that any rent or revenue (in cash or kind) will be agricultural in nature only if the
following conditions are fully satisfied:

a. Rent or revenue is derived from land,

b. The land is situated in India, and

c. The land is used for agricultural purposes.

Since the term 'agriculture' will determine the nature of income, it is necessary for us to be
able to understand what is agriculture. Income is said to have been derived from land when
that land is subjected to the labour and skill of man, whether in the form of cultivation or
otherwise. Though tilling is not a necessary part of agriculture, human labour and skill are
supposed to be expended on the land itself and not merely on the growth from land. Kinds of
agricultural income:

1. Any rent or revenue derived from land [S. 2(1A)(a)]

Principles of Taxation Law 28

 Rent or revenue derived from land situated in India and used for agricultural purposes is
agricultural income. Rent is received by one person from another for the grant of right to
the other person to use land. It may be in cash or in kind and the recipient of rent may or
may not be the owner of the land. Ifthe land has been let out by the person on rent and
the rent is in the nature of produce, he is termed as 'receiver ofrent in kind' Where the
land is used by the receiver of rent in kind for carrying out any process to make the
produce marketable or where he derives any income on the sale of such produce, this will
be treated as agricultural income in his hands too. It is, of course, agricultural income in
the hands of the cultivator.

2. Income derived from such land by agriculture or from manufacturing process [S.
2(1A)(b)]
The words 'such land' are ofsignificance here. These words limit agricultural income to
the land situated in India which is used for agricultural purposes;the income generated by
the following activities is considered agricultural income: a) Agriculture b) Process
ordinarily employed by a cultivator to render the produce marketable c) Sale by
cultivator of the produce without any further processing except the one mentioned in (b)
above. It is, thus, clear that the cultivator may need to make the produce marketable as
the produce as such may not be sold. He is allowed the use ofa process which is generally
employed by all the cultivators to make the produce marketable. Tobacco leaves are
generally dried before being sold, and therefore, the income from the sale ofdried
tobacco leaves will be agricultural in nature. However, the income from the sale of
beedies made out of the same tobacco will not be treated as agricultural income, because
marketable produce has been further processed and made more valuable.

3. Income from agricultural house property or farm buildings [S. 2(1A)(c)]

Income derived from any building in the following cases will be agricultural income:

a. The building is owned and occupied by the receiver of rent or revenue of any such
land;

b. The building is on or in the immediate vicinity of the agricultural land in India;

c. The agriculturist needs it by virtue of his connection with the land and uses it as a
dwelling house, store house or as an outhouse;

d. The land on which such building is situated must be subject to land revenue in India
or subject to a local rate assessed and collected by the officers of the said
Government;

e. If the land is not subject to land revenue, it must be outside the urban area, i.e., area
comprising a cantonment board, municipal board, notified area, town area,

Principles of Taxation Law 29

 municipal corporation or any other name by which it is known and which has a
population of 10,000 or more;

f. If it is notified by the Central Government in the Official Gazette, it must not be

situated within a distance of 8 kilometer or within the area of such lower limits from
the jurisdiction of such municipal board etc. as the Central Government may notify
in this regard.

4. Any income derived from sale of product [in 3 only]

5. Income from farm building [in 3 only]

Instances of non-agricultural income:

1. Commission for selling agricultural produce.

2. Income from Dairy Farm

3. Forest produce resulting from wild growth.

4. Fisheries

5. Ginning of cotton.

6. Harvesting of crop on purchased land.

Application and Diversion of Income

Application of income

Where the income is required to be applied to discharge an obligation after such income
reaches the assessee it is an application of income and is taxable.

Here the obligation is on the receipt of income i e. after income reaches to the assessee.
There is no overriding title in this case

In case of application, income is included in the income of assessee.

