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“NK Key Notes”

LAW OF TAXATION
Prepared as per the syllabus prescribed by Karnataka
State Law University (KSLU), Hubballi

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 Syllabus:

UNIT CONTENT PAGE

NO.
I Concept of Tax-Nature and characteristics of different types of taxes-
Direct and Indirect taxes-Distinction between tax and fees, tax and Cess-
Tax evasion, Tax planning and Tax avoidance- Retrospective Taxation-
Federal Base of Taxing Power -Power of Taxation under the Constitution,
Immunity of State agencies/ instrumentalities - Fundamental Rights and
the power of Taxation-Commerce Clause, Inter-State Commerce and
Taxation, Scope of Taxing powers of Parliament. Delegation of taxing
power to State Legislatures and Local bodies.
Direct Tax Regime:
II The lncome Tax Act 1961: Basis of taxation of Income —Basic concepts,
Person, Residential Status and incidence of tax, Income from Salaries-
lncome from House Property-Income from Business or profession and
vocation-Capital gains, Income from other sources-Deemed assessee, Set
off and carry forward Loss; Incomes exempt from tax, permissible
deductions & Chapter VIA deductions, Assessment, Kinds of assessment,
Income tax authorities- Appointment-powers and functions, Provisions
relating to collection and recovery of tax- filing of returns, electronic
filing, I.T.Portal wor1‹ingandRefundoftax, appeal and revision
provisions, offences and penalties.
Indirect Tax Regime:
III Concept of ” Goods and Service Tax (GST)-The Constitutional
(Amendment)Act 2017.The Centl‘a1Goods and Services Tax Act, 2017-
Dual GST model taxation-GST Council — Central GST (CGST); GST levy on
transactions-sale, transfer, Purchase, barter, lease, or import of goods
and/or services. IGST/SGST/UTGST/compensation Law to State
Governments GSTN-Goods and Services Tax Network Portal; Tax invoice,
GST on Imports & Exports, benefits of GST to trade, industry, e-commerce
& Service Sector and the consumers at large, impact of GST on GDP of
India and Inflation.
Indirect Tax Regime:
IV IGST-integrated GST(IGST) levied by the Central Government. inter-state
transactions and imported goods or services-State GST(SGST); The State
Goods & Service tax Law, Power of Central government to levy tax on
inter-state taxable supply, Impact of GST on State revenue; Indemnifying
State Revenue Loss; UTGST -Union Territory Goods and Service Tax Law-
GST Exemption on the sale and purchase of securities, Securities
Transaction Tax (STT)
Custom Law
V Legislative Background of the levy-ports-Warehouses-Nature and
restrictions on exports and imports-Levy, exemption and collection of
customs, duties and over view of law and procedure-Clearance of goods
from the port, including baggage-Goods imported or exported by post and
stores and goods in transit-Duty drawbacks provisions, Authorities-
Power’s and functions and SEZ Units.
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UNIT-I
 Syllabus:
 Concept of Tax-Nature and characteristics of different types of taxes- Direct and
Indirect taxes-Distinction between tax and fees, tax and Cess-Tax evasion, Tax
planning and Tax avoidance- Retrospective Taxation- Federal Base of Taxing
Power -Power of Taxation under the Constitution, Immunity of State agencies/
instrumentalities - Fundamental Rights and the power of Taxation-Commerce
Clause, Inter-State Commerce and Taxation, Scope of Taxing powers of
Parliament. Delegation of taxing power to State Legislatures and Local bodies .

• PYQ
1. Define tax. State the different types of tax?
2. Advantages and dis-advantages of tax?
3. Write a note on difference between tax evasion and tax avoidance.
4. Distinction between Tax and cess?
5. Distinction between fee and tax?
6. Explain the ConstitutionalProvisions Regarding Taxation in India
7. Explain the provisions relating to immunity of State agencies from tax.

1. Define tax. State the different types of tax? Advantages and dis-advantages of
tax?
• Introduction:
• A tax may be defined as a "pecuniary burden laid upon individuals or property
owners to support the government or a payment exacted by legislative
authority.
• A tax "is not a voluntary payment or donation, but an enforced contribution,
exacted pursuant to legislative authority" and is "any contribution imposed by
government whether under the name of toll, tribute, tallage, gabel, impost,
duty, custom, excise, subsidy, aid, supply, or other name.

• Purpose of taxation.
• Tax is entirely different from fee. Tax is collected on the personal income,
assets, property, wealth, transactions., etc. Tax is collected by the central
government or by the state government.
• The state government collects tax and hands over the same to the central
government.

• Tax are of two types;

1. Direct tax

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2. Indirect tax.
• Tax is a means of generating revenue to the government. Money collected by
way of tax is used for variou8s developmental projects and other aspects.

• Taxation has four main purposes or effects:

• Revenue, Re-distribution, Re-pricing, and Representation. The main purpose is
revenue: taxes raise money to spend on armies, roads, schools and hospitals,
and on more indirect government functions like market regulation or legal
systems.
• A second is redistribution. Normally, this means transferring wealth from the
richer sections of society to poorer sections.
• A third purpose of taxation is reprising. Taxes are levied to address
externalities; for example, tobacco is taxed to discourage smoking, and a
carbon tax discourages use of carbon-based fuels.
• A fourth, consequential effect of taxation in its historical setting has been
representation. The American revolutionary slogan "no taxation without
representation" implied this: rulers tax citizens, and citizens demand
accountability from their rulers as the other part of this bargain. Studies have
shown that direct taxation (such as income taxes) generates the greatest
degree of accountability and better governance, while indirect taxation tends
to have smaller effects.
• Therefore, these are the essential features of taxation.

 The following are the different types of tax :

1. Direct Tax
• Direct tax is tax that are to be paid directly to the government by the individual
or legal entity. Direct taxes are overlooked by the Central Board of Direct Taxes
(CBDT). Direct taxes cannot be transferred to any other individual or legal
entity.
• Sub-categories of Direct Taxes.
• Income tax: Income tax is levied on the income of the assessee. There are 5
heads of income under Income tax Act, 1961. They are as follows;
• Salary
• income from house property
• profits and gains from business or profession
• income from other sources
• capital gains.

• Capital gains tax: Capital gains tax is levied on the sale of a property or money
received through an investment. It could be from either short- term or long-
term capital gains from an investment. This includes all exchanges made in kind
that is weighed against its value.

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2. Indirect tax
• Taxes that are levied on services and products are called indirect tax.
• Sales tax: A tax levied for the sale of a product is called sales tax. This tax is
levied on a product’s seller who then passes the price to the product’s buyer
with the tax included in the product’s price.
• Service tax: Like sales tax, this tax is also included in the price of a product sold
in the country. It is levied on the services that a company offers. They are
collected depending on the way these services are offered.
• Excise duty: Excise duty is the tax imposed on . produced goods or
goods in India. It is collected directly from the manufacturer of the goods.
They are also collected from entities that receive the goods and work for the
individuals to ship the products.
• Value Added Tax (VAT): VAT is levied on different steps that are involved in the
distribution of a product. Basically, from the manufacturer to the end-user, the
tax is imposed on the product’s movement in the supply chain.
• Custom Duty: Customs duty is the charge levied on any product that has been
imported from abroad. It is to make sure the goods which enter the country are
taxed and are paid for. Ever since the inception of GST, many indirect taxes
have been clubbed into one indirect tax – the Goods and Services Tax (GST).
• Goods & Services Tax: The GST is an indirect tax that has clubbed together
many indirect taxes in India like excise duty, VAT, service tax, etc. This is the tax
levied on the supply of services and goods, which are sold for domestic
consumption in India. GST is considered a multi-stage comprehensive tax
which is levied as per the destination on the value addition. The tax is levied on
the consumers buying the goods or services. However, the responsibility of
remitting the tax to the government lies on the seller/provider of the goods
and services.

 Law of taxation and the Constitution of India:

• Federal Base of Taxing Power:
• The 7th schedule of the constitution has defined the subjects on which
Union/State or both can levy taxes. As per the 73rd and 74th amendments of
the constitution, limited financial powers have been given to the local
governments which are enshrined in Part IX and IX-A of the constitution.

• Constitutional Provisions Regarding Taxation in India:

 Only by the authority of law can taxes be levied.(Article 265)
 Levy of duty on tax and its distribution between centre and states (Article 268,
Article 269, and Article 270)
 Restriction on power of the states to levy taxes (Article 286)

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 Sale/purchase of goods which take place outside the respective state
 Sale/purchase of goods which take place during the import and export of the
goods
 Taxes imposed by the state or purpose of the state (Article 276, and Article
277)
 Taxes imposed by the state or purpose of the union
 (Article 271, Article 279, and Article 284)
 Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282).

