LB - 3033 - Taxation-I (Income Tax)
Income Tax Act 1961
Topic 1 - Introduction
Definition of Income S2(24)
Section 2(24)
"Income" includes-
(i) profits and gains;
(ii) dividend;
[(iia) 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 8[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 sub-clause (v) of clause (23C) of section 10].
Explanation.-For the purposes of
this sub-clause, "trust" includes any other legal obligation;]
(iii) the value of any perquisite
or profit in lieu of salary taxable under clauses (2) and (3) of section
17;
[(iiia) any special allowance or
benefit, other than perquisite included under sub-clause (iii), specifically
granted to the assessee to meet expenses wholly, necessarily and exclusively
for the performance of the duties of an office or employment of profit;
(iiib) any allowance granted
to the assessee either to meet his personal expenses at the place where
the duties of his office or employment of profit are ordinarily performed by
him or at a place where he ordinarily resides or to compensate him for the increased
cost of living;]
(iv) the value of any benefit or
perquisite, whether convertible into money or not, obtained from a
company either by a director or by a person who has a substantial interest in
the company, or by a relative of the director or such person, and any sum paid
by any such company in respect of any obligation which, but for such payment,
would have been payable by the director or other person aforesaid;
[(iva) the value of any benefit
or perquisite, whether convertible into money or not, obtained by
any representative assessee mentioned in clause (iii) or clause (iv) of
sub-section (1) of section 160 or by any person on whose behalf or for whose
benefit any income is receivable by the representative 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;]
(v) any sum chargeable to income-tax
under clauses (ii) and (iii) of section 28 or section 41 or section 59;
[(va) any sum chargeable to
income-tax under clause (iiia) of section 28;]
[(vb)] any sum chargeable to
income-tax under clause (iiib) of section 28;
[(vc ) any sum chargeable to
income-tax under clause (iiic) of section 28;]
[(vd)] the value of any benefit or
perquisite taxable under clause (iv) of section 28;
[(ve) any sum chargeable to
income-tax under clause (v) of section 28;]
(vi) any capital gains chargeable under section 45;
(vii) 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 section 44 or any surplus taken to be such profits and gains by virtue of
provisions contained in the First Schedule;
[(viii) Omitted by the Finance Act,
1988, with effect from April, 1988. It was inserted by the Finance Act, 1964,
w.e.f 1-4-1964.]
[(ix) any winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or betting of
any form or nature whatsoever;]
[(x)any sum received by the assessee
from his employees as contributions to any provident fund or superannuation
fund or any fund set up under the provisions of the Employees' State Insurance
Act, 1948 (34 of 1948), or any other fund for the welfare of such
employees;] interest in the company or a relative of the director or the
other person.
The word 'income' is of the widest
amplitude and it must be given its natural and grammatical meaning.
The definition of income in section 2(24) is inclusive. The purpose of
the definition is not to limit the meaning of 'income' but to widen
its net and the several clauses therein are not exhaustive of the
meaning of income; even if a receipt did not fall within the ambit of any of
those clauses, it might still be income if it partook the nature of income.
The words "other games of any sort' were of wide amplitude and
their meaning was not confined to mere gambling or betting activities. Assuming
that the expression "winnings" had acquired a particular
meaning viz. receipts from activities of a gambling or betting nature only,
it did not follow that monies received from non-gambling or non-betting
activities were not included within the ambit of income. The assessee
participated in a car rally and won a prize. The car rally was a
contest, if not a race and the assessee entered the contest to win it. What
he got was a return for his skill and endurance. It was "income" construed in its widest sense. Though it was
casual in nature, it was nevertheless income.
Application of Income or
diversion by overriding title - Capital Receipt
vs Revenue Receipt - Test to distinguish (with spl ref to 'Salami');
Assessee;
Prev Year (Section 3);
Assessment Year;
Basis of charge (Receipt, Accrual
and Arisal);
General Scheme of Income Tax Act
1961
(1) CIT v. G.R. Karthikeyan,
1993 Supp (3) SCC 222
Concept of income in relation to S2(24)(ix)
– Q whtr prize money frm car rally(fr testing skill)(i.e. minimum no of
violations) is income?
SC osberved –
Kamakshya Narayan Singh v CIT – Income is a word difficult & impossible to define in any
precise general formula
Gopal Saran Narain Singh v CIT – Anything which can properly be described as income is taxable
under the act
Navinchandra Mafatlal v CIT – “the definition of income as given in 2(24) is inclusive
and its purpose is not to limit the meaning of income but to widen its net.”
Several clauses there in are not exhaustive of the meaning of income.
Its meaning should be same as that of income occurring in Entry 82, List I,
Seventh Schedule of the CoI.
Bhagwan Das Jain v UoI - Income includes not merely what is received or what comes in by
exploiting the use of property but also what one saves by using it oneself or
that which can be converted into income
In US & Aus – income used
in wide sense so as to include capital gain. Its natural
meaning embrace any profit received.
St of Bombay
St of AP v K Satyanarayana – Even in card games there are some games which are games of skill
without an element of gamble.
Further obsrvd – Upto assessment
year 1972-73 reciept of a casual nature were exempted from tax. Finance Act
of 1972 enlarged the concept of income by including winnings from lotteries,
betting etc. Therefore a single transaction may result in income for IT
purpose.
S10(3) – receipts of casual
nature not being winnings from lotteries, to the extent such receipts do
not exceed one thousand rupees. – indicates income.
Held:
(i)
words ‘other games of any sort’ are of wide amplitude not
limited to games of gambling nature alone.
(ii) Assuming expression winnings
had acquired a particular meaning, namely receipts from the activities of a
gambling/betting nature alone, it did not follow that money from non
gambling or non betting were not included in the word income.
(iii) The rally was a contest,
if not a race, and assesee entered the contest to win it. What he got
was a return for his skill & endurance but there was some earning.
Hence declared income in its widest sense.
(2) CIT v. Sitaldas Tirathdas (1961) 2 SCR 634
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. This was disallowed by the Income Tax Officer. The matter
reached till the Supreme Court.
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 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 income, 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. The wife and children
of the assessee who continued to be members of the family received a portion of
the income of the assessee only after the assessee had received the income as
his own. Therefore there was no
diversion of income by an overriding charge.
Citations:-
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. This was disallowed by the High Court of Calcutta
The Judicial Committee 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. Thus, he was like a conduit pipe between his step-mother and
the resources which generated the income.
Diwan Kishen Kishore v CIT
There was an impartible estate governed by the law of primogeniture, and under the custom applicable to be
family, an allowance was payable to the junior member. Under an
award given by the Deputy Commissioner acting as arbitrator and according to
the will of the father of the holder of the estate and the junior member, a
sum of Rs. 7,200 per year was payable to the junior member. This amount
was sought to be deducted, which was disallowed. The appellants argued
that the payment which was made was necessary and obligatory payment,
and therefore the deduction should be allowed. Due to the distinctive nature of the estate, the junior member is
not entitled to separate his share and collect his income
directly. Hence in lieu of his share a separate allowance is given to
him. That allowance therefore, cannot form the part of the income of the
assessee.
It was held it was not a case of application of income.
Since, the junior member cannot claim himself to be a member of the
coparcenary with the assessee, the assessee was merely acting as a
collector of the allowance on his behalf. The Court further substantiated
its decision by pointing out the fact that the junior member cannot legally
claim an increase in the allowance even if the income of the estate materially
increases.
Case should be distinguished from
instances where an allowance is given by the head of the Hindu coparcenaries
to its members by way of maintenance. In that situation the income
generated by the resources of the Hindu joint family comes to the hands of the
karta of the family which he distributes among the coparceners as per
their needs. Unless there is a partition in the family, the coparceners
who receive separate maintenance, still remain the members of the joint
Hindu family. Therefore, providing maintenance allowance to them is a
case of application of income.