In CIT v. Sitaldas Tirathdas, The respondent sought to deduct 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 and his children.
The Supreme Court made a distinction between the amount which a person is obliged to
apply out of his income and an amount which by the nature of an obligation cannot be said to
be the part of the income of the assessee. When the income does not reach the hands of the
assessee due to diversion under an obligation, it is deductible. But on the other hand when 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 first kind of payment is exempted
u/ IT Act but not the second one. The second one is a case of application of income which has

Principles of Taxation Law 30

 been received. The first is a case in which the income never reaches the assessee, who even if
he were to collect it, does so, not as part of his in come, but for and on behalf of the person to
whom it is payable. On the facts and circumstances of the case it was held that it was a mere
case of application of income to discharge an obligation.
In Bejoy Singh Dudhuria v. CIT, Bengal, The step mother and the Raja had entered into a
compromise decree whereby a sum of Rs. 1,100 per month was to be paid to her for her
maintenance . This amount was declared as a charge upon the properties in the hands of the
Raja by the Court. The Raja sought to deduct this amount from his assessable income. After
appeal it was held that the amount which the Raja paid to his step- mother did not constitute
his income. This was a case of diversion of income by overriding title , as the Court had
created a charge on the whole resources of the Raja with a specific payment to his step-
mother. To that extent it was not his income. Further it was observed that it is not a case
where the appellant is applying his income in a particular way rather it is the allocation of a
sum out of his revenue before it becomes income in his hands. It is submitted that given the
facts and circumstances of the case it was correctly held that the case was of diversion of
income by overriding title. The assessee never received the sum of Rs. 1, 100 in his hands.
Even if he received it was not for himself. He was acting as a mere collector of that income
which was to be paid to his step-mother.
Diversion of Income

Income never reaches to the assessee as his own income. By virtue of an obligation, the
income is diverted at source before it reaches the assessee it is diversion of income and it
is not taxable.

Here, the obligation is on the source of income.

There is an overriding title by virtue of which diversion of income takes place.

In case of diversion, the income is not included in the income of the assessee.

Diversion of income by transfer of overriding title at source, it should normally have the
support of

the statutory requirements or

some decretal binding character of Courts of law and

even though the private contractual obligations can also bring about such “diversion
of income at source” but in this last sphere of private contractual obligations, the
Courts and the Income Tax Authorities have to examine such aspects carefully in
comparison to the above two other categories of statutory requirements and the

Principles of Taxation Law 31

 Court decrees and then examine the real purport and object of such private
arrangements and Contracts.

Tax Slabs for Assessment Year 2024-25

Applies to individuals, Hindu Undivided Family, Association of Persons, Body of Individuals
and Artificial Judicial Person
Financial Year 2023-24 (Old Slab)

1. Resident till 60 years old

Income Tax Rate

0 - 2,50,000 Nil

2,50,000 - 5,00,000 5%

5,00,000 - 10,00,000 20%

10,00,000+ 30%

2. Resident between age 60 - 80

Income Tax Rate

0 - 3,00,000 Nil

3,00,000 - 5,00,000 5%

5,00,000 - 10,00,000 20%

10,00,000+ 30%

3. Resident above the age of 80

Income Tax Rate

0 - 5,00,000 Nil

5,00,000 - 10,00,000 20%

10,00,000+ 30%

Financial Year 2024-25 (New Slab)

Income Tax Slab

0 - 3,00,000 Nil

3,00,000 - 6,00,000 5%

6,00,000 - 9,00,000 10%

9,00,000 - 12,00,000 15%

Principles of Taxation Law 32

 12,00,000 - 15,00,000 20%

15,00,000+ 30%

Rebate, Surcharge, Cess

Rebate
Under S. 87A

Applies only to resident individuals

Applied before charging cess

Old Slab

In old slab, if income is below 5 lakhs, there is a rebate of upto 12,500. If the tax liability
is under 12,500, then rebate is the same as tax computed. No rebate if income exceeds 5
lakhs.

New Slab

For new slab, there is a rebate of upto 25,000 if income is up to 7 lakhs, restricted to the
amount of tax payable by him.

If the income exceeds 7 lakhs and tax payable on such income exceeds the amount by
which the total income is in excess of 7 lakhs, assessee shall be entitled to a rebate of an
amount equal to the amount by which the income tax payable on such total income is in
excess of the amount by which total income exceeds 7 lakhs.

Surcharge
tax on tax.

The surcharge on income tax is levied on the tax and not the income. There are different
tax rates for different income slabs. There are also different categories that have different
quantums of surcharge percentage.