• Article 265 Without the ‘authority of law,’ no taxes can be collected is what this
article means in simple terms. The law here means only a statute law or an act
of the legislature. The law when applied should not violate any other
constitutional provision. This article acts as an arm our instrument for arbitrary
tax extraction.
• Article 266 : This article has provisions for the Consolidated Funds and Public
Accounts of India and the States.

 Delegation of taxing power to State Legislatures :

• Article 268 This gives the duties levied by the Union government but are
collected and claimed by the State governments such as stamp duties, excise
on medicinal and toilet preparations which although are mentioned in the
Union List and levied by the Government of India but collected by the state
(these duties collected by states do not form a part of the Consolidated Fund of
India but are with the state only) within which these duties are eligible for levy
except in union territories which are collected by the Government of India.

• Article 269 provides the list of various taxes that are levied and collected by the
Union and the manner of distribution and assignment of Tax to States.

• Article 269(A) 2 This article is newly inserted which gives the power of
collection of GST on inter-state trade or commerce to the Government of India
i.e. the Centre and is named IGST by the Model Draft Law. But out of all the
collecting by Centre, there are two ways within which states get their share out
of such collection.

1. Direct Apportionment (let say out of total net proceeds 42% is directly
apportioned to states).

2. Through the Consolidated Fund of India (CFI). Out of the whole amount in
CFI a selected prescribed percentage goes to the States.

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• Article 270 This Article gives provision for the taxes levied and distributed
between the Union and the States:
 All taxes and duties named within the Union List, except the duties and
taxes named in articles 268, 269 and 269A, separately.
 Taxes and surcharges on taxes, duties, and cess on particular functions
which are specified in Article 271 under any law created by Parliament
are extracted by the Union Government.
 It is distributed between the Union and the States as mentioned in
clause (2).
 The proceeds from any tax/duty levied in any financial year, is assigned
to the states where this tax/duty is extractable in that year but it
doesn’t form a part of the Consolidated Fund of India.
 Any tax collected by the centre should also be divided among the centre
and states as provided in clause (2).
 With the introduction of GST 2 sub-clauses having been added to this
Article- Article 270(1A) and Article 20(1B7).

• The Supreme Court of India has set a famous judicial precedent under Article
270 of the Constitution of India in the case T.M. Kanniyan v. I.T.O. The SC, in
this case, propounded that the Income-tax collected forms a part of the
Consolidated Fund of India.

• The Income-tax thus extracted cannot be distributed between the centre,

union territories, and states which are under Presidential rule.

• Article 271 At times the Parliament for the Union Government (only when such
a requirement arises), decides to increase any of the taxes /duties mentioned
in article 269 and Article 270 by levying an additional surcharge on them and
the proceeds from them form a part of the Consolidated Fund of India.
• Article 271 is an exception to Article 269 and Article 270.
• The collection of the surcharge is also done by the Union and the State has no
role to play in it.
– Cess and surcharge
• There seems to be a lot of confusion between cess and surcharge.
• Cess is described in Article 270 of the Constitution of India. Cess is like a fee
imposed for a particular purpose that the legislation charging it decides.
• Article 271 deals with a surcharge which is nothing but an additional tax on the
existing tax collected by the union for a particular purpose.

• Grants-in-aid
• The constitution has provisions for sanctioning grants to the states or other

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federating units. It is Central Government financial assistance to the states to
balance/correct/adjust the financial requirements of the units when the
revenue proceeds go to the centre but the welfare measures and functions are
entrusted to 3 the states.
• These are charged to the Consolidated Fund of India and the authority to grant
is with the Parliament.
• Article 273 This grant is charged to the Consolidated Fund of India every year in
place of any share of the net proceeds, export duty on products of jute to the
states of Assam, Bihar, Orissa, and West Bengal.
• This grant will continue and will be charged to the Consolidated Fund of India
as long as the Union government continues to levy export duty on jute, or
products of jute or the time of expiration which is 10 years from its
commencement.

• Article 275 These grants are sanctioned as the parliament by law decides to
give to those states which are in dire need of funds and assistance in procuring
these funds. These funds /grants are mainly used for the development of the
state and for the widening of the welfare measures/schemes undertaken by
the state government. It is also used for social welfare work for the Scheduled
tribes in their areas.

• Article 276 This article talks about the taxes that are levied by the state
government, governed by the state government and the taxes are collected
also by the state government. But the taxes levied are not uniform across the
different states and may vary. These are sales tax and VAT, professional tax and
stamp duty to name a few.
• Article 277 Except for cesses, fees, duties or taxes which were levied
immediately before the commencement of the constitution by any municipality
or other local body for the purposes of the State, despite being mentioned in
the Union List can continue to be levied and applied for the same purposes
until a new law contradicting it has been passed by the parliament.
• Article 279 This article deals with the calculation of“net proceeds” etc.

• Here ‘net proceeds’ means the proceeds which are left after deducting the cost
of collection of the tax, ascertained and certified by the Comptroller and
Auditor-General of India.
• Article 282 It is normally meant for special, temporary or ad hoc schemes and
the power to grant sanctions under it is not restricted.

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Article 286
• This article restricts the power of the State to tax:
• 1) The state cannot exercise taxation on imports/exports nor can it impose
taxes outside the territory of the state.
• Article 289 State Governments are exempted from Union taxation as regards
their property and income but if there is any law made by the parliament in this
regard then the Union can impose the tax to such extent.

 Inter-State Commerce and Taxation:

• Some other tax-related provisions:

• Article 301 which states that trade, commerce and inter-course are exempted
from any taxation throughout India except for the provisions mentioned in
Article 302, 303, and 304 of the Indian Constitution, 1949.
• Article 302 empowers the parliament to impose restrictions on trade and
commerce in view of public interest.
• Article 303– Whenever there is the scarcity of goods this article comes in play.
Discrimination against the different State Governments is not permitted under
the law except when there is a scarcity of goods in a particular state and this
preference to that state can be made only by the Parliament and in keeping
with the law.
• Article 304– permits a State Government to impose taxes on goods imported
from other States and Union Territories but it cannot discriminate between
goods from within the State and goods from outside the State. The State can
also exercise the power to impose some restrictions on freedom of trade and
commerce within its territory.
• Article 366
• Apart from all these provisions, there are other provisions also that require
mention such as Article 366 which gives the definition of:
 Goods; Services;
 Taxation;
 State;
 Taxes that are levied on the sale/purchase of goods;
 Goods and service tax etc.

 Fundamental Rights and the power of Taxation:

• Constitutional Limitations Upon The Taxing Power ( FUNDAMENTAL RIGHTS) :

• Apart from the limitation by the division of the taxing power between the
Union and State Legislature by the relevant Entries in the legislative Lists, the
taxing power of either Legislature is particularly subject to the following

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limitations imposed by particular provisions of our Constitution:
1) It must not contravene Art.13.
2) It must not deny equal protection of the laws, must not be discriminatory
or arbitrary . (Art.14)
3) It must not constitute an unreasonable restriction upon the right to
business.(19(1)(g).
4) No tax shall be levied the proceeds of which are specially appropriated in
payment of expenses for the promotion or maintenance of any particular
religion or religious denomination (Art.27).
5) A State Legislature or any authority within the State cannot tax the
property of the Union. (Art.285) (6) The Union cannot tax the property
and income of a State (Art.289).
6) The power of a State to levy tax on sale or purchase of goods is
subject to Art.286.
7) Save in so far as Parliament may, by law, otherwise provide, a State shall
not tax the consumption or sale of electricity in the cases specified in
Art.287

 Scope of Taxing powers of Parliament :

• Seventh schedule to constitution

• Seventh schedule deals with division of subjects for powers and responsibilities
in Union , State and Concurrent list. Seventh schedule has three types of list
Union list [Article 246 (1)]
• Under this list Parliament authorized to make laws as per list 1 of seventh
schedule.

• State list [ Article 246(3)]

• Under this list state is authorized to make laws as per the list of 7th schedule.

• Concurrent list
• Under this list both Union and State are authorized to make law.

• Article 245 of constitution is extent of law made by parliament and by

legislature of state, both the government have right to make laws. These are
provided by constitution itself , these subject matters provided in 7th schedule
of Indian constitution.
• According to article 245 subject to provision of this constitution , Parliament
may make laws for whole or any part of the territory of India and legislature
can make law for any part of the State.

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 Local bodies.
• Article 243H states that every Panchayat shall have the power to impose taxes,
tolls, and fees on various items within its jurisdiction. However, these taxes
cannot be imposed on the subjects mentioned in the Union List or the State List
of the Constitution.