Seth Motilal Manekchand v CIT ***
Prince Khanderao Gaekwar v CIT ***
P.C. Mullick and Another v. Commissioner of Income Tax, Bengal
The testator appointed the
appellants as executors and directed them to pay Rs. 10,000 out of the income
on the occasion of his addya sradh. The executors paid Rs. 5,537 for
such expenses, and sought to deduct the amount from the assessable
income. The Judicial Committee disallowed the deduction. It held that whatever payments were
made, were done once the income had reached the hands of the assessee and in
pursuance of the obligation imposed upon them by the testator. This was not
the case of diversion of income. It is submitted that the decision of the
Judicial Committee in the above case rightly brings out the intention of the
drafters of the Act. The Act is not concerned about how one spends his
money, that is, the Act is indifferent to the destination of the income.
What is of material concern is that whether the income has reached the hands of
the assessee or not. Once it is in the hands of the assessee it is liable for
tax.
CIT v Makanji Lalji ***
CIT v D.R. Naik ***
DC Aich In Re (possibly same case as
PC Mullick)
Hira Lal In Re ***
V M Raghavalu Naidu & Sons v CIT
***
(3) CIT v. Sunil J Kinariwala (2003) 1 SCC 660
The assessee a partner in a
firm created trust – by settlement
deed assigned to it a specific percentage of his right, title and
interest (excluding capital) in the firm. The question was what is the
criteria to determine, when does the income attributable to an assessee get
diverted by overriding title created in favor of a third party.
Court held – no overriding title in favor of the trust
CIT v Bhagyalakshmi & Co – 2 members of HUF together held 10 annas share in a firm – on
partition in the family of the said members was divided among various
members of the family – thereafter a fresh partnership deed was executed
in which the said two persons were however shown as having the same
proportion of share in the firm. They claimed that they were liable to
pay tax only on respective shares shown in the partnership deed.
Murlidhar Himatsingha v CIT – One of the partners in a partnership firm constituted a sub
partnership firm with his two sons and a grand son. The deed of
sub partnership provided that the P/L of partner in main firm belonged to the
sub partnership and shall be borne and divided in accordance with the shares
specified therein. Question arose: whether share of the partner in the main
firm, who had become a partner in the sub partnership could be assessed in his
individual assessment. It was held that
there was an overriding obligation which converted the income of the
partner in the main firm into the income of the sub partnership and
therefore the income attributable to the share of the partner had to be
included in the assessment of the sub partnership.
In Raja Bejoy Singh Dudhuria v.
Commissioner of Income Tax, 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. This was disallowed by the High Court
of Calcutta. He went on appeal to the Judicial Committee. The Judicial Committee held that the amount which the Raja paid to his
step-mother did not constitute his income. (discussed in case above)
PC Mullick v CIT – Adya Shradh case
discussed above
The Supreme Court in Moti Lal Chhadami Lal Jain v. Commissioner
of Income Tax, observed that what is of cardinal importance is the nature of obligation by reason of
which the income becomes payable to a person other than the one entitled to
it. Where the obligation flows out of an antecedent and independent title,
it effectively diminishes the total income of an individual and so it would be a case of diversion.
Whereas when the obligation is self
imposed or gratuitous, it is only a case of application of income.
From the above observation of the
Apex Court
K A Ramachar – The assessee a partner
in a firm executed three deeds of settlement in favour of his wife,
married daughter and a minor daughter, assigning to each of them 1/4th
of his share in the firm’s profit. Assessee contended that the amounts
covered by the settlements could not be included in his total income for the
purpose of assessment to income tax. Court held that under law of partnership it was the partner and the partner alone who
was entitled to the profits and that a stranger, even if he were an assignee
did not have and could not have any direct claim to the profits. The claim
of the assesee was negatived on the ground that what was paid was in law a
portion of his income, as such the amounts have to be included in his
total income.
(4) Maharaja Chintamani Saran Nath Sah Deo v. CIT (1971) 2 SCC 521 (capital
or revenue receipt)
The assessee had granted a prospecting
lease of his land to a company in 1941 for a period of one year. In 1944
he granted a lease, of mining rights to the same company in respect of a part
of the land for a period of 30 years. The assessee took a large amount
by way of premium but charged a slightly lesser amount than what he had
charged in the prospecting lease,
by way of royalty. The assessee had also granted other leases and the
premium per acre in the case of those leases was very much less than the
premium per acre in the 1944 lease. On the question whether the premium or a part of it was in the nature of a revenue receipt.
High Court on reference, held against assessee. in appeal to SC.
HELD : (1) When the interest of
the lessor is parted for a price, the price paid is premium or salami
but the periodical payments made for the continuous enjoyment of the
benefits under the lease are in the nature of rent. The former is
capital receipt and the latter a revenue receipt. In finding the
real nature of the transaction it is not the nomenclature or form
but the circumstances of the transaction that matter. 'The onus
however, is upon the IT authorities to show that there exist
facts and circumstances which would make payment of what has been called
salami, income.
Commissioner of Income-tax , Assam
(2)The terms of 1941 lease which
was only for one year and which was for the entirely different purpose
of prospecting would
not afford any reasonable basis for holding that the terms of 1944 lease, which
was a mining lease for 30 years, were fixed in such a manner that part of
the proceeds of the royalty were included in the figure of the salami.
'When the lessor creates a lease for a long period it is legitimate for him
to charge more amount by way of premium as he is transferring possession of the
demised land and he may charge royalty at a slightly lesser rate. The
mere fact that the amount taken on account of premium was substantial and on
the face of it looked considerably large would not justify the, view that the
amount represented capitalized royalty.
(3)The fact that the premium was
approximately equal to the difference between the total amounts of royalty
calculated at the rates in the 1941-lease and the 1944- lease, would not
justify an inference that the amount was taken was taken in exchange of
royalty because, the assessee could not have known how much mineral could
be extracted from the areas it the time of
granting the 1944-lease.
(4)It was open to the
Departmental authorities to have examined lie assessee or his
representative and discovered all the reasons for the terms in the various
leases being different. The Department could also have ascertained the
details of the quantity of mineral which could be extracted from the
areas covered by the other leases and discharged the onus which lay on the
Revenue to show that the payment of premium was in fact of royalty. But the
same was not done.
Citations:-
CIT, Assam etc v Panbari Tea Co. Ltd
In the Panbari Tea (1) case certain tea
estates had been leased out for a period of 10 year. The lease was
executed on a consideration of a sum of Rs. 2,25,000 as and by way of premium
or salami and an annual rent of Rs. 54,000 to be paid by the lessee to the
lessor. The payments were to be made by installments. This Court declined
to assume that the parties had camouflaged their real intention and fixed a
part of the rent in the shape of premium and it was observed that no material
had been placed either direct or circumstantial to disbelieve the description
given in the lease deed to the amount as premium and to hold that it was not in
fact premium but was only rent
Topic 2 - Agricultural Income - Meaning of Agricultural Income [ (S2(1A),
10(1)]
S2 (1A) "Agricultural income" means -
(a) any rent or revenue derived from land which is situated in India
(b) Any income derived from such land by -
(i) Agriculture; or
(ii) The performance by a
cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator
or receiver of rent-in-kind to render the produce raised or received
by him fit to be taken to market;
or
(iii) The sale by a cultivator or
receiver of rent-in-kind of the produce raised or received by him, in
respect of which no process has been performed other than a process of the
nature described in paragraph (ii) of this sub-clause;
(c) Any income derived from any
building owned and occupied by the receiver of the rent or revenue of any such
land, or occupied by the cultivator or the receiver of rent-in-kind, of any
land with respect to which, or the produce of which, any process mentioned in
paragraphs (ii) and (iii) of sub-clause (b) is carried on :
Provided that - (i) The building
is on or in the immediate vicinity of the land, and is a building which
the receiver of the rent or revenue or the cultivator, or the receiver of
rent-in-kind, by reason of his
connection with the land, requires as a dwelling house, or as a store-house,
or other out-building, and
(ii) The land is either assessed
to land revenue in India or is subject to a local rate assessed and collected
by officers of the Government as such or where the land is not so
assessed to land revenue or subject to a local rate, it is not
situated - (A) In any area which is comprised within the jurisdiction of
a municipality (whether known as a municipality, municipal corporation,
notified area committee, town area committee, town committee or by any other
name) or a cantonment board and which has a population of not less than ten
thousand according to the last preceding census of which the relevant figures
have been published before the first day of the previous year; or
(B) In any area within such
distance, not being more than eight kilometres, from the local limits of any
municipality or cantonment board referred to in item (A), as the Central
Government may, having regard to the extent of, and scope for, urbanization of
that area and other relevant considerations, specify in this behalf by
notification in the Official Gazette.