Inclusive (income u/s Exclusive (excludes

Assessee Threshold Limit
111A, 112, 112A) 111A, 112, 112A)

HUF, BoI, AoP, AJP 50L - 1cr 10% 10%

1cr - 2cr 15% 15%

2cr+ 15% 25%

Principles of Taxation Law 33

 Firm/LLP 1cr 12%

Domestic
Companies/Co- 1cr 7%
operative societies

Cess
Applied at a rate of 4% on the final tax amount reached

Applied at the end, after rebate, surcharge etc.

Health and Education Cess (H&E Cess)

Residential Status
S. 5: incidence of tax depends on nature of income

S. 6: provides for residential status on individuals, HUF, company, partnership firm, AoP,
BoI, AJP, Local Authority

All assessees are either resident or non-resident. Further classification for individual
residents.

S. 6(1): Individual
S. 6(2): HUF, firm or other (LLP, AoP, BoI)
S. 6(3): companies
S. 6(4): every other person

Residential Status of Individual: S. 6(1)

An individual is either resident or non-resident. If he is a resident, he is either an ordinary

resident or non-ordinary resident.

Rules for determination:

Residential status of each person is to be determined separately.

Determined for the relevant PY

Determined annually or for each year

Not determined for each of source of income separately.

Basic Conditions:

a. If he is in India for 182 days or more in PY OR

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 b. If he is in India for at least 60 days during relevant PY and 365 days in 4 PPY
immediately preceding PY

If he fulfills either conditions, he is a resident. If he doesn’t, non-resident.

If he is Resident, then:

a. resident for at least 2 out of 10 years immediately preceding PY AND

b. in India for at least 730 days in last 7 PPY immediately preceding PPY

If both conditions fulfilled, ordinary resident (ROR)

If one or neither conditions fulfilled, not ordinary resident (RNOR)
Exceptions:

Indian citizen leaves India as crew member of ship - 182 days

Indian citizen leaves for employment - 182 days PY

Person of Indian origin visits India in PY

income less than 15L: 182 days

income more than 15L: 182 days in PY OR or 120 days in PY and 365 days in 4
PPY.

Income from Capital Gain (S. 45 - S. 55A)

S. 45(1): Basis of charge

Any profit or gain arising from transfer of capital asset shall be charged as tax under
capital gain

Only arises when:

there is a capital asset

capital asset is transferred

transfer should take place in PY

such a transfer is not exempt under S.54

Transfer: S. 2(47)

the sale, exchange or relinquishment of the asset; or

the extinguishment of any lights therein; or the compulsory acquisition thereof under any
law; or

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 the owner of a capital asset may convert the same into the stock-in-trade of a business
carried on by him. Such conversion is treated as transfer; or

the maturity or redemption of a zero coupon bond; or

Part-performance of the contract: Sometimes, possession of an immovable property is

given in consideration of part-performance of a contract.

Capital Asset: S. 2(14)

Can be movable or immovable

Movable - business or personal, business is capital gain.

Exceptions for personal: gold, jewelry, archaeological collection, painting, drawing,

sculpture, any art work - capital gain

property of any kind, whether or not connected to business or profession

securities held by foreign institutional investor

ULIP

Capital gain does not include stock in trade, rural agricultural land, only urban and urban
agricultural land.

Land as capital asset

Population less than 10k = rural area

Population equal to or more than 10k = urban area

Explanation regarding gains arising on the transfer of urban agricultural land - Explanation 1
to section 2(1A) clarifies that capital gains arising from transfer of any agricultural land
situated in any non-rural area (as explained above) will not constitute agricultural revenue
within the meaning of section 2(1A) in other words, the capital gains arising from the transfer
of such urban agricultural lands would not be treated as agricultural income for the purpose of
exemption under section 10(1). Hence, such gains would be subject to tax under section 45.
Rural Agricultural Land in India

If land is in urban area, and sold, capital gain. If land is not urban area, it will not be capital
gain.
Rural agricultural land is:

any area comprised in jurisdiction of a municipality having population of 10k or more

any area within distance measured aerially

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 Short Aerial Distance Population

Municipal Limit + 2km is urban 10k - 1L

Municipal Limit + 6km is urban 1L - 10L

Municipal Limit + 8km is urban 10L+

Within the distance limit and population limit - it is rural land.