 Immunity of State agencies/ instrumentalities:

• The doctrine of immunity of instrumentalities stipulates that both the State and
Central (Federal) Governments possess immunity from being subjected to taxes
imposed by the other. This immunity applies to entities established by these
governments, specifically Statutory Corporations established by them.
• In India, the scope of inter-governmental tax immunities or doctrine of
immunity of instrumentalities is quite limited. These immunities are primarily
addressed in Articles 285, 287, 288 and 289 of the Indian Constitution.
• Article 285: Exemption of property of the Union from State taxation
• Article 286: Restrictions as to imposition of tax on the sale or purchase of
goods
• Article 287: Exemption from taxes on electricity
• Article 288: Exemption from taxation by States in respect of water or
electricity in certain cases
• Article 289: Exemption of property and income of a State from Union
taxation.
• This doctrine came into prominence through the landmark case of McCulloch v.
Maryland, where the State of Maryland was prohibited from taxing a federally
chartered bank. The ruling in this case established that not only the property
but also the functions and instrumentalities of the Federal Government were
exempt from State taxation.

2. Explain the provisions relating to immunity of State agencies from tax.

• Introduction

• The Indian Constitution provides certain immunities to State agencies from

taxation by other states or the Union. These provisions ensure that the
financial operations of State governments are not hindered by inter-
governmental taxation.
• Constitutional Provisions
• Article 285: Exemption of Property of the Union from State Taxation
• Clause (1): This clause stipulates that the property of the Union shall be exempt
from all taxes imposed by a State or by any authority within a State.
• Clause (2): The Parliament may, by law, provide for the taxation of Union
property in such manner and to such extent as it thinks fit.

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• Article 289: Exemption of Property and Income of a State from Union Taxation .
• Clause (1): The property and income of a State shall be exempt from Union
taxation.
• Clause (2): However, the Parliament has the power to remove this exemption in
respect of a business carried on by or on behalf of a State.
• Clause (3): Any law made by Parliament under Clause (2) must be subject to
any restrictions or limitations provided by such law.

• Explanation of Provisions
• 1. Article 285: Exemption of Union Property Purpose: This article ensures that
the property of the Union government is not subject to taxation by State
governments, preserving the financial sovereignty of the Union.
• Scope: The exemption applies to all types of property, including lands,
buildings, and assets owned by the Union.
• Exceptions: Parliament can enact laws to provide for the taxation of Union
property by States if deemed necessary
2. Article 289: Exemption of State Property and Income Purpose: This article
protects the property and income of State governments from Union taxation,
ensuring that States can manage their finances without interference.
• Scope: The exemption covers all property and income of a State, including
revenues from activities conducted by the State.
• Exceptions: Parliament can legislate to tax the income generated from any
business carried out by a State, provided such legislation respects any
restrictions set by the Constitution.

• Case Laws :
• State of West Bengal v. Union of India (1963 AIR 1241).
• Facts: The case dealt with the question of whether theproperty of the Union is
immune from State taxation.
• Judgment: The Supreme Court held that the property of the Union is indeed
immune from State taxation under Article 285, emphasizing the clear
constitutional mandate.
• New Delhi Municipal Committee v. State of Punjab (1997 AIR 2847).
• Facts: The issue was whether the properties owned by the Union were subject
to municipal taxation.
• Judgment: The Supreme Court reaffirmed the immunity of Union property
from State and municipal taxes as per Article 285

3. Write a note on difference between tax evasion and tax avoidance.

• what is tax avoidance and tax evasion?
• Tax avoidance, while legal, involves exploiting loopholes in tax laws and is

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considered morally questionable. Tax evasion, on the other hand, is illegal and
involves fraudulent practices to reduce tax burden.

 Difference between tax evasion and tax avoidance.

TAX AVOIDANCE TAX EVASION
BASIS FOR
COMPARISON
Meaning Minimization of tax liability, by taking Reducing tax liability by using illegal
such means which do not violate the ways is known as Tax Evasion.
tax rules, is Tax Avoidance.
What is it? Hedging of tax Concealment of tax
Attributes Immoral in nature, which involves Illegal and objectionable, both in script
bending the law without breaking it. and moral
Concept Taking unfair advantage of the Deliberate manipulations in accounts
shortcomings in the tax laws. resulting in fraud.
Legal Use of Justified means Use of such means that are
implication
Happened Before the occurrence of tax liability . After tax liability arises.
when
Type of act Legal Criminal
Consequences Deferment of tax liability Penalty or imprisonment
Objective To reduce tax liability by applying the To reduce tax liability by exercising
script of law. unfair means.

• Reasons for tax avoidance and evasion

• High rate of tax
• Complexity in tax laws
• Lack of strong tax policies
• Weak administration

3. Distinction between Tax and cess?

• A cess is a form of tax levied by the government on tax with specific purposes
till the time the government gets enough money for that purpose.
Tax Cess

Introduction Type of financial charge Kind of tax collected for

imposed by a government specific purpose
on wealth and income
Scope Wider Limited
Purpose/ Generating revenue Collecting fund for
Objective special purpose
It Is Kind Of Fee Kind of tax

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Examples Direct and indirect Educational cess, healthcare
tax cess etc.

4. Distinction between tax and fee?

• What is Fee?
• A fee is a voluntary payment made to the government in exchange for one-of-a-
kind services provided in the public interest, but which provides the payer with
a specific benefit.
• Mahant Sri Jagannath Ramanuj Das v. State of Orissa, AIR 1954 SC 400, where
it was held that the fee must be the consideration for certain services that the
individuals received and that it must not be merged in the general revenue of
the state to be used for general public purposes, further established these two
factors. Through successive legal decisions, the two aforementioned principles
of a fee have undergone significant alteration, and their stringent requirement
has been lessened.
Basis Tax Fee
Definition A tax is money that the A fee is similar to a tax in that both are
government levies on a person or amounts that people or businesses
company when they carry out a must pay to the government. The main
particular act or complete a purpose of fees is to manage or control
particular transaction. Taxes are different kinds of activities.
imposed for the benefit of the
nation as a whole.
Measured This tax is frequently calculated as The cost of providing the service is
a percentage of the transaction's closely correlated with the rate. In
total cost. general, the fee's proceeds are only
used to provide the service for which
they are intended.
Taxes are levies that are paid for A charge is a levy that is taken in order
Levy Collection general government to provide a service that helps the
services. It is a method for the population from which the money is
government to make money. taken. It is billed for services provided
by a person, a business, or a
professional.
Administration Administration and Use: Your taxes
and Application may cover a teacher's, police An exacting service is charged a fee,
officer's, or bureaucrat's wage. and the money obtained is typically set
They might aid in building a school aside for that service.
or paving a road. They might
provide funding for the local
sewage treatment facility.
The money that a person earns However, a fee is imposed specifically
over the course of a year is subject for the use of a service. For instance, a

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to taxation. Furthermore, taxes are government might impose admission
Example frequently levied on the sale of charges for parks. Examples of fees
goods. Taxes include things like include stamp fees, license fees for
income tax, gift tax, wealth tax, driving, government registration fees,
VAT, etc etc.

5. Tax Planning?
• Tax Planning Meaning
• Tax planning is an activity to reduce tax liability. Tax planning is the basic and
important part of the financial plan and helps to save our capital.
• Exemptions and deductions available under the Act may broadly be grouped as
under : a. Tax-free income [secs. 10, 10A, 10B, 10BA and 13A]. b. Deductions
from gross total income [secs. 80C to 80U].
• As in the case of McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, McDowell & Co.
Ltd. was a licensed manufacturer of Indian liquor. Appellant paid sales tax to
the sales tax authority on the basis of turnover but excluded excise duty. The
question raised before the SC was that whether the excise duty which was
payable by the appellant but had been paid by buyers was actually a part of
turnover.
• Here appellant tried to reduce the burden of sales tax for which the duty
burden was directly transferred to the buyers.
• SC held that “tax planning may be legitimate if it is within the framework of
law, but the colorable device cannot be part of tax planning. It is wrong to say
that it is honorable to avoid payment of tax by the dubious method. It is the
obligation of every citizen to pay tax honestly without resorting to
subterfuges.”

 Methods of Tax Planning

• Short-Range Tax Planning.
• Long-Range Tax Planning.
• Permissive Tax Planning.
• Purposive Tax Planning.

 Features of Tax Planning

• Reduction in tax liability.
• Advance planning.-
• Investment in the right direction.-
• Dynamic in nature.-

 What is a Retrospective Tax?

• The meaning of the word 'retrospective' is 'looking backward'. It relates to

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thinking about the past, 'looking back over the past', etc. In terms of taxation,
retrospective tax means giving effect to the amendment in the present law
before the date on which the changes were brought in.

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UNIT-II
SYLLABUS
Direct Tax Regime:
The lncome Tax Act 1961: Basis of taxation of Income—Basic concepts, Person,
Residential Status and incidence of tax, Income from Salaries-lncome from House
Property-Income from Business or profession and vocation-Capital gains, Income
from other sources- Deemed assessee, Set off and carry forward Loss; Incomes
exempt from tax, permissible deductions & Chapter VIA deductions, Assessment,
Kinds of assessment, Income tax authorities- Appointment- powers and
functions, Provisions relating to collection and recovery of tax- filing of returns,
electronic filing, I.T.Portal working and Refund of tax, appeal and revision
provisions, offences and penalties.