Explanation : For the removal of
doubts, it is hereby declared that revenue derived from land shall
not include and shall be deemed never to have included any income arising from
the transfer of any land referred to in item (a) or item (b) of sub-clause
(iii) of clause (14) of this section;
S10(1) INCOMES NOT INCLUDED IN TOTAL INCOME.
In computing the total income of a
previous year of any person, any income falling within any of the following
clauses shall not be included - (1)
Agricultural income;
(5) Bacha F Guzdar v. CIT Bombay
The Dividend received by the shareholder is not exempt u/s 10(1).
This case was decided when there was
no Dividend Distribution Tax on companies. Dividend received from a
company having agricultural income does not have the character of agricultural
income in the hands of the shareholders. This is because of the separate legal
entity concept. Hence such income was taxable as dividend income. Now, with
the introduction of Section 10(34), dividend received from a company is
exempt as dividend income because tax for the same is paid by the
company as DDT/CDT u/s 115 O
Read more at:
http://www.caclubindia.com/forum/mrs-bacha-f-guzdar-vs-cit-102962.asp#.ULREVIeE0vg
Citations:-
Commissioners of Inland Revenue v Forrest – shareholder does not
hold rights in assets of firm
Buckley's Company's Act - Defn of
Dividend - etymological meaning of dividend is given as dividendum, the total
divisible sum but in its ordinary sense it means the sum paid and received as
the quotient forming the share of the divisible sum payable to the recipient.
This statement does not justify the
contention that shareholders are owners of a divisible sum or that they are
owners of the property of the company.
CIT v Raja Bahadur Kamakshya Narayan Singh
(1), dealt with the question whether interest on arrears of rent payable
in respect of land used for agricultural purposes is agricultural income
and therefore exempt from income-tax. It was held that it was neither rent nor revenue derived from land within
the meaning of section 2(1) of the Income-tax Act. Lord Uthwatt who delivered the judgment of the Privy Council used
the following piquant language in coming to that conclusion: "The
word derived' is not a term of art. Its use in the definition indeed
demands an enquiry into the genealogy of the product. But the enquiry
should stop as soon as the
effective source is discovered. In
the genealogical tree of the interest land indeed appears in the
second degree, but the immediate and
effective source is rent, which has
suffered the accident of non-payment. And rent is not land within the meaning of the definition. "
Premier Construction Co. Ltd. v. CIT
Dealt, with the nature of the commission of a managing agent of the company a part of
whose income was agricultural income. The assessee claimed exemption
from tax on the ground that his remuneration at 10 per cent of the profits
was calculated with reference to the income of the company part of
which was agricultural income. It was held
that the assessee received no agricultural income as defined by the Act but
that he received a remuneration under a
contract for personal service calculated on the amount of profits earned
by the employer, payable not in specie out of any item of such profits,
but out of any moneys of the employer available for the purpose, and that
the remuneration therefore was not agricultural income and was not
exempt from tax. Sir John Beaumont
in the above case observed: " In their Lordships' view the principle to
be derived from a consideration of the terms of the Income-tax Act and the authorities referred to is that where
an assessee receives income, not itself of a character to fall within
the definition of agricultural income contained in the, Act, such income
does not assume the character of agricultural income by reason of the source
from which it is derived, or the method by which it is.
Maharaj Kumar Gopal Saran Narain Singh
An annual payment for life to the assessee was not held to be agricultural
income and therefore not exempt from tax where the annuity arose
out of a transfer made by the assessee of a portion of his estate for
discharging his debts and for obtaining an adequate income for his life it being held that it was not rent or revenue
derived from land --but. Money paid under a contract imposing personal
liability on the covenanter the discharge of which was secured by a charge on
land.
CIT v Sir Kameshwar Singh
That was a case of a usufructuary mortgagee the profits
received by whom were exempt from income-tax on the ground that they were agricultural
income in his hands. Lord Macmillan,
after referring to certain
sections of the Act, observed that "the result of those sections is
to exclude agricultural income altogether from the scope of the Act howsoever
or by whomsoever it may be received." These observations must be
held to be confined to the facts of that particular case which was a case of
usufructuary mortgagee who had received profits directly from the land. The
obvious implication of the words used by Lord Macmillan was that whosoever
receives profit from the land directly is entitled to the exemption.
(6) Premier Construction Co. Ltd. v. CIT., Bombay CIty
Dealt, with the nature of the commission of a managing agent of the company a part of
whose income was agricultural income. The assessee claimed exemption
from tax on the ground that his remuneration at 10 per cent of the profits
was calculated with reference to the income of the company part of
which was agricultural income. It was held
that the assessee received no agricultural income as defined by the Act but
that he received a remuneration under a
contract for personal service calculated on the amount of profits earned
by the employer, payable not in specie out of any item of such profits,
but out of any moneys of the employer available for the purpose, and that
the remuneration therefore was not agricultural income and was not
exempt from tax. Sir John Beaumont
in the above case observed: " In their Lordships' view the principle to
be derived from a consideration of the terms of the Income-tax Act and the authorities referred to is that where
an assessee receives income, not itself of a character to fall within
the definition of agricultural income contained in the, Act, such income
does not assume the character of agricultural income by reason of the source
from which it is derived, or the method by which it is
Citations:-
Gopal Saran Narain Singh v. CIT Bihar & Orissa
Assessee was entitled to an annuity under a contract, the annuity being made a charge upon agricultural land. The Board held that the annuity was not rent or
revenue derived from land : it was
money payable under a contract imposing personal liability on the covenantor,
the discharge of which was secured by a
charge on land.
CIT Bihar & Orissa v
Maharajadhiraj of Darbhanga
the assessee carried on business as
a money-lender. As security for a
debt due to him in respect of his business he was put into possession of
agricultural land as a mortgagee. It was held that the rents received by the assessee from the agricultural land
were agricultural income and exempt from Income-tax and that the exemption was
not affected by the circumstance that the rents were received as part of the
money-lending business of the assessee, the exemption depending on the kind of income received and not on the
character of the recipient
Nawab Habibulla v CIT Bengal
the assessee as the Mutawalli of
a Wakf received as remuneration for his services a monthly salary. It was held by the Board that the fact that the
income of the Wakf was derived from agricultural land did not make the
remuneration paid to the Mutawalli "agricultural income" since
the remuneration did not depend either on the nature of the properties
which constituted the wakf Estate, or on the amount of income derived there
from by the Estate.
Muhammad Isa v CIT, Central
& United Provinces
where the High Court of Allahabad
(7) CIT v. Benoy Kumar Sahas Roy, AIR 1957 SC 768 ( Forest
Income not agriculture income)
S2(1A) IT Act Basic operation like tilling
of the land, sowing of the seeds, planting, etc. is
necessary to establish an activity as an agricultural operation. Mere subsequent activity like tending,
pruning, and cutting does not constitute agricultural operation.
Further, all these are products like jute, tobbaco, cotton, timber etc. raised
from the land and the term ‘agriculture’ cannot be confined merely to the
production of grain and food products for human beings and beasts but must be
understood as comprising all the products of the land which have some utility
either for consumption or for trade and commerce and would also include forest
product such as timber, sal and piyasal trees, etc.