House Property (Ss. 23-27)

Refers to the income that an individual earns from owning a property, such as a house,
building, or land attached to a building. This income is calculated based on the potential
rental value of the property, regardless of whether it is actually rented out or not.
Basis of Charge - S. 22

Property should consist of buildings or lands appurtenant thereto.

Assessee should be owner of the property. Includes legal owner and deemed owner,
individual, HUF, company, co-op society etc. Subletting is not charged under this.

Property should not be used for the purpose of any business or profession carried on by
him, the profits of which are chargeable to income tax.

Exceptions

Buildings or staff quarters for employees: if a business owner rents out buildings or staff
quarters to their employees, and the employees’ residence there is necessary for the
efficient running of the business, the rental income will not be taxed as “income from
house property”.

If a building is rented to authorities for purposes such as setting up a bank, post office,
police station etc., the rental income will be treated as a business income.

If a person lets out a building along with machinery, plant or furniture as a package, and
the rent from the building cannot be separated from the rent for other items, the income
will be taxed under the head of “other sources”.

If a person runs a paying-guest accommodation, then income from other sources.

Where the assessee is the lessee of a building and he derives an income from subletting
or reletting, it will be taxable under “other sources”.

“deemed owner”: person who is considered the owner for tax purposes, even if he is not
legal owner.

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 If letting is only incidental and subservient to the main business of the assessee, rental
income is taxable under “other sources”.

House Property income not charged to tax

Income from farm house

Annual value of any one palace of an ex-ruler

Property income of a local authority

Approved scientific research association

Educational institution and hospital

Trade Union

Charitable Purposes

Political Party

Business or profession

Two self-occupied properties

Annual Value (S. 23)

Gross Annual Value: Tax under the head income from house property is tax on inherent
capacity of a building to yield income. Annual value – standard selected as a measure of
income to be taxed.

Definitions:

Municipal Valuation: Fixed by the local authorities, municipal corporations, town

community, on the basis of income earning capacity of property.

Actual Rent: Received/receivable from tenant

Fair Rent: Rent of similar properties in same locality

Standard Rent: Rent fixed by rent controller under Rent Control Act.

Numericals

Income under “Salary” head

Salary refers to the compensation or renumeration that an individual receives from their
employers for services rendered. Such renumeration may be in cash or in kind, and both
are taxable under the head of “salary”.

If it is in kind, then it will be valuated for calculation of tax.

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 Three components:

Employee: always an individual, part-time or full-time work, govt. or semi-govt. or

non-govt. job

Employer: Who provides the job (can be individual, HUF, firm or company)

Services: for physical services, he receives wages and for mental services, he
receives salary.

Important Points

Employer-Employee relationship: Every payment made by an employer to his employee

for service rendered would be chargeable to tax as salaries.

Full-time or Part-time employment: It does not matter whether the employee is a full-
time employee or a part-time one.

Foregoing of Salary: once salary accrues, the subsequent waiver by the employee does
not absolve him from liability to income tax. Such waiver is only an application and
hence, chargeable to tax. (Example- waiving the 12th month salary for some relief fund
is also to be evaluated for tax purpose).

Surrender of Salary: to central government under Voluntary Surrender of Salaries Act is

exempt while computing his/her taxable income. Ex A took salary for 11 months and
surrendered to the central government his salary of the 12th month under the said act,
then only his salary till 11 months shall be taxable.

Salary paid tax-free: This, in other words, means that the employer bears the burden of
the tax on the salary of the employee. In such a case, the income from salaries in the
hands of employee will consist of his salary income and also the tax on this salary paid
by the employee (seen as a perquisite only for the employee).

Place of accrual of salary: Salary earned in India is deemed to accrue or arise in India
even if it is paid outside India or it is paid or payable after the contract of employment in
India comes to an end. Exception: Section 9

Professional income of such employment is incidental to the exercise of profession and

the renumeration received will be taxable under S. 28, i.e., PGBP.

Basis of Charge (S. 15)

Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever is

earlier.

Where any salary, paid in advance, is assessed in the year of payment, it cannot be
subsequently brought to tax in the year which it is due.