PYQ
1. The incidence of income tax depends upon the residential status of an assessee
Explain.
2. Explain the meaning of salary and various deduction of salary.
3.
4. Give a format determining the taxable income from salary.
5. Define Salary. Discuss the rules of Income chargeable under the heads of salaries.
6. Explain the provisions relating to ‘income from house property’ under the IT Act,
1961.
7. What is depreciation? What are the expenses and payments disallowed while
computing income from business and profession. Explain?
8. Explain the provisions regulating tax incidence on capital gains?
9. Explain the various types of assessments under IT act 1961.
10. Explain the various Income Tax Authorities under the Income tax Act, 1961.

Q. The incidence of income tax depends upon the residential status of an assessee
Explain.
The lncome Tax Act 1961:
 The Income Tax Act 1961 is the set of rules and regulations upon which the
Income Tax Department levies, administers, collects and recovers taxes. It
contains 298 sections, 23 chapters and several important provisions which
contain all the aspects of taxation in India.
 The nature of the Income Tax Act 1961 is direct i.e. the taxpayer must pay direct
taxes at a certain percentage based on his/her income.

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 Residential status :
 Residential status is a term coined under Income Tax Act and has nothing to do
with nationality or domicile of a person. An Indian, who is a citizen of India can
be non-resident for Income-tax purposes, whereas an American who is a citizen
of America can be resident of India for Income-tax purposes. Residential status of
a person depends upon the territorial connections of the person with this
country, i.e., for how many days he has physically stayed in India.

 As we know that Income tax is charged on every person. The term ‘Person’ has
been defined under section 2(31) includes :
I. An individual
II. Hindu Undivided Family
III. Firm iv. Company
IV. AOP/BOI
V. Local authority
VI. Every other artificial juridical person not falling in preceding six
subclasses

Basic rules for determining Residential Status of an Assessee

The following basic rules must be kept in mind while determining the residential
status:
• — Residential status is determined for each category of persons separately
e.g. there are separate set of rules for determining the residential status of an
individual and separate rules for companies, etc
• — Residential status is always determined for the previous year because we
have to determine the total income of the previous year only.
• — Residential status of a person is to be determined for every previous year
because it may change from year to year. For example A, who is resident of
India in the previous year 2017- 18, may become a nonresident in previous
year 2018-19.
• — If a person is resident in India in a previous year relevant to an
assessment year in respect of any source of income, he shall be deemed to be
resident in India in the previous year relevant to the assessment year in
respect of each of his other source of income. [Section 6(5)]
• — A person may be a resident of more than one country for any previous
year. If Y is a resident in India for previous year 2017-18, it does not mean that
he cannot be a resident of any other country for that previous year.
• — Citizenship of a country and residential status of that country are

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separate concepts. A person may be an Indian national/citizen, but may not
be a resident in India. On the other hand, a person may be a foreign
national/citizen, but may be a resident in India.
• — It is the duty of the assessee to place all material facts before the
assessing officer to enable him to determine his correct residential status.

 The total income of an assessee will be different depending upon whether he is

1. Resident,
2. Not ordinarily resident,or
3. Non-resident.

Income Type Residential Status

Resident and Resident but Non-
Ordinarily not-Ordinarily Resident
Resident (ROR) Resident (NR)
(RNOR)
Income received or deemed to Taxable Taxable Taxable
be received in India
Accrued income in India Taxable Taxable Taxable
Income accrues from outside Taxable Taxable Non-
India, but the profession or taxable
business is inside the country.
Income accrues from outside Taxable Non-taxable Non-
India, but the profession or taxable
business is outside the country.
The untaxed past foreign Non-taxable Non-taxable Non-
income brought into the taxable
country.

 Income from Salaries:

 Explain the meaning of salary and various deduction of salary?
 “Salary” includes:- (Sec.17(1))
i. wages, fees, commissions, perquisites, profits in lieu of, or, in addition to
salary, advance of salary, annuity or pension, gratuity, payments in respect
of encashment of leave etc.
ii. the portion of the annual accretion to the balance at the credit of the
employee participating in a recognized provident fund as consists of {Rule

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6 of Part A of the Fourth Schedule of the Act}:
a) contributions made by the employer to the account of the employee in
a recognized provident fund in excess of 12% of the salary of the
employee, and
b) interest credited on the balance to the credit of the employee in so far
as it is allowed at a rate exceeding such rate as may be fixed by Central
Government. [w.e.f. 01-09-2010 rate is fixed at 9.5% – Notification No
SO1046(E) dated 13-05-2011]
iii. the contribution made by the Central Government or any other employer to the
account of the employee under the New Pension Scheme as notified vide
Notification F.N. 5/7/2003- ECB&PR dated 22.12.2003 (enclosed as Annexure VII)
referred to in section 80CCD (para 5.5.3 of this Circular).

Various deductions from Salaries

Deductions under Section 16: Certain deductions are allowed from the gross
salary, such as standard deduction, entertainment allowance, and professional tax
paid.
The income chargeable under the head Salaries is computed after making the
following Deductions-

 Standard deduction;
• Standard Deduction has been reintroduced in the 2018 budget. This
deduction has replaced the conveyance allowance and medical allowance.
The employee can now claim a flat Rs. 40,000 deduction from the total
income, thereby reducing the tax outgo.

 Entertainment allowance;
 Entertainment allowance received is fully taxable and is first to be included in
the salary and thereafter the following deduction is to be made:
 However, deduction in respect of entertainment allowance is available in case
of Government employees. The amount of deduction will be lower of:
 One-fifth of his basic salary or
 5,000 or
 Entertainment allowance received.
 Amount actually spent by the employee towards entertainment out of the
entertainment allowance received by him is not a relevant consideration at all.

 Professional tax on employment;

• Professional tax or taxes on employment levied by a State under Article

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276 of the Constitution is allowed as deduction only when it is actually
paid by the employee during the previous year.
• If professional tax is reimbursed or directly paid by the employer on behalf
of the employee, the amount so paid is first included as salary income and
then allowed as a deduction u/s 16.

Q. Give a format determining the taxable income from salary.

 Introduction:
 Income from salary is the compensation received by an employee for their
services. However, this amount is considered income under the Income Tax Act
only if there is an employer and employee relationship between the person who
makes the payment and the person who receives the compensation. Typically,
income from salary includes:
• Basic salary as per the terms of employment
• Allowance for meeting personal expenses
• Fees, commission, bonus, etc.
 Various deductions to calculate income tax on salary:
 Here is a list of the various deductions considered under income tax laws to
calculate income tax on salary:

1. House Rent Allowance (HRA);

 Employees staying in rented accommodations can claim deductions for the same
under the old tax regime. The income tax deductions are the least of the
following:
• Total HRA paid
• Actual rent paid less than 10% of basic salary
• 50% of salary for metro cities or 40% of salary for non-metro cities.

2. Leave Travel Allowance (LTA) ;

 Employees can claim LTA up to the amount of actual expense incurred (bills to be
produced), twice in a block of four years. The LTA covers domestic travel only.
Further, it doesn’t cover expenses incurred for personal reasons, such as leisure,
food expenses, shopping, or entertainment.

3. Standard Deduction ;
 In the interim budget of 2019, the total limit of standard deduction under income
tax has been increased to Rs. 50,000.

4. Section 80C, 80CCD (1), and 80CCC ;

 There are tax savings options wherein salaried employees can invest and claim an

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income tax deduction on salary up to Rs. 1.5 lacs. Some of the investments
covered under the sections mentioned above include Employee Provident Fund
(EPF), Life Insurance Premium, Equity Linked Savings Scheme (ELSS), Pension
schemes, etc. There are also many other government savings schemes included
under these sections.

5. Deductions Against Loans ;

 The principal and interest paid towards the home loan are eligible for deduction
under section 80E subject to a maximum limit of Rs. 1.50 lacs. Employees can
claim deductions for interest paid on home loans for up to Rs. 2.0 lacs under
section 24.

Q. Define Salary. Discuss the rules of Income chargeable under the heads of
salaries.
Meaning
• The meaning of the term ‘salary’ for purposes of income tax is much wider
than what is normally understood. The term ‘salary’ for the purposes of
Income-tax Act, 1961 will include both monetary payments (e.g. basic salary,
bonus, commission, allowances etc.) as well as non-monetary facilities (e.g.
housing accommodation, medical facility, interest free loans etc.).
• Section 17(1) defined the term “Salary”. It is an inclusive definition and
includes monetary as well as non-monetary items.

 INCOME CHARGEABLE UNDER THE HEAD “SALARIES”:

(1) The following income shall be chargeable to income-tax under the head
“Salaries” :
 (a) any salary due from an employer or a former employer to an assessee in the
previous year, whether paid or not;
 (b) any salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer though not due or before it became due to him.
 (c) any arrears of salary paid or allowed to him in the previous year by or on
behalf of an employer or a former employer, if not charged to income-tax for any
earlier previous year.