Facts: The respondent owns an
area of 6,000 acres of forest land assessed to land revenue and grown with sal
and piyasal trees.The forest was originally
of spontaneous growth, "not grown by the aid of human skill and
labour" and it has been in existence for about 150 years. A considerable
income is derived by the assessee from sales of trees from this forest. The
assessment year in which this forest income was last taxed under the Indian
Income-tax Act was 1923-24, but, thereafter and till 1944-45, which is
the assessment year in question, it was always left out of account. The
assessment for 1944-45 also was first made without including therein any
forest income, but the assessment was subsequently re-opened under
section 34. In response to a notice under section 22(2) r/w S34 of
the Act, the respondent submitted a return showing the gross receipt of Rs.
51,798 from the said forest. A claim was, however, made that the said
income was not assess able under the Act as it was agricultural income and was
exempt under section 4(3)(viii)of the Act. The Income-tax Officer rejected
this claim and added a sum of Rs.34,430 to the assessable income as income
derived from the forest after allowing a sum of Rs. 17,548 as expenditure.
6000 acres – sal & piyasal - The forest is occasionally parceled
out for the purposes of sale and the space from which trees sold are cut away
is guarded by forest guards to protect off shoots - It has been satisfactorily
proved that considerable amount of human labour and care is being applied year
after year for keeping the forest alive as also for reviving the portions that
get denuded as a result of destruction by cattle and other causes – staff
employed for following operations à pruning,
weeding, felling, clearing, cutting of channel to help the flow of rain water,
guarding the trees against pests and other destructive elements, Sowing
the seeds after digging of the soil in the denuded areas.
Citations:- Court looked into
Defn of Agriculture - Webster's New Intl Dictionary "the art or science
of cultivating the ground, including rearing and management of live-stock,
husbandry, farming, etc. and also including in its broad sense farming,
horticulture, forestry, butter and cheese-making etc", Murray's
Oxford Dictionary "the science and art of cultivating the soil;
including the allied pursuits of gathering in the crop and rearing live-stock;
tillage, husbandry, farming (in the widest sense)"
Corpus Juris the term"agriculture"
has been understood to mean: "art or science of cultivating the ground,
especially in fields or large quantities, including the preparation of the
soil, the planting of seeds, the raising and harvesting of crops, and the
rearing, feeding and management of live-stock; tillage, husbandry and farming.
In its general sense the word also includes gardening of horticulture"
Raja Mustafa Ali Khan v CIT – income from sale of forest trees growing on
land naturally without human intervention is not agricultural income within the
meaning of S2(1)(a) of the IT Act
Court held that cannot construe
the meaning of agriculture with respect to dictionary meaning.
Held only income from basic
operations of cultivating land and require the expenditure of human skill and
labour on land is agricultural income. Present case the income is not
agricultural income to the extent where the above operations have not been
carried out.
(8) CIT v. Maddi Venkatasubbayya (1951) XX ITR 151 (Mad.)
Assessee purchased standing crop
of tobacco from person who had raised the tobacco on the land. Tobacco harvested, cured and sold in the marker by the
assessee. Plucking of the ripe leaves the pruning and flue curing of the
harvested tobacco leaves were all done by the assessee firm. Firm also
did some sort of ploughing on the land. The assessee firm was not a
landholder or a ryot or a lessee of the land on which the tobacco crop stood.
Tobacco plants had been raised on the land by its owner or lessee and they
had reached such a degree of maturity as to render them saleable as standing
crops to tobacco merchants in the locality.
Issue: whether sale of tobacco by
assessee firm constitutes agricultural income.
Raja Mustafa Ali Khan v CIT – income from sale of forest trees
growing on land naturally without human intervention is not agricultural income
within the meaning of S2(1)(a) of the IT Act
Yagappa Nadar v CIT - held that income
earned by a person who had a licence to tap toddy from trees belonging to
licensors and who sold the toddy extracted by him at a profit was
non-agricultural income, though if the same income was earned by the
owner or the lessee of the land on which the trees grew, it would be
agricultural income.
CIT v Kamakhya Narain Singh
Interest on arrears of rent payable in respect of land used for
agricultural purposes was not agricultural income within Section 2 (1) of the
Income-tax Act. It was held that the interest was
neither rent nor revenue derived from the land. The relationship between the
tenant who executed the bond for arrears of rent with interest and the landlord
was held to be that of a debtor and creditor. There is however one observation
of the Judicial Committee which might be helpful in connection with the present
case. Their Lordships while holding that interest on rent was revenue derived
by the land-holder, went on to hold that it was not revenue "derived"
from land. They observed:
"The word 'derived' is not a
term of art. Its use in the definition indeed demands an enquiry into
the genealogy of the product. But the enquiry should stop as soon as the
effective source is discovered. In the genealogical tree of the
interest, land indeed appears in the second degree, but the immediate
and effective source is rent, which has suffered the accident of
non-payment."
Here also the land appears in the
history of the trading operations of the assessee but it can not be said to be
the immediate or the effective source of the income made by the assessee firm.
The immediate and effective source
was the trading operation of purchase of the standing crop and its
resale in the market after harvesting the produce at an advantageous price.
For these reasons we hold that
the sum of Rs. 7500 was not exempt from liability to assessment to income-tax
and that the answer to the question referred to must be in the negative and
against the assessee. The assessee shall pay Rs. 250, the costs of the
Commissioner of Income-tax on this reference.
(9) Sakarlal Naranlal v. CIT. AIR 1965 Guj 165 – Galka Case
Facts: In or about 1952, a friend of
the assessee suggested to him the idea of growing a vegetable product commonly
called galka, the botanical name being luffa pentendra and the assessee
accordingly obtained galka seeds from abroad and, after preparing the
lands for cultivation, raised galka on the lands in 1952. Now the kind
of galka grown by the assessee was not an indigenous kind but was a kind grown
fairly widely in Formosa , Japan
The foreign loofahs are about
16" in length and 4" in width. The loofahs prepared by the
assessee were, however, only 5" in length and 2-1/2" in width.
The assessee tried to market these loofahs abroad and sent them to England India
Tribunal came to the conclusion that the process employed by the
assessee was a process within the purview of Sec 2(1A) (b)(ii) and the losses
suffered by the assessee were therefore agricultural losses which were not
liable to be deducted in computing the income of the assessee.
HC held that it was not enough
for the Tribunal to find that there was no market for Galkas in India. The tribunal should have also considered whether there was no
market for Galkas outside India and it was only if the Tribunal found that
there was no market for Galkas outside India, the tribunal could come to the
conclusion that the process employed for the purpose of converting Galkas into
Loofahs was a process covered by S2(1A)(b)(ii). HC held that Galkas as
such being marketable outside India
Court explained the reason behind
S2(1A)(b)(ii) A cultivator raises produce from the land with a view to
selling it. If there is a market for the produce as grown, there is no
difficulty; the cultivator can in such a case sell the produce without anything
more and he need not perform any process on the produce. But if there is no
market for the produce as grown and it can be sold only by performing some
process on it., the cultivator would have to perform such process in order to
be able to sell the produce; otherwise the produce would not be marketable and
the raising of it would be futile. Where such is the case, the legislature
says that, though strictly the agricultural operations ceases when the
produce is raised and removed from the soil, the performance of the process
should be regarded as a continuation of the agricultural operations since the
process has to be performed by the cultivator for the purpose of enabling him
to sell the produce which the otherwise cannot. It is because the
performance of the process is essential in order to render the produce marketable,
which it is otherwise not, that the law regards it as part of the agricultural
operations carried on by the cultivator. This reason also explains the
other requirement of the section, namely, that the process must be such as
is ordinarily employed by
cultivators to make the produce saleable. The performance of the process
is assimilated to agricultural operations and must, therefore, like
agricultural operations stricto sense, be an operation which is ordinarily done
by cultivators. If some special or unusual process is employed by a
cultivator, which is not ordinarily employed by cultivators to render the
produce marketable, it cannot be regarded as part of the agricultural
operations and the benefit of the income being treated as agricultural income
would not be available to the cultivator. It will be clear from this
discussion that there are two conditions
which are required to be fulfilled before a process performed by the assessee
can be said to be a process within the meaning of section 2(1)(b)(ii). The
first condition is that the process must
be necessary to render the produce fit to be taken to market and that involves the proposition that there must be
no market for the produce in its raw state. If there is already a market
for the produce in its raw state, then the process cannot be said to be a
process employed to render the produce fit to be taken to market or, in
other words, to make it marketable. That which is already marketable does
not need any process to render it marketable. The second condition is that
the process must be one which is ordinarily
employed by a cultivator of the produce to render it marketable. But even if these two conditions are satisfied,
it is not sufficient to attract the applicability of section 2(1)(b)(ii).