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 If the salary is paid in arrears (retrospective increment or increment from past dates), and
has already been assessed on due basis, the same cannot be taxed again when it is paid.
The year when such arrear received is the year from when it would be taxable.

Difference between loan, advance salary and advance against salary

Loan is different from salary. When an employee takes a loan from his employer, which
is repayable in certain specified installments, the loan amount cannot be brought to tax as
salary of the employee.

Similarly, advance against salary is different from the advanced salary. It is an advance
taken by the employee from the employer. This advance is generally adjusted with his
salary over a specified time period. It cannot be taxed as salary.

Ex- A secures an advance from B, his employer, a sum of Rs. llakh. He is deducting from
his salary every month an amount of Rs. 10,000 for it repayment. This is a loan not a
salary and hence, non-taxable.

X got an advance from Y, his employer, a sum of 1 lakh and X's salary is 50k p.m. and he
won't be getting salary for next two months. This is salary in advance without any
adjustment from salary and is part of salary and is taxable in the year of receipt.

Due Date of Salary

Govt. or semi-govt. employee

Salary due on 1st day of next month. Eg.: October’s salary will be due on 1st
November.

FY: March to February

Non-govt. and banking employees

Salary due on last of the same month.

FY: April to March

In absence of information relating to type of employee, the assumption would be that he

is a non-govt. employee.

Definitions

Annuity/Pension: Periodical payment form employer to employee upon retirement

Profit in lieu of salary (S. 17(3)): includes mount of any compensation due or received by
an assessee from his employer at or in connection with the termination of his
employment.

Perquisite (S. 17(2))

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 Personal advantages to the employees, such as rent-free accommodation. Essentially,
perks of being an employee.

Taxable under salary only if the following conditions are satisfied:

Allowed by employer to employee

Allowed during continuance of employment

Directly dependent on the service.

Results in nature of personal advantage to the employee

Derived by virtue of employer’s authority

Salary under S. 17(1)

wages

any annuity or pension

any gratuity

fees, commission, perquisites, or profits in lieu of or in addition to any salary or wages

any advance of salary

Gross Salary

wages

annuity or pensions

gratuity

fees, commission, perquisites or profits in lieu of or in addition to salary

Advance salary

encashment of leave

provident fund

transferred balance

voluntary payment

Allowances

can be fully or partly taxable

fully exempt

Perquisites

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 can be general or specific perquisites

tax free perquisites

Profit in lieu of Salary

compensation for the loss of or the variation in the terms of service

any payment by the employer to his employee in appreciation of his services

amount received from PF

Basic Pay: the main point of salary

Dearness Allowance: given by employer for increase in the price if it is allowed as a
percentage of BP (to account for inflation. It is fully taxable
Bonus: given by employer to employee after assessing his performance during the year. It is
fully taxable.
Allowance

A fixed sum paid to an employee for a specific purpose w/o confirming the end
utilization. Always given in cash.

Allowance for personal use is fully taxable

Allowance for official use is fully exempt.

Any of the remainder allowance saved by the employee is fully taxable.

Travelling Allowance

Given by employer to meet the cost of travelling when the employee is on official tour.

Conveyance Allowance: given by to meet expenditure for one location of the

factory/workplace
Helper Allowance: given by the employer for performance of official duty.
Academic Allowance: given by employer for academic research and training.
Uniform Allowance: given by employer to meet the expenditure incurred on the maintenance
or purchase of the uniform.
Daily Uniform: given by employer to meet the cost of boarding and lodging when the
employee is on official tour.
Personal Allowance: partly taxable, purely exempt.
House Rent Allowance (S. 10(13A) and Rule 2a)

Given for accommodation of employee

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 Taxable Amount = HRA received - exempt amount

Exemption - least of the following will be the exemption amount:

HRA actually received

rent paid in excess of 10% of salary

50% of salary or 40% of salary, depending on the metropolitan city

Entertainment Allowance

It is included in the head salary and thereafter, a deduction is given from the total salary.
Deduction can be availed only in the case of a govt. employee i.e., CG/SG employee.

The least of the following amounts are deductible:

Rs. 5,000/-

20% of basic salary

Amount of entertainment allowance received during the PY

Amount actually spent towards entertainment is not taken into consideration

In case of a non-govt. employee, including employer of statutory corporations and local

authorities, entertainment allowance is not deductible.