(2) For the removal of doubts, it is clarified that where any salary paid in advance is
included in the total income of any person for any previous year it shall not be
included again in the total income of the person when the salary becomes due.
 Any salary, bonus, commission or remuneration, by whatever name called, due
to, or received by, a partner of a firm from the firm shall not be regarded as

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“Salary”.

• lncome from House Property:

Q. Explain the provisions relating to ‘income from house property’ under the IT
Act, 1961.

Introduction:

INCOME FROM HOUSE PROPERTY is dealt under the following sections (SEC 22
TO27);

• Sec 22 & 23 – Income taxable under the head and how it is calculated
• Section 24 – Deductions Allowed
• Section 25 – Deductions which are not allowed and taxable
• Section 26 – Special treatment in case of co – owners of the house.
• Section 27 – Various Terms for this head of income.

• Meaning:
• The annual value of a property, consisting of any buildings or lands appurtenant
thereto, of which the assessee is the owner, is chargeable to tax under the head
‘Income from house property’.

• BASIS OF CHARGE
• Section 22 of the Act provides as follows: “The annual value of a property
consisting of any buildings or lands appurtenant thereto of which the assessee is
owner, other than such portions of such property as he may occupy for the
purposes of business or profession carried on by him the profits of which are
chargeable to income tax, shall be chargeable to income tax under the head
Income from House Property”.

• CONDITIONS FOR INCOME FROM HOUSE PROPERTY :

Three conditions are to be satisfied for property income to be taxable under this
head;
1. The property should consist of buildings or lands appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any

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business or profession carried on by him, the profits of which are
chargeable to income-tax.

• OWNERSHIP OF HOUSE PROPERTY

• It is only the owner (or deemed owner) of house property who is liable to
tax on income under this head.
• Owner may be an individual, firm, company, cooperative society or
association of persons.
• The property may be let out to a third party either for residential purposes
or for business purposes.
• Annual value of property is assessed to tax in the hands of the owner even if
he is not in receipt of the income.

• Owner/deemed owner: Section 27 of the Income Tax Act provides that , Income
from house property is taxable to the owner of the property. The owner is the
person who is entitled to receive income from property. This means that income
is chargeable to the person who receives financial benefit from the property,
even if the property is not registered to him, i.e. deemed owner. A deemed
owner is an owner by implication and not necessarily documented registration.

• PROPERTY INCOME EXEMPTED FROM TAX:

o Income from a farm house [section 2(1A) (c) and section 10(1)]. 2.
o Annual value of one palace in the occupation of an ex-ruler [section
10(19A)].
o Property income of a local authority [section 10(20)].
o Property income of an approved scientific research association [section
10(21)].
o Property income of an educational institution and hospital [section
10(23C)].
o Property income of a registered trade union [section 10(24)].
o Income from property held for charitable purposes [section 11].
o Property income of a political party [section 13A].
o Income from property used for own business or profession [section 22].
o Annual value of oneself occupied property [section 23(2)].

• DEDUCTIONS U/S SEC 24:

• Standard Deduction: 30 % of the adjusted annual value is deductible
irrespective of expenses incurred by the taxpayer.

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• Interest on Borrowed Capital: Interest on Borrowed capital is allowed as
deduction if capital is borrowed for the purpose of purchase, construction,
repair, renewal or reconstruction of the property. It is deductible on accrual
basis. It can be deductible as yearly, it is deductible even if it is not actually paid
during the previous year No deduction for any brokerage or any expenses for
arranging the loan is allowed interest of a fresh loan taken for the repayment of
the earlier loan is allowed as deduction.

• DEDUCTIONS WHICH ARE TAXABLE (U/S 25):

• Any interest chargeable under the Act, payable out of India on which tax has not
been paid or deducted at source, and in respect of which there is no person in
India who may be treated as an agent, is not deductible, by virtue of Section 25,
in computing income chargeable under the head “Income from house
property”.
• Thus, the interest payable outside India, will not be allowable as deductions if
No tax is paid thereon or No tax is deducted at source there from or There is no
person in India whois liable to pay tax thereon as agent

• PROPERTY OWNED BY CO – OWNER (SEC 26):

• When it is applicable a house property is owned by two or more persons (co –
owners) their share in the property and its income is definite and ascertainable
as per the agreement between them.
• Procedure in case of co – owners Determine the income of the whole house
property Divide the income between the co-owners according to the shares
Include the share of each co-owner in other incomes of each of them to find his
total income. Tax the co-owneraccordingly.

Q. What is depreciation? What are the expenses and payments disallowed while
computing income from business and profession.Explain?
• What is section 28 of the Income Tax Act?
• Section 28 of the Income Tax Act,1961 outlines the taxation rules regarding
income generated from professional activities or business operations. It defines
the scope of income classified under "Profits and Gains of Business &
Profession".
• These include revenue from the sale of goods or services, interest earned on
capital, and remuneration such as salaries, commissions, or bonuses
received by partners of a partnership firm.
• Additionally, it encompasses other receipts deemed to be profits and gains from
business or profession, such as insurance claims for stock-related profit or loss

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and compensation for the cessation of employment duties.

Types of incomes covered under section 28

Section 28 of the IT Act 1961 covers the following types of income.

1. Profits from Business or Profession: Any income generated during the previous
year through the conduct of a business or profession is taxable under Section 28.
This includes profits from sales of goods or services, fees earned by professionals,
and income from freelance work.

2. Salary, Commission, Bonus etc.: The income mentioned in section 28

encompasses salaries, commissions, bonuses and other incomes that come as
reward for effort exerted in connection with trade/profession employed by
individuals as well as partners in a firm.

3. Compensation Payments: These include payments made upon termination of

employment, modification of contracts, or termination/modification of agency
agreements related to managing an Indian company.

4. Income from Specific Activities: This can include income earned through
import/export businesses or income received by a partner from a firm (including
salary, interest, bonus, etc.).

5. Receipts under Agreements: It also covers the amounts received in terms of any
agreement where the person carrying out the activity is paid off for refraining from
performing any action concerning their trade or profession or nor sharing their
know-how, patent right, copyright, trade mark, license, franchise or other
commercial rights like those capable of being used by it in manufacturing processing
goods for sale or providing services.

6. Any sum received under the Keyman Insurance policy: Any sum received by an
assessee as an employer under a Keyman Insurance policy will be taxable as income
from the business.

7. Fair market value of inventory on its conversion/treatment as a capital

asset: Fair market value of inventory on the date of its conversion or treatment as a
capital asset would be chargeable to tax as business income.

• What is Tax Depreciation?

• Tax depreciation is the depreciation expense claimed by a taxpayer on a tax
return to compensate for the loss in the value of the tangible assets used in

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income-generating activities. Similar to accounting depreciation, tax depreciation
allocates depreciation expenses over multiple periods. Thus, the tax values of
depreciable assets gradually decrease over their useful lives.

• What Assets are Eligible for Tax Depreciation?

• A taxpayer owns the asset: A taxpayer can claim depreciation expenses only for
those assets that are considered to be a property owned by a taxpayer.

• The asset is used in the income-generating activities: A taxpayer can deduct

depreciation expenses only for assets that are employed in the business or
income-generating activities. Thus, assets that are intended solely for personal
use are not eligible for the depreciation claim.

• The asset has a determinable useful life: The asset eligible for depreciation claim
must have a useful life that can be reasonably estimated. In other words, one can
provide a reasonable estimate of the number of years during which the asset will
remain in service until the point in time when it will become obsolete or will stop
producing any economic benefits.

• The asset’s useful life exceeds one year: Depreciation can be claimed only for
long-term assets. It implies that the assets have a useful life of more than one
year.

• Expenses Disallowed under Income Tax :

• The provisions of Income-tax Law facilitate taxpayers to deduct certain
expenditures for the purpose of performing the calculation of taxable income.
However, certain expenses incurred under the head “Profits and Gains of
Business or Profession (PGBP)” do not qualify for any deductions and are
classified as expenses disallowed under Income Tax. This requirement prompts
taxpayers to remit the taxes on such expenditures by adding it back to the net
profits. In this article, we briefly discuss the various expenses disallowed under
the Income Tax Act.

• Reasons for Disallowance

o An expense could be disallowed for the following reasons:
o Any tax amount deductible on certain expenses like TDS was not deducted
while making the payment.
o The expenditure is not associated with the conduct of the assessee’s
business or profession

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• Tax Implications
• Expenditures prohibited under this provision attract a tax rate of 30%, in addition
to the applicable interest, penalty, and prosecution provisions.