There is an additional requirement which must be satisfied and that
requirement springs directly from the language and the reason of the
enactment. It follows as a necessary corollary from what is stated
above that, even where the produce is subjected to a process ordinarily
employed by cultivators to render it fit to be taken to market, the produce
must not change its original character. The cultivator is permitted to subject the produce to a process in order to
make it marketable and what is ultimately marketed must, therefore, be that
produce. The character of the
produce must not be altered as a result of the process. Of course when we
say this we must make it clear that there may be changes brought about in the
produce for the purpose of making the produce marketable but those changes must
not amount to altering the original
character of the produce. (vide Dooars Tea Co Ltd v CIT )
Brihan Maharashtra Sugar Syndicate Ltd v CIT
The question which arose in this
case was whether income realised as a
sale of gur manufactured by the assessee out of sugarcane grown by it, was
agricultural income within the meaning of section 2(1)(b)(ii). The Tribunal
found that the requirements of the section were satisfied, but on a reference
to the High Court a Division Bench of the High Court held that though there was
evidence to support the finding of the Tribunal that the process employed by
the assesse in the manufacture of gur was a process ordinarily employed by a
cultivator, the finding that the process was one ordinarily employed by a
cultivator to render the produce fit to be taken to market was erroneous in as much
as there was a market for the sale of sugarcane before it was turned into gul. Kania
J., as he then was, after referring to section 2(1)(b)(ii), said "Reading
the words used in the definition section with their mutual meaning they must
mean that the produce must retain its original character in spite of the
process unless there is no market for selling it in that condition. If there is
no market to sell the produce then any process which is ordinarily employed to
render it fit to reach the market, where it can be sold, would be covered by
the definition..."
In re Bhikanpur Sugar Concern -
process employed by the assessee for manufacturing sugar was not a process
ordinarily employed by cultivators of sugarcane for rendering it fit for
marketing.
Killing Valley Tea Compnay Ltd v Secretary of State
The assessee in this case grew
green leaf tea in a tea garden owned by it and manufactured tea by
performing a process on green leaves plucked from the tea garden. In its
assessment to income-tax, the assessee
contended that the entire income from the sale of manufactured tea was
agricultural income within the meaning of section 2(1)(b)(ii) of the
Income-tax Tax Act, 1918. The Calcutta High Court, however, held that though
the green leaf from the tea plant was not a marketable commodity for immediate
use as an article of food, it was certainly
"a marketable commodity to be manufactured by people who possess the
requisite machinery into tea fit for human consumption" and the
manufacturing process could not, therefore, properly be said to be employed to
render the tea leaves fit to be taken to market as required by the section.
This decision, therefore, proceeded on the basis that if there is a market for
the produce grown by the assessee and despite that, some process is performed
on it, such process cannot be said to be a process to render the produce fit to
be taken to market so as to attract the applicability of section 2(1)(b)(ii).
J M Casey v CIT - assessee cultivated
aloe plants and from them by means of machinery prepared sisal fibre which he
sold in the market. The question arose whether the whole of the income
derived by the assessee was exempt from tax as being agricultural income.
The Patna High Court held that it was
so exempt and the ground on which the Patna
"It may be that in the
future the economic conditions may change. If the growth of the aloe leaf
should become established as an agricultural industry by itself and if the
manufacturers of sisal fibre should cease to cultivate the plant themselves and
should purchase the leaves in an open market then and such circumstances may
possibly require reconsideration in the light of the income-tax law..."
Sheolal v CIT - whether the process
of ginning applied by the assesse could be said to be a process within the
meaning of section 2(1)(b)(ii). The court held that the process of ginning was not a process ordinarily employed
by cultivators to render cotton grown by them fit to be taken to market since
unginned cotton was sold by the cultivators and ginning was not essential in
order to render the cotton fit to be taken to market.
Boggavarapu Peda Ammaih v CIT
The assessee in this case
carried on the business of export of tobacco grown on his lands and he claimed
exemption in respect of income arising on the sale of tobacco as agricultural
income. The revenue authorities treated the income derived from operations
up to the stage of "flue-curing" as agricultural income but regarded
the subsequent activities which involved the performance of the process of
re-drying, stripping and grading and sale of tobacco subjected to such process
as non-agricultural operations and treated the income attributable to those
operations as income from business subject to tax. The Andhra Pradesh High
Court before whom the question came on a reference took the view that the
tobacco after flue-curing had a large market in the country and the
operations of re-drying, stripping and grading were, therefore, not quite
essential to make the tobacco marketable. The High Court also took the view
that these operations could not be regarded as a process ordinarily employed by
cultivators in order to make the tobacco marketable. Since in the opinion of
the High Court both the conditions of section 2(1)(b)(ii) were not satisfied,
the High Court held that the income
attributable to the operations of re-drying, stripping, and grading could not
be described as agricultural income but should be treated as income liable to
tax.
(10) CIT v. HG Date (1971) 82 ITR 71 (Bom)
Assessee converted Sugarcane to Jaggery – was held to be
‘process ordinariy employed to render produce fit to be taken into market.
– observed mills buy sugarcane near the mills as far as possible – but
if no mills nearby then no other option for cultivator but to convert it into
Gur – also mills buy at prices fixed by Gov – If no market as
such where sugarcane of his quality can be sold – Existence of a single mill would not constitute a market for the
assessee’s sugarcane. Incase the
mill refuses to buy his sugarcane
the agriculturalist has no other option available. In such case agriculturalist
can claim exemption.
Citations:-
Brihan Maharashtra Sugar Syndicate Ltd v CIT (discussed in previous
case)
(11) K Lakshmanan & Co v. CIT (1999) 239 ITR 597 (SC)
Dooars Tea Co Ltd v CIT
Topic 3 - Residence & Scope of Total Income
Test for determination of residential status of Assessee (S6);
Section 6 RESIDENCE IN INDIA
For the purposes of this Act, -
(1) An individual is said to be
resident in India in any previous year, if he - (a) Is
in India
(c) Having within the four years preceding that year been in India for a
period or periods amounting in all to three
hundred and sixty-five days or more, is in India for a period or periods
amounting in all to sixty days or more
in that year.
Explanation : In the case of an
individual, - (a) Being a citizen of
India, who leaves India in any
previous year as a member of the crew of an Indian ship as defined
in clause (18) of section 3 of the Merchant Shipping Act, 1958, (44 of
1958) or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation
to that year as if for the words
"sixty days", occurring therein, the words "one hundred and eighty-two days" had been
substituted;
(b) Being a citizen of India, or a person of Indian origin within the
meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to
India in any previous year, the provisions of sub-clause (c) shall apply
in relation to that year as if for the words
"sixty days", occurring therein, the words "one hundred eighty-two days" had been substituted.