Personal Allowances
Children Education

Allowance granted by employer for the employee’s children’s education

Exempt upto Rs. 100/- per month per child for maximum of 2 children

Hostel Allowance

Given by employer for the hostel accommodation of employee’s children.

Exempt up to Rs. 300/- per month per child for maximum of up to 2 children.

Transport Allowance

Given by employer to employee to meet the expenditure between place of residence and
place of duty. Eg.: school bus for school teachers.

Fully taxable, but if it is given to disabled employee, then deductible up to Rs. 3,200/-
per month.

Underground Allowance

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 Given by employer to employees working in the mines.

Exempt up to Rs. 800/- per month.

Outstation Allowance

Given by employer to employee who is working in any transport system to meet his
personal expenditure during duty.

Given in lieu of daily allowance.

Exempt to the extent of 70% of allowance or Rs. 10,000/- per annum whichever is lower.

Fully Exempt Allowances

Foreign Allowance

Any allowance or perquisite paid allowed outside India by the govt. to citizen of India for
rendering services outside India are exempt from tax.

Sumptuary Allowance

Expenditure on food and personal allowance

Allowed to HC and SC Judges.

Allowance from UNO

Allowance paid by the United Nations Organization to its employee is fully exempt.

Per Diem Allowance

Paid for the purpose of use of hotel, boarding and lodging facility to an employee.

International travel is also exempt from tax.

Fully Taxable Allowances

Dearness allowance, Tiffin allowance, Medical allowance, Overtime allowance, Warden
allowance.

Income from Other Sources

Basis of charge - S. 56

Any income which is not charged under any other head is charged under this head.

Eg.: Director’s fee, MP/MLA’s salary, interest from subletting

Following incomes are always charged under this head - gifts, dividends, lottery income,
rent of plant, income of owning and maintaining race horses

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 Other income covered under the head “other sources”

family pension

letting of plant and machinery

owning and maintaining racehorses

lottery, gambling or any other casual income also called windfall gains. No deduction
even on expenditure to incur it. Flat 30% tax is charged on it

maturity proceeds of keyman insurance policy received by legal heir.

Keyman insurance - employees which are the most important for the organization
are provided an insurance policy whose premium is paid by the employer. If
proceeds is received by the employee then it will be treated as income under the
head salary, if to employer then treated under PGBP, if to legal heir then treated
under the head other sources.

Composite letting of of building - plant and machinery where rent is inseparable for both
assets.

maturity proceeds from the life insurance policy - taxability would be as follows:

proceeds received to the legal her on the death of the assessee - always exempt

if received to assessee

Interest on securities (debentures and bonds)

Security held as stock in trade (trading of debenture/bonds) - PGBP

Security held as investment - other sources

Following interest incomes are exempted u/s 10(15)

interest on post office savings bank account upto Rs. 3,500 in case of individual
account and upto 7,000 in case of joint account

deduction u/s 80TTA: taxable interest on saving account or the specified limit,
whichever is less, would be raised as deduction

deduction u/s 80TTB: for senior citizen age of 60 years or above resident getting
interest from savings account, FD, time deposit, recurring deposit, deduction will be
raised upto Rs. 50,000/-

income on following post-office scheme

interest on IRFCL, NHAI, RECL, PFCL (S. 54EC bonds)

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 Interest on gold deposit bonds issued under gold monetization scheme, 2015

Interest from “tax-period pooled finance development bonds”

Taxability of Gift

Three types of gifts

in money form/monetary gift

in kind - two types here as well as movable property, without consideration or

inadequate consideration or immovable property without consideration or inadequate
consideration

Movable property only notified here is taxable in the hands of recipient:

jewellery/bullion

securities

drawings/paintings

sculpture

archaeological collection

Apart from this, no other thing is taxable in this head

Inadequate consideration (for movable property) - Fair Market Value, consideration paid
and the differential amount is treated as a gift.

Inadequate consideration (for immovable property) - Stamp Duty Value, consideration

paid.