• Expenses Disallowed on TDS Default:

• Certain payments to taxpayers must comply with the TDS mechanism. If TDS due
is not deducted appropriately, the expense will be disallowed, leading to higher
taxes. The provisions connected with disallowance on account of TDS include the
following constituent elements:

• Relief for Non-Deduction of TDS:

• Not all occasions on which the TDS was not deducted will result in a
disallowance, as the taxpayer may claim relief on the following scenarios:
• The recipient has filed the returns of income within the stipulated time.
• The payment has been accounted for by the recipient during the filing of
returns.
• The recipient has remitted the appropriate tax payments on the declared
income.
• A certificate of the chartered accountant has been obtained and uploaded
with the return for this purpose.

• Expenses Disallowed for Default in Equalization Levy:

• In the event of any default on account of equalization levy with respect to a
particular expenditure (which qualifies for deduction in equalization levy)
through either of the following channels, the amount of such expenditure is
prohibited:
 Non-deduction of equalization levy.
 Non-deposit of equalization levy prior to the date affixed for filing
ITR returns.

However, the expenditure shall be allowed if the respective deposit or deduction is

made in the subsequent year.

• Cash Expenditures Disallowed

• Taxpayers making cash payments for their goods or services are allowed as
expenditures under this provision if the sum of such payment is less than Rs.
20,000. Taxpayers making remittances above this limit may do so in the form of
an account payee cheque, account payee bank draft, bank transfer, and so on.
Certain payments, a list of which is provided in Rule 6DD, is allowed as expenses

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for payments remitted through cash mode, irrespective of the sum remitted in
total. A few of the admissibilities are mentioned below:

o Payments made to financial institutions

o Payments made to the government
o Payments made through book adjustments
o Payments made for the procurement of agricultural products
o Payments made to specific cottage industries
o Payments made to a person domiciled in a rural area where there is
genuine inadequacy of banking facilities
o Payments made towards employment terminal benefits
o Payment of salary after the appropriate deduction of TDS
o Payments remitted on a government holiday during which the banks are
not functioning
o Payments made by a forex dealer

 Set off and carry forward Loss

 Set off of losses means adjusting the losses against the profit or income of that
particular year. Losses that are not set off against income in the same year can
be carried forward to the subsequent years for set off against income of those
years.

 Incomes exempt from tax

Exempt Incomes are the incomes that are not chargeable to tax as per Income Tax
law i.e. they are not included in the total income for the purpose of tax
calculation while taxable Incomes are chargeable to tax under the Income Tax law.
Exempt income are those on which tax is not likely to be paid. Some examples are -
dividend income, agricultural income etc.

Example of Exempted Income

– Agricultural Income: Income derived from agricultural activities within India is
given tax exemption under Section 10(1).
– HRA (House Rent Allowance): Exemptions applicable to HRA are determined
based on specific criteria including the actual HRA received, rent payments made,
and components of salary.
– Income for HUF (Hindu Undivided Family): Funds received by a member from the
income of an HUF or from an impartible estate are exempt under Section 10(2).
– Partner’s Share from a Firm: Profits distributed to a partner from a firm are

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exempt under Section 10(2A).
– Interest to Non-Residents: Certain interest earnings are exempt for non-residents
under Section 10(4).


 What is Income Tax Deduction under Chapter VI A of Income Tax Act?

 Income Tax Deduction under Chapter VIA of Income Tax Act refers to a reduction
in the taxable income of an individual or a business entity, which results in a
lower tax liability. The Indian Income Tax Act provides for various deductions
under sections 80C to 80U, which can be claimed by an individual or a business
entity while calculating their taxable income.
 80C: Deduction in respect of life insurance premium, deferred annuity,
contributions to provident fund (PF), subscription to certain equity shares or
debentures, etc. The deduction limit is Rs 1.5 lakh together with section 80CCC
and section 80CCD(1).
 80CCC: Deduction in respect of contribution to certain pension funds. The
deduction limit is Rs 1.5 lakh together with section 80C and section 80CCD(1).
 80CCD(1): Deduction in respect of contribution to pension scheme of Central
Government – in the case of an employee, 10 per cent of salary (Basic+DA) and
in any other case, 20 per cent of his/her gross total income in a FY will be tax
free. Overall limit is Rs 1.5 lakh together with 80C and 80CCC.
 80CCD(1B): Deduction up to Rs 50,000 in respect of contribution to pension
scheme of Central Government (NPS).
 80CCD(2): Deduction in respect of contribution to pension scheme of Central
Government by employer. Tax benefit is given on 14 per cent contribution by the
employer, where such contribution is made by the Central Government and
where contribution is made by any other employer, tax benefit is given on 10 per
cent.
 80D: Deduction in respect of Health Insurance premium. Premium paid up to Rs
25,000 is eligible for deduction for individuals, other than senior citizens. For
senior citizens, the limit is Rs 50,000 and overall limit u/s 80D is Rs 1 lakh.
 80DD: Deduction in respect of maintenance including medical treatment of a
dependent who is a person with disability. The maximum deduction limit under
this section is Rs 75,000.
 80DDB: Deduction in respect of expenditure up to Rs 40,000 on medical
treatment of specified disease from a neurologist, an oncologist, a urologist, a
haematologist, an immunologist or such other specialist, as may be prescribed.
 80E: Deduction in respect of interest on loan taken for higher education without

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any upper limit.
 80EE: Deduction in respect of interest up to Rs 50,000 on loan taken for
residential house property.
 80EEA: Deduction in respect of interest up to Rs 1.5 lakh on loan taken for
certain house property (on affordable housing).
 80EEB: Deduction in respect of interest up to Rs 1.5 lakh on loan taken for
purchase of electric vehicle.
 80G: Donations to certain funds, charitable institutions, etc. Depending on the
nature of the donee, the limit varies from 100 per cent of total donation, 50 per
cent of total donation or 50 per cent of donation with a cap of 10 per cent of
gross income.
 80GG: Deductions in respect of rent paid by non-salaried individuals who don’t
get HRA benefits. Deduction limit is Rs 5,000 per month or 25 per cent of total
income in a year, whichever is less.
 80GGA: Full deductions in respect of certain donations for scientific research or
rural development.
 80GGC: Full deductions in respect of donations to Political Party, provided such
donations are non-cash donations.
 80TTA: Deductions in respect of interest on savings bank accounts up to Rs
10,000 in case of assessees other than Resident senior citizens.
 80TTB: Deductions in respect of interest on deposits up to Rs 50,000 in case of
Resident senior citizens.
 80U: Deduction in case of a person with disability. Depending on type and extent
of disability maximum deduction allowed under this section is Rs 1.25 lakh.

Q. Explain the provisions regulating tax incidence on capital gains?

 Capital gains tax is a tax imposed on the profits realized from the sale of
assets such as stocks, bonds, real estate, and other investments. It is the tax
applied to the difference between an asset's purchase price (or "cost basis")
and its selling price.
• Section 45 of Income Tax Act, 1961 provides that any profits or gains
arising from the transfer of a capital asset effected in the previous year
will be chargeable to income-tax under the head 'Capital Gains'. Such
capital gains will be deemed to be the income of the previous year in
which the transfer took place.

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 What are the Different Types of Capital Gain Tax?
• Capital gains are divided into short-term capital gains and long-term capital
gains –

• What is Short-term Capital Gain Tax?

• Short-term capital gains (STCG) are the profits you earn when you sell off your
capital assets within one year of holding them. Note that the holding period
varies as per the capital asset.

• Section 111A is applicable in case of gains arising on transfer of equity shares

or units of equity oriented mutual-funds or units of business trust, from
1.10.2004 through a recognised stock exchange. This transaction is liable to
securities transaction tax (STT).

• When the security transaction tax is applicable: Short-term capital gain tax is
15%
• When a security transaction tax is not applicable, the short-term capital gain
tax will be calculated based on the taxpayers' income and will be
automatically added to the taxpayer's ITR and charged at normal slab rates.

• What is Long-term Capital Gain Tax?

• Long-term capital gain tax (LTCG) are the profits you earn when you sell off
your capital assets after one year. Note that the period of holding for different
assets to be claimed as long-term assets varies according to the asset.

• Long-term capital gain tax is applicable at 20% except on the sale of equity
shares and the units of equity-oriented funds.
• Long-term capital gains are 10% over and above Rs 1 lakh on the sales of
equity shares and units of equity-oriented funds.

Q. Explain the various types of assessments under IT act 1961.

• Once you file your income tax return, it undergoes a thorough review process
by the Income Tax Department (ITD). This review involves assessing and
verifying the details you submitted. If everything is accurate and compliant,
you’ll receive your income tax refund. Essentially, Income Tax Assessment is
the examination of the information provided in your return to ensure it meets

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all regulatory requirements.
• In simpler terms, Income Tax Assessment is the process where the ITD
reviews the details from your tax return to confirm their accuracy and
compliance.