(2) A Hindu undivided family, firm
or other association of persons is said to be resident in India in any previous year in every
case except where during that year the control
and management of its affairs is situated wholly outside India
(3) A company is said to be resident in India
(ii) During that year, the control and management of its affairs is situated wholly in India
(4) Every other person is said to
be resident in India in any
previous year in every case, except where during that year the control and management of his affairs
is situated wholly outside India
(5) 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
(6) A person is said to be "not
ordinarily resident" in India in any previous year if such person
is - (a) An individual who has not
been resident in India in nine
out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or
periods amounting in all to, seven
hundred and thirty days or more, or
(b) A Hindu undivided family whose manager
has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years
preceding that year been in India
for a period of, or periods amounting in all to, seven hundred and thirty days or more.
Total Income of assessee(Ss 4 & 5);
Section 4 CHARGE OF INCOME-TAX.
(1) Where any Central Act enacts
that income-tax shall be charged for any assessment year at any rate or rates,
income-tax at that rate or those rates shall be charged for that year in
accordance with, and subject to the provisions (including provisions for the
levy of additional income-tax) of, this Act in respect of the total income of
the previous year of every person :
Provided that where by virtue of
any provision of this Act income-tax is to be charged in respect of the income
of a period other than the previous year, income-tax shall be charged
accordingly.
(2) In respect of income
chargeable under sub-section (1), income-tax shall be deducted at the source or
paid in advance, where it is so deductible or payable under any provision of
this Act.
Section 5 SCOPE OF TOTAL INCOME.
(1) Subject to the provisions of
this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived which - (a) Is
received or is deemed to be received in India in such year by or on
behalf of such person; or
(b) Accrues or arises or is
deemed to accrue or arise to him in India
(c) Accrues or arises to him
outside India
Provided that, in the case of a
person not ordinarily resident in India within the meaning of sub-section (6)
127a of section 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.
(2) Subject to the provisions of
this Act, the total income of any previous year of a person who is a
non-resident includes all income from whatever source derived which - (a) Is
received or is deemed to be received in India in such year by or on behalf of such
person; or
(b) Accrues or arises or is
deemed to accrue or arise to him in India
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 to him shall not again be so
included on the basis that it is received or deemed to be received by him in
India.
Income deemed to accrue or arise in India
Section 9 .INCOME DEEMED TO ACCRUE OR ARISE IN INDIA.
(1) The following incomes shall
be deemed to accrue or arise in India :- (i) All income accruing or
arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or
through or from any asset or source of income in India, or through the
transfer of a capital asset situate in India;
Explanation : For the purposes of
this clause - (a) In the case of a business of which all the operations are
not carried out in India, the income of the business deemed under this clause
to accrue or arise in India shall be only such part of the income as is
reasonably attributable to the operations carried out in India;
(b) In the case of a non-resident,
no income shall be deemed to accrue or arise in India
to him through or from operations which are confined to the purchase of goods
in India
(c) In the case of a non-resident,
being a person engaged in the business of running a news agency or of
publishing newspapers, magazines or journals, no income shall be deemed to
accrue or arise in India to him through or from activities which are
confined to the collection of news and views in India for transmission out of
India;
(d) In the case of a non-resident,
being - (1) An individual who is not a citizen of India
(2) A firm which does not have
any partner who is a citizen of India
or who is resident in India
(3) A company which does not have
any shareholder who is a citizen of India or who is resident in India,
no income shall be deemed to accrue or arise in India to such individual, firm
or company through or from operations which are confined to the shooting of any
cinematograph film in India;
(ii) Income which falls under the
head "Salaries", if it is earned in India
Explanation : For the removal of
doubts, it is hereby declared that
income of the nature referred to in this clause payable for service rendered in
India shall be regarded as
income earned in India
(iii) Income chargeable under the
head "Salaries" payable by
the Government to a citizen of India
for service outside India
(iv) A dividend paid by an Indian
company outside India
(v) Income by way of interest
payable by - (a) The Government; or
(b) A person who is a resident,
except where the interest is payable in respect of any debt incurred or moneys
borrowed and used, for the purposes of a business or profession carried
on by such person outside India or for the purposes of making or earning any
income from any source outside India; or
(c) A person who is a non-resident,
where the interest is payable in respect of any debt incurred, or moneys
borrowed and used, for the purposes of a business or profession carried on by
such person in India;
(vi) Income by way of royalty
payable by - (a) The Government; or
(b) A person who is a resident,
except where the royalty is payable in respect of any right, property or
information used or services utilised for the purposes of a business or
profession carried on by such person outside India or for the purposes of
making or earning any income from any source outside India; or
(c) A person who is a non-resident,
where the royalty is payable in respect of any right, property or information
used or services utilised for the purposes of a business or profession carried
on by such person in India ,
or for the purposes of making or earning any income from any source in India
Provided that nothing contained
in this clause shall apply in relation to so much of the income by way of
royalty as consists of lump sum consideration for the transfer outside India
of, or the imparting of information outside India in respect of, any data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process or trade mark or similar property, if
such income is payable in pursuance of an agreement made before the 1st day of
April, 1976, and the agreement is approved by the Central Government :
Provided further that nothing
contained in this clause shall apply in relation to so much of the income by
way of royalty as consists of lump sum payment made by a person, who is a
resident, for the transfer of all or any rights (including the granting of a
licence) in respect of computer software supplied by a non-resident
manufacturer along with a computer or computer-based equipment under any scheme
approved under the Policy on Computer Software Export, Software Development and
Training, 1986 of the Government of India.
Explanation 1 : For the purposes of
the first proviso, an agreement made on or after the 1st day of April, 1976,
shall be deemed to have been made before that date if the agreement is made in
accordance with proposals approved by the Central Government before that date;
so, however, that, where the recipient of the income by way of royalty is a
foreign company, the agreement shall not be deemed to have been made before
that date unless, before the expiry of the time allowed under sub-section (1)
or sub-section (2) of section 139 (whether fixed originally or on extension)
for furnishing the return of income for the assessment year commencing on the
1st day of April, 1977, or the assessment year in respect of which such income
first becomes chargeable to tax under this Act, whichever assessment year is
later, the company exercises an option by furnishing a declaration in writing
to the Assessing Officer (such option being final for that assessment year and
for every subsequent assessment year) that the agreement may be regarded as an
agreement made before the 1st day of April, 1976.
Explanation 2 : For the purposes of
this clause, "royalty" means consideration (including any
lump sum consideration but excluding any consideration which would be the
income of the recipient chargeable under the head "Capital gains")
for - (i) The transfer of all or any rights (including the granting of a
licence) in respect of a patent, invention, model, design, secret formula or
process or trade mark or similar property;
(ii) The imparting of any
information concerning the working of or the use of, a patent,
invention, model, design, secret formula or process or trade mark or
similar property;
(iii) The use of any patent,
invention, model, design, secret formula or process or trade mark or
similar property;
(iv) The imparting of any
information concerning technical, industrial, commercial or scientific
knowledge, experience or skill;
(v) The transfer of all or any
rights (including the granting of a licence) in respect of any copyright,
literary, artistic or scientific work including films or video tapes for use in
connection with television or tapes for use in connection with radio
broadcasting, but not including consideration for the sale, distribution or
exhibition of cinematographic films; or
(vi) The rendering of any
services in connection with the activities referred to in sub-clauses (i) to
(v);
Explanation 3 : For the purposes of
this clause, the expression "computer software" shall have the
meaning assigned to it in clause (b) of the Explanation to section 80HHE;
(vii) Income by way of fees for
technical services payable by - (a) The Government; or
(b) A person who is a resident,
except where the fees are payable in respect of services utilised in a business
or profession carried on by such person outside India or for the purposes of
making or earning any income from any source outside India; or
(c) A person who is a
non-resident, where the fees are payable in respect of services utilized in a
business or profession carried on by such person in India
or for the purposes of making or earning any income from any source in India
Provided that nothing contained
in this clause shall apply in relation to any income by way of fees for
technical services payable in pursuance of an agreement made before the 1st day
of April, 1976, and approved by the Central Government.