For movable property as a gift without consideration, aggregate FMV is to be considered

for determining the taxability

Eg.: Mr. A received gifts from his two friends Mr. X and Ms. Y. Mr. X gifted a gold
ring worth Rs. 20,000 while Ms. Y gifted earrings worth Rs. 5,000. Hence, the FMV
will be 25,000 and not taxable.

For movable property as gift with inadequate consideration, FMV - consideration paid to
be considered for determining the taxability.

Eg.: Mr. S bought a jewelry from his friend at Rs. 2,00,000. The FMV of it was Rs.
2,40,000. So its inadequate consideration would be Rs. 30,000. Mr. S bought shares
from another friend @ Rs. 1,50,000. The FMV of this was Rs. 1,50,000. Inadequate
consideration is Rs. 10,000 over shares. Mr. S bought from another friend @ Rs.
60,000 whose FMV was Rs. 65,000. So, for painting the inadequate consideration

Principles of Taxation Law 46

 value would be Rs.5,000. Aggregate of Inadequate consideration would be Rs.
45,000 which is less than the exemption limit. Hence, it will be exempted.

For immovable property as gift without consideration, SDV is to be considered for

determining the exempt limit.

For immovable property, aggregate of gift value is not to be considered, rather only
individual value of gift is to be considered.

Ms. S gifted a land worth Rs. 30,000 to Mr. T and Mr. X gifted a flat worth Rs.
1,00,000 to Mr. T. The gift by Ms. S will not be taxable as it does not exceed the
limit of Rs.50,000. While Mr. X’s gift would be taxable.

Gift when not taxable:

received from any relative

received under a will or inheritance

received by the individual (not by his/her parents) on the marriage of that individual

received in contemplation of death of the payer.

received from registered charitable institute (u/s 12AA, 12AB, 10, 10AA, 10AB)

Meaning of relatives:

for HUF: members of HUF are relatives

for individual, the following are relatives

spouse/brother/sister of the individual

brother/sister of either of the parents of the individual

lineal ascendant/descendant of spouse of individual

brother/sister of spouse of individual

lineal ascendant/descendant of the individual

spouse of any of the persons referred earlier

Dividend

Profit distribution by the company to its shareholders. Wider scope under the IT Act,
1961 as it covers both dividend and deemed dividend

It is a normal income, taxes paid over it is per the slab rate. Also, maximum surcharge is
to be charged at 15%.

received from domestic company - fully taxable

Principles of Taxation Law 47

 received from foreign company - fully taxable

deemed dividend u/s 2(22)(a) to (e)

Note: expenses incurred for earning dividend shall not be allowed except interest on loan
subject to maximum 20% of dividend income.
S. 2(22)(a): distribution by company to shareholder which releases company’s assets shall be
deemed dividend to the extent of accumulated profit including capitalized profits.
S. 2(22)(b): if any company has distributed debentures/deposit certificates to shareholders
(both equity and preference shareholder) or bonus shares to preference shareholders, it will be
considered to be dividend but only to the extent of accumulated profits including capitalized
profits.

S. 2(22)(c): distribution at the time of liquidation:

a. Distribution to the extent of accumulated profit including capitalised profit would be

deemed dividend and taxable in hands of shareholders under the head 'other sources'

b. Excess distribution i.e., distribution over and above accumulated profit including
capitalised profit would be considered as full value of consideration for the shares held in
the company.

S. 2(22)(d): any distribution to its shareholders by a company on the reduction of its capital
(share face’s value) to the extent to which the company possesses accumulated profits
including capitalized profit.
S. 2(22)(e): distribution of accumulated profits by closely held company (private company or
public company whose shares is not listed in stock exchange) by way of advance/loan to:

a. shareholders beneficially holding at least 10% equity shares in the company

b. any person on behalf of such shareholders or for benefit of such shareholder

c. any concern in which such shareholder has substantial interest

d. any concern in which such shareholder is member/partner

S. 57: Amount expressly allowed as deduction

expenditure should be incurred wholly and exclusively for earning income u/s 56

capital expenditure with respect to depreciation along with revenue expenditure is also
allowed.

S. 58: Inadmissible deductions

personal expenses

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 excessive payment

cash payment more than Rs. 10,000/- other than a specified mode

payment on which TDS provisions apply but TDS is not deducted on time or not
deposited on time.

Principles of Taxation Law 49