• Types of Income Tax Assessment:

1. Self-assessment – u/s 140A
2. Summary Assessment – u/s 143(1)
3. Scrutiny Assessment – u/s 143(3)
4. Best Judgment Assessment – u/s 144
5. Protective Assessment
6. Re-assessment or Income Escaping Assessment – u/s 147
7. Assessment in case of Search – u/s 153A

1. Self-assessment – u/s 140A

 This is the type of income tax assessment in which the assessee calculates the
tax them self, usually accompanied by payment of the amount they believe is
due.
 After taking TDS and subtracting advance tax paid, tax payable is required to
be given under section 139, section 142, section 148, or section 153A.

2. Summary Assessment – u/s 143(1)

 The assessment under section 143(1) is similar to the initial review of a tax
return. The taxpayer receives an intimation u/s 143(1) from the IRS under this
section. The department will send you a comparative income tax calculator.
The overall income or loss incurred is computed in the income tax
assessment.

3. Scrutiny Assessment – u/s 143(3)

 Scrutiny assessment is the assessment of a return filed by an assessee by
providing an opportunity for the assessee to support the declared income
and expenses, as well as claims of deductions, losses, exemptions, and so on,
in the return using proof. The committee manages it using a single work plan.
The committee undertakes specific work, as well as forming informal panels
(for indepth activities) or working groups.

4. Best Judgment Assessment – u/s 144

 The term ‘best judgment assessment’ refers to the assessing officer’s opinion
or calculation of the assessee’s income in the context of income tax law. In

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the situation of best judgment assessment, the evaluating officer will make
the decision based on the best reasoning, i.e., they will not be dishonest. The
assessee will not be dishonest in his or her assessment, nor will he or she be
hostile to the officer.

5. Protective Assessment
 This type of assessment in income tax focuses on those that are made to
‘protect’ the revenue’s interests. However, the income tax legislation doesn’t
have the provision to impose income tax on anyone other than the person to
whom it’s due.

6. Re-assessment or Income Escaping Assessment – u/s 147

 If the assessing officer has reason to think that income liable to tax has
escaped assessment for any assessment year, they will conduct an income
escaping assessment under Section 147. Moreover, it gives them the
authority to reassess or re-compute income, turnover, and other figures that
have escaped their notice. The goal of conducting an assessment under
Section 147 is to bring any income that escaped assessment in the original
assessment into the tax net.

7. Assessment in case of Search – u/s 153A

 Section 153A establishes a mechanism for the assessment of income of a
searched individual. In this type of assessment in Income Tax, the Assessing
Officer has the right to frame the searched individual’s assessment for the six
assessment years that immediately precede the ‘search’ year.

Q. Explain the various Income Tax Authorities under the Income tax Act, 1961.

 Income tax authorities:

 Who Appoints Income Tax Authorities?

 According to section 117 of the Income Tax Act, the central government has the
power to appoint such persons as it deems fit to income tax authorities. The
central government has the power to choose officials up to and above the rank
of Assistant Commissioner of the Income Tax.

 The central government, can further, authorise the appointment of income tax
officials below the rank of a Deputy Commissioner or Assistant Commissioner by
the Board, a Director-General, a Chief Commissioner, a Commissioner, or a

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Director. However, the appointment by such authorities is made according to the
rules and regulations of the central government regulating the conditions of
service of persons in public services and posts.

 According to section 116 of the Income Tax Act, there shall be the following
types of income tax authorities for the purposes of this Act . they are as
follows ;
1. The Central Board of Direct Taxes constituted under the Central Board of
Revenue Act, 1963.
2. Directors-General of Income-tax or Chief Commissioners of Income-tax.
3. Directors of Income-tax or Commissioners of Income-tax or Commissioner
of Income-tax(Appeals).
4. Additional Directors of Income-tax, or Additional Commissioners of Income-
tax or AdditionalCommissioners of Income-tax (Appeals).
5. Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or
Deputy Commissioners of Income-tax (Appeals).
6. Assistant Directors of Income-tax or Assistant Commissioners of Income-tax.

a. Income-tax Officers.
b. Tax Recovery Officers.
c. Inspector of Income-tax.

 The authorities acting under the Income-tax Act have to act judicially and one of
the requirements of judicial action is to give a fair hearing to the person before
deciding against him. The taxing authorities exercise quasi-judicial powers and in
doing so they must act in a fair and not a partisanmanner.

 Powers of Income Tax Authorities:

 Power relating to Discovery, Production of evidence, etc: The Assessing Officer,
The Joint Commissioner, The Chief Commissioner or the Commissioner has the
powers as are provided in a court under the code of Civil Procedure, 1908 when
trying to suit for the following matters:
– discovery and inspection;
– to enforce any person for attendance, and examining him on oath;
– issuing commissions; and
– compelling the production of books of account and another document.

 Power of Search and Seizure: Today, it is not hidden from income tax authorities

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that people evade tax and keep unaccounted assets. When the prosecution fails
to prevent tax evasion, the department has to take actions like search and
seizure.

 Requisition of Books of account, etc: Where the Director or the Director-General

or Commissioner or the Chief Commissioner in consequence of information in his
possession, has reason to believe that (a), (b), or (c) as mentioned under section
132(1) and the book of accounts or other documents or the assets have been
taken under custody by any authority or officer under any other law, then the
Chief Commissioner or the Director-General or Director or Commissioner can
authorize any Joint Director, Deputy Director, Joint Commissioner, Assistant
Commissioner, Assistant Director, or Income-tax Officer to require the authority
to provide such books of account, assets or any documents to the requisitioning
officer when such officer thinks that it is no longer necessary to retain the same
in his custody.

 Power to Call for Information: The Commissioner, The Assessing Officer or the
Joint Commissioner may for the purpose of this Act:

– can call any firm to provide him with a return of the addresses and names of
partners of the firm and their shares;
– can ask any Hindu Undivided Family to provide him with the return of the
addresses and names of members of the family and the manager;
– can ask any person who is a trustee, guardian or an agent to deliver him with
the return of the names of persons for or of whom he is an agent, trustee or
guardian and their addresses;
– can ask any person, dealer, agent or broker concerned in the management of
stock or any commodity exchange to provide a statement of the addresses
and names of all the persons to whom the Exchange or he has paid any sum
related to the transfer of assets or the exchange has received any such sum
with the particulars of all such payments and receipts:

 Power of Survey: The term 'survey' is not defined by the Income Tax Act.
According to the meaning of dictionary 'survey' means casting of eyes or mind
over something, an inspection of something, etc. An Income Tax authority can
have a survey for the purpose of this Act.

 The objectives of conducting Income Tax surveys are:

– To discover new assessees;

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– To collect useful information for the purpose of assessment;
– To verify that the assessee who claims not to maintain any books of accounts
is, in fact, maintaining the books;
– To check whether the books are maintained, reflect the correct state of
affairs.

 Collection of Information: For the purpose of collection of information which

may be useful for any purpose, the Income-tax authority can enter any building
or place within the limits of the area assigned to such authority, or any place or
building occupied by any person in respect of whom he exercises jurisdiction.

 Provisions relating to collection and recovery of tax under taxation:

 The collection and recovery of taxes are fundamental processes that ensure the
government has the necessary funds to provide public services and
infrastructure. In India, the collection and recovery of tax are governed by the
Income Tax Act, 1961, which outlines the procedures and mechanisms for tax
administration. Understanding these processes is crucial for both taxpayers and
tax authorities to maintain compliance and ensure the smooth functioning of the
tax system.

 Overview of the Income Tax Act, 1961

 The Income Tax Act, 1961 is the primary legislation governing income tax in India.
It establishes the framework for tax assessment, collection, and recovery. Key
sections relevant to tax collection and recovery include:


 Section 220: This section outlines the procedures for the collection of tax dues,
including the issuance of demand notices and the circumstances under which a
taxpayer is deemed to be in default.
 Section 221: This section provides for penalties for failure to pay tax as per the
demand notice.
 Section 222: This section allows tax authorities to take action for recovery of tax
dues.
 Sections 226 to 232: These sections provide mechanisms for the collection of tax
due from the assessee, including the authority to attach property and recover
dues from third parties.

 Tax Collection Mechanisms

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1. Direct Tax Collection
 Direct taxes are levied directly on individuals and corporations. The primary types
of direct taxes include income tax, corporate tax, and capital gains tax. The
collection of direct taxes involves several mechanisms:
a. Tax Deducted at Source (TDS)
 TDS is a method of collecting income tax at the source of income. It requires
the payer to deduct tax before making payments to the payee. For example,
employers deduct TDS from employees' salaries and deposit it with the
government.

b. Tax Collected at Source (TCS)

 TCS is applicable to specific transactions, such as the sale of goods and
services. Sellers are required to collect tax from buyers at the time of sale and
deposit it with the government.