Explanation 1 : For the purposes
of the foregoing proviso, an agreement made on or after the 1st day of April,
1976, shall be deemed to have been made before that date if the agreement is
made in accordance with proposals approved by the Central Government before that
date.
Explanation 2 : For the purposes
of this clause, "fees for technical services" means any consideration
(including any lump sum consideration) for the rendering of any managerial,
technical or consultancy services (including the provision of services of
technical or other personnel) but does not include consideration for any
construction, assembly, mining or like project undertaken by the recipient or
consideration which would be income of the recipient chargeable under the head
"Salaries".
(2) Notwithstanding anything
contained in sub-section (1), any pension payable outside India to a person
residing permanently outside India shall not be deemed to accrue or arise in
India, if the pension is payable to a person referred to in article 314 of the
Constitution or to a person who, having been appointed before 15th day of
August, 1947, to be a Judge of the Federal Court or of a High Court within the
meaning of the Government of India Act, 1935, continues to serve on or after
the commencement of the Constitution as a Judge in India.
Incidence of tax varies with residential status of an assessee?
(12) V.V.R.N.M Subbayya Chettiar vs CIT., AIR 1951 SC 101
Test of residence of a hindu undivided family
Court- The words used in s. 4A (b) show: (i) that, normally a
Hindu undivided family will be taken to be resident, in the taxable territories,
but such a presumption will not apply if the case can be brought under the
second part of the provision, (ii)the word "affairs" means
affairs which are relevant for the purpose of the Income-tax Act and which
have some relation to income, (iii) the question whether the case falls
within the exception depends on whether
the seat of the direction and control of the affairs of the family is inside or
outside British India, and (iv)the
onus of proving facts which would bring his case within the exception which
is provided by the latter part is on the
assessee.(Facts: The karta of a Hindu undivided family lived with his
wife and children and carried on business in Ceylon, which had become their
place of domicile. [He owned some immoveable property and had a house and
investments in British India . In the year of
account he visited British India and stayed there for periods amounting in all
to 101days and during his stay started two firms in British India, person- ally
attended to a litigation relating to the family lands, and appeared before the
Income-tax authorities in proceedings relating to assessment of the income of
the family)Court dismissed the petition, but said that it is open to the
appellant to show through evidence that the seat of control and management was
wholly outside India. Therefore, Court did
not say that the seat was in India
Therefore, the test laid down was:
(1) Control and management signifies the controlling and directive power.
(2) Mere activity by a company in a place does not create residence.
(3) Central management and control of a company may be divided.
(3) Central management and control of a company may be divided.
(4) In case of dual residence, there may be two centres of management
Lord Loreburn in De Beers v Howe
A foreign corporation may reside in this country for the purposes of
income tax. The test of residence is not where it is registered, but where it really keeps house and does its
real business. The real business is
carried on where the central management and control actually abides.
Calcutta Jute Mills v Nicholson & Cesena Sulphur Company v
Nicholson à company resides ( fr IT) where its real
business is carried on.
Swedish Central Railway Company v
Thompson
(13) Narottam and Parekh Ltd. v. CIT, Bom. City, AIR 1954 Bom 67
Company – Resident or not? Assessee company subsidiary of Scindia Company carrying on
business in Ceylon
Held: It is entirely irrelevant
where the business is done and where the income has been earned. What is
relevant and material is from which place has that business been controlled and
managed. "Control and management"
referred to in Section 4A(c) is central control and management. The control and management contemplated by this
Sub-section is not the carrying on of day to day business by servants,
employees or agents. The real test
to be applied is, where is the controlling and directing power. When we
turn to the facts of the case, we see that two managers under two
powers-of-attorney look after all the affairs of the assessee company in Ceylon Bombay
and has been exercised by the directors in Bombay Ceylon
Bhimji Naik v CIT, Bombay
In this case Sir Leonard Stone, C. J., and Kania J. were really dealing with
a question of construction of Section 4A(b), and the question that
presented itself for decision before that Bench was whether the control and management contemplated by that sub-section
was a 'de facto' or a 'de jure' control.
In that case one Naik carried on business in South Africa India
The Income Tax Appellate Tribunal
found that the firm was resident in British India as the legal right to control
and manage vested in Naik and he was resident in British India and it was not
shown that he had not exercised any control. The Court remanded the matter to
the Tribunal taking the view that what they were concerned with was actual
events which would go to show where the actual control and management of the
affairs was 'de facto' situated, and as the Tribunal had merely held
that on the legal aspect of the partnership deed there were not sufficient
facts on which they could express an opinion, It is rather important to
note that Mr. Setalvad who appeared for the Commissioner attempted to argue
that the position in the case was not materially different from that of a man
owning a business and having employees, and the learned Chief Justice dealt
with that argument as being "destructive of the whole reference, which
proceeds on the basis that we are dealing with a partnership firm, as indeed is
the case when the partnership deed is considered."
Therefore, the learned Chief
Justice was at pains to draw a distinction between the case of a partner and
the case of an agent or an employee, and inasmuch as in that case the business
was being managed by the partners of Naik in South Africa
"As it is difficult to apply
the test of physical residence to an association of persons or a firm, the test
is held to be : 'where the central control and management actually abides'."
Therefore, the learned Judge holds that the expression "control and
management" means where the central control and management actually
abides.
Talipatigala Estate v CIT [Mad HC]
There the question that arose was
whether the assessee firm had any part of the control and management within British India . There a rubber estate in Ceylon was
managed by the assessee firm consisting of two partners, one of whom was
resident in British India, and the estate was managed by an agent
holding a power-of-attorney from the partners, and the Court held that not only
the right to exercise control and management over the firm's affairs in Cevlon
vested with the partner resident in British India but some amount of control
and management of the firm's affairs was actually exercised in British India
and the assessee firm was therefore resident in British India within the
meaning of Section 4-A.
The Court was concerned to
determine whether any part of the control and management was within British
India and notwithstanding the fact that the rubber estate was managed by an
agent holding, a power-of-attorney, it was found that there was the exercise of
control and management by the partners from British India.
Topic 4 - Heads of Income (Ss 14-59)
Heads of income (S14), Rationale; Heads whtr mutually exclusive
Section 14 . HEADS OF INCOME.
Save as otherwise provided by this
Act, all income shall, for the purposes of charge of income-tax and computation
of total income, be classified under the following heads of income -
A. - Salaries.
C. - Income from house property.
D. - Profits and gains of business
or profession.
E. - Capital gains.
F. - Income from other sources.
Head A - Salaries (Ss 15 - 17) Chargeability - Meaning of Salary;
Prerequisites; Profits in lieu of Salary
Section 15. SALARIES.
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.
Explanation 1 : For the removal
of doubts, it is hereby declared 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.
Explanation 2 : 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
"salary" for the purposes of this section.
Section 16. DEDUCTIONS FROM
SALARIES.
The income chargeable under the head
"Salaries" shall be computed after making the following deductions,
namely :-
(i) In the case of an assessee
whose income from salary, before allowing a deduction under the clause, -
(a) Does not exceed one lakh rupees, a deduction of a sum equal to
thirty-three and one-third per cent of the salary or twenty-five thousand
rupees, whichever is less;
(b) Exceeds one lakh rupees but
does not exceed five lakh rupees, a deduction of a sum of twenty thousand
rupees.