2. Indirect Tax Collection

 Indirect taxes are levied on goods and services. The Goods and Services Tax
(GST) is the primary indirect tax in India. The collection of GST involves:

a. Input Tax Credit (ITC)

 Businesses can claim credit for the tax paid on inputs used in the production
of goods and services. This reduces the overall tax liability and encourages
compliance.
b. GST Returns
 Businesses are required to file GST returns periodically, detailing their sales,
purchases, and tax collected. This ensures transparency and accountability in
tax collection.

 Recovery of Tax Dues

a. Assessment and Demand Notices
 The recovery of tax dues begins with the assessment process. Tax authorities
assess the income of taxpayers and issue demand notices for any outstanding
tax liabilities.
 Types of Demand Notices
o Notice under Section 156: This notice is issued when there is a demand
for tax payment. It specifies the amount due and the due date for
payment.
o Notice under Section 220: This notice informs the taxpayer about the
due date for payment and the consequences of non-payment.

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 Modes of Recovery
 Tax authorities have several modes of recovery available to them, including:
– Tax Recovery Officers (TROs)
– TROs are responsible for the collection of tax dues. They can initiate recovery
proceedings against defaulters.
– Garnishee Proceedings
– This involves recovering tax dues from third parties who owe money to the
taxpayer.
– Attachment of Property
– In cases of significant tax arrears, tax authorities can attach the taxpayer's
property, including bank accounts, assets, and properties, to recover the
dues.
– Legal Proceedings for Recovery
– Tax authorities can initiate legal proceedings to recover tax dues. The Income
Tax Appellate Tribunal (ITAT) plays a crucial role in resolving disputes related
to tax recovery.
– Filing Appeals Against Tax Demands
– Taxpayers have the right to appeal against tax demands issued by the tax
authorities. The appeal process involves filing a petition with the ITAT, which
reviews the case and makes a determination.

 Case Study 1: Successful Tax Recovery Strategy

 In a recent case, the Income Tax Department successfully recovered ₹5 crore in
tax dues from a prominent real estate developer. The recovery process involved
issuing demand notices, followed by garnishee proceedings against the
developer's bank accounts. The department's proactive approach and timely
action led to the successful recovery of the dues without resorting to legal
proceedings. This case illustrates the effectiveness of using multiple recovery
mechanisms in a coordinated manner.

 Income Tax Return Filing in India:

 An Income Tax Return (ITR) is a form primarily used for filing details about your
income and the applicable tax to the Income Tax Department of India. The Indian
income tax laws state that the IT return should be filed by every individual and
business earning an income. It assists in declaring taxable income, tax liability,
and tax deductions claims, if any.

 It is mandatory for Firms or corporations, Hindu Undivided Families (HUFs), and

self-employed or salaried individuals to file income tax returns before the due

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date otherwise, a penalty will be levied for late filing. Understanding what is
Income Tax Return ensures compliance with Indian tax laws.

 What is Income Tax Return Filing

 ITR filing is the process through which a taxpayer must record his total income
earned during the fiscal year. Individuals can file their taxes through the Income
Tax Department's official portal. It has been notified in seven different forms.

 Income Tax e-Filing

 According to Section 139 (1) of India, any individuals whose total income in the
last year exceeds the tax exemption bracket should file their ITR or income tax
returns. E-filing is the process through which an individual file their income tax
returns online.
 As a taxpayer, you can seek expert assistance or file your own taxes by
registering on the income tax departments or other relevant websites. While the
deadline for e filing income tax returns is July 31 each year, the government may
give a grace period of 15-30 days to file the forms online or in person.

 I.T.Portal working :

 Online Mode:
 For filing the income tax return online, first, determine the income tax liability.
Visit the official portal of the income tax department for e-filing income tax. Fill
in the required details, upload the necessary documents if needed, and once
confirmed, validate the filings.

 Income Tax Refund

 An income tax refund is sanctioned when a taxpayer pay more duties than their
actual liability. It can be issued against different types of direct taxes, like self-
assessment tax, Tax Deducted at Source, foreign tax credit, advance tax, etc.

 IT refund is calculated after filing an income tax return. If a taxpayer is eligible to

get a refund, he or she is informed of the same via an SMS or email. It contains
the total amount of refund credited to one’s account, along with a refund
sequence number, in accordance with Section 143(1) of the Income Tax Act,
1961.

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 The fund is credited either directly to the taxpayer’s account via RTGS or NEFT or
is sent via cheque or demand draft to the registered address.

 To learn more about income tax refund, when and how to claim it, the process
for checking income tax refund status and more, scroll through till the end.

 Appeal and revision provisions:

Aspect Appeals Revisions

To seek redressal against an To correct errors or address

Purpose
assessment order issues in an assessment order

Commissioner of Income Tax

Initiated by Assessee (primarily)
(CIT) or assessee

Relevant Sections 246A, 253, 260A and

Sections 263 and 264
Sections 261

30 days (to Commissioner 1 year from the date of the

Time Limit
(Appeals)), 60 days (to ITAT) order or its communication

Electronic filing via Form 35,

CIT examines records, may call
Process hearings before appellate
for additional inquiries
authorities

Correction of errors
Review of factual and legal prejudicial to revenue (Section
Scope
issues 263) or providing relief to
assessee (Section 264)

Decision Commissioner (Appeals), ITAT,

Commissioner of Income Tax
Authority High Court, Supreme Court

Available, can escalate to higher Limited, only writ petition

Higher Appeal authorities (ITAT, High Court, under Article 226 for Section
Supreme Court) 264

On revenue for proving errors

Burden of
Typically on the assessee under Section 263; assessee
Proof
for relief under Section 264

Nature of Judicial (structured hearings) Quasi-judicial (administrative

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Aspect Appeals Revisions

Proceedings discretion with legal

guidelines)

 Dwarka Nath v. ITO, where it was held that the CIT must grant an oral hearing
before deciding on a revision application.
 Harish Wadhwa v. ITO, the Karnataka High Court held that an order passed
without application of mind and consideration of the case facts deserved to
be set aside, directing the Tribunal to redo the exercise after giving the
assessee an opportunity to present their arguments.
 The CIT’s decision should be free from external influences, including
undisclosed matters or directives from other authorities, to ensure a fair and
just resolution.

 Offences and penalties:

 A penalty is a form of punishment given for violating a law. In the context of
income tax, one shall be penalized if one fails to comply with the rules
mentioned in the Income Tax Act,1961. The penalty can either be a fixed amount
or a percentage of a certain amount.

 Default in Making Income Tax Payment ;

 Section 220(1) states that a taxpayer shall pay the amount due within 30 days of
receiving a demand notice under section 156 of the Act for the payment of tax
(other than advance tax).
 Default in Furnishing Income Tax Return;
 According to Section 234F, the assessee who is obligated to file income tax
returns will be punished if he does not do so by the deadline specified in section
139(1).
 Section 139 (1)of the Income Tax Act acts as a framework that allows taxpayers
to file late returns in case they miss the prescribed deadline. There are various
sub-sections under section 139(1) of the Income Tax Act.

 TDS/TCS Deduction or Collection Issues;

 If an individual neglects to deduct tax at source, they will be responsible for
paying a penalty equivalent to the amount of tax they neglected to deduct or
pay.

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 If someone does not collect tax at the source, they will be responsible for paying
a penalty equivalent to the amount of tax they did not collect.

 Delay in Filing the TDS/TCS Statement Return

 Everybody is required to deduct tax at source and to file a TDS return, which is a
statement of the amount they have deducted. This is stated in section 200(3).
Everybody who is liable to collect tax at source is required under section 206C (3)
to provide a statement regarding the tax they have levied, which is known as a
TCS return. The penalty for filing a TDS/TCS return after the deadline is outlined
in Section 234E. Failure to file a TDS/TCS return may result in a payment of Rs.
200 for each day the failure persists.

 Failure to Maintain Books and Documents;

 The Act stipulates that a taxpayer must keep, maintain, or retain books of
accounts; otherwise, a penalty of ₹25,000 will be assessed.
 If the taxpayer is an individual who has transacted internationally, the penalty is
two percent of the total amount of those transactions.

 Non-Compliance to Audit and Audit Report;

 Undisclosed Income;
 If hidden income is included in the income determination, a penalty of 10% is
due.

 False Entry such as Fake Invoices

 Should the tax officer discover that any of the following is present in the books of
accounts that the taxpayer submitted for the proceeding:
 Fabricated or falsified records, such as a fake invoice, fraudulent documented
proof, or an invoice for the provision of goods or services without the real
provision.
 An unidentified person's supply invoice; an entry that is missing that is important
to the calculation of total income.
 The assessee may therefore be required to pay a penalty equivalent to the total
of these omitted or incorrect entries.

 failure to provide information/statements under section 285A

 Penalty for failure to answer questions, sign statements, furnish information,
returns or statements, allow inspections, etc. he shall pay, by way of penalty, a
sum of ten thousand rupees for each such default or failure.

For more information Please visit “Nammakanunu” youtube channel & whatsapp text to 95915 73526
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