Explanation : For the purposes of
this clause, where salary is due from, or paid or allowed by, more than one
employer, the deduction under this clause shall be computed with reference to
the aggregate salary due, paid or allowed to the assessee and shall in no case
exceed the amount specified under this clause;
(ii) A deduction in respect of
any allowance in the nature of an entertainment allowance specifically granted
to the assessee by his employer -
(a) In the case of an assessee
who is in receipt of a salary from the Government, a sum equal to
one-fifth of his salary (exclusive of any allowance, benefit or other
perquisite) or five thousand rupees, whichever is less; and
(b) In the case of any other
assessee who is in receipt of such entertainment allowance and has been
continuously in receipt of such entertainment allowance regularly from his
present employer from a date before the 1st day of April, 1955, the amount of
such entertainment allowance regularly received by the assessee from his
present employer in any previous year ending before the 1st day of April, 1955,
or a sum equal to one-fifth of his salary (exclusive of any allowance, benefit
or other perquisite) or seven thousand five hundred rupees, whichever is the
least;
(iii) A deduction of any sum paid
by the assessee on account of a tax on employment within the meaning of clause
(2) of article 276 of the Constitution, leviable by or under any law.
Section 17. "SALARY", "PERQUISITE" AND
"PROFITS IN LIEU OF SALARY" DEFINED.
For the purposes of sections 15 and
16 and of this section, -
(1) "Salary" includes -
(i) Wages;
(ii) Any annuity or pension;
(iii) Any gratuity;
(iv) Any fees, commissions, perquisites or profits in lieu of or in addition
to any salary or wages;
(v) Any advance of salary;
(va) Any payment received by an employee in respect of any period of leave
not availed of by him;
(vi) The annual accretion to the balance at the credit of an employee
participating in a recognised provident fund, to the extent to which it
is chargeable to tax under rule 6 of Part A of the Fourth Schedule; and
(vii) The aggregate of all sums that are comprised in the transferred
balance as referred to in sub-rule (2) of rule 11 of Part A of the
Fourth Schedule of an employee participating in a recognised provident
fund, to the extent to which it is chargeable to tax under sub-rule (4)
thereof;
(2) "Perquisite" includes -
(i) The value of rent-free accommodation provided to the assessee by his
employer;
(ii) The value of any concession in the matter of rent respecting any
accommodation provided to the assessee by his employer;
(iii) The value of any benefit or amenity granted or provided free of cost or at
concessional rate in any of the following cases :-
(a) By a company to an employee who is a director thereof;
(b) By a company to an employee being a person who has a substantial interest in
the company;
(c) By any employer (including a
company) to an employee to whom the provisions of paragraphs (a) and (b) of
this sub-clause do not apply and whose income under the head
"Salaries" (whether due from, or paid or allowed by, one or more
employers), exclusive of the value of all benefits or amenities not provided
for by way of monetary payment, exceeds twenty-four thousand rupees.
Explanation : For the removal of doubts, it is hereby declared
that the use of any vehicle provided by a company or an employer for journey by
the assessee from his residence to his office or other place of work, or from
such office or place to his residence, shall not be regarded as a benefit or
amenity granted or provided to him free of cost or at concessional rate for the
purposes of this sub-clause.
(iiia) The value of any specified security allotted or transferred, directly
or indirectly, by any person free of cost or at concessional rate,
to an individual who is or has been in employment of that person :
Provided that in a case where
allotment or transfer of specified securities is made in pursuance of an option
exercised by an individual, the value of the specified securities shall be
taxable in the previous year in which such option is exercised by such
individual.
Explanation - For the purposes of
this clause, - (a) "Cost" means the amount actually paid for
acquiring specified securities and where no money has been paid, the cost shall
be taken as nil;
(b) "Specified
security" means the securities as defined in clause (h) of section 2 of
the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes
employees' stock option and sweat equity shares;
(c) "Sweat equity
shares" means equity shares issued by a company to its employees or
directors at a discount or for consideration other than cash for providing
know-how or making available rights in the nature of intellectual property
rights or value additions, by whatever name called; and
(d) "Value" means the
difference between the fair market value and the cost for acquiring specified
securities.
(iv) Any sum paid by the employer
in respect of any obligation which but for such payment, would have been
payable by the assessee;
(v) Any sum payable by the
employer, whether directly or through a fund, other than a recognised provident
fund or an approved superannuation fund or a Deposit-linked Insurance Fund
established under section 3G of the Coal Mines Provident Fund and Miscellaneous
Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of
the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of
1952), to effect an assurance on the life of the assessee or to effect a
contract for an annuity;
Provided that nothing in this
clause shall apply to, - (i) The
value of any medical treatment provided to an employee or any member of his
family in any hospital maintained by the employer;
(ii) Any sum paid by the employer in respect of any expenditure actually
incurred by the employee on his medical treatment or treatment of any member of
his family -
(a) In any hospital maintained by the Government or any local authority or
any other hospital approved by the Government for the purposes of medical
treatment of its employees;
(b) In respect of the prescribed
diseases or ailments in any hospital approved by the Chief Commissioner having
regard to the prescribed guidelines :
Provided that, in a case falling in
sub-clause (b), the employee shall attach with his return of income a
certificate from the hospital specifying the disease or ailment for which
medical treatment was required and the receipt for the amount paid to the
hospital;
(iii) Any portion of the premium
paid by an employer in relation to an employee, to effect or to keep in force
an insurance on the health of such employee under any scheme approved by the
Central Government for the purposes of clause (ib) of sub-section (1) of
section 36;
(iv) Any sum paid by the employer
in respect of any premium paid by the employee to effect or to keep in force an
insurance on his health or the health of any member of his family under any
scheme approved by the Central Government for the purposes of section 80D;
(v) Any sum paid by the employer
in respect of any expenditure actually incurred by the employee on his medical
treatment or treatment of any member of his family [other than the treatment
referred to in clauses (i) and
(ii)]; so, however, that such sum
does not exceed five thousand rupees, in the previous year, in the case of the
employee and further five thousand rupees in the case of his family;
(vi) Any expenditure incurred by the
employer on - (1) medical treatment of the employee, or any member of the
family of such employee, outside India
(2) Travel and stay abroad of the
employee or any member of the family of such employee for medical treatment;
(3) Travel and stay abroad of one
attendant who accompanies the patient in connection with such treatment,
subject to the condition that -
(A) The expenditure on medical
treatment and stay abroad shall be excluded from perquisite only to the extent
permitted by the Reserve Bank of India
(B) The expenditure on travel
shall be excluded from perquisite only in the case of an employee whose gross
total income, as computed before including therein the said expenditure, does
not exceed two lakh rupees;
(vii) Any sum paid by the
employer in respect of any expenditure actually incurred by the employee for
any of the purposes specified in clause (vi) subject to the conditions
specified in or under that clause.
Explanation : For the purposes of
clause (2), - (i) "Hospital" includes a dispensary or a clinic or
a nursing home;
(ii) "Family", in
relation to an individual, shall have the same meaning as in clause (5) of
section 10; and
(iii) "Gross total
income" shall have the same meaning as in clause (5) of section 80B;
(3) "Profits in lieu of salary" includes -
(i) The amount of any compensation
due to or received by an assessee from his employer or former employer at or in
connection with the termination of his employment the modification of the terms
and conditions relating thereto;
(ii) Any payment other than any
payment referred to in clause (10), clause (10A), clause (10B), clause (11),
clause (12), clause (13) or clause (13A) of section (10), due to or received by
an assessee from an employer or a former employer or from a provident or other
fund, to the extent to which it does not consist of contributions by the
assessee or interest on such contributions or any sum received under a Keyman
insurance policy including the sum allocated by way of bonus on such policy.
Explanation : For the purposes of
this sub-clause, the expression "Keyman insurance policy" shall have
the meaning assigned to it in clause (10D) of section 10.
(14) Ram Pershad v. CIT (1972) 2 SCC 696: AIR 1973 SC 637
The assessee via a contract became the managing director of a company for a
period of 20 years. He was required to do work of agent to and manager
of and to do any other work as agreed upon. The contract provided that
the assessee was at liberty to resign and the company would terminate his
services before the end of 20 years if he acts irresponsibly. Assessee was to receive 2000 pm gross
profit and 10% of Gross profits of company, and he and his wife were entitled
to free boarding, etc, in hotel.
In a particular assessment year
he was assessed in respect of Rs 53000 payable to him as 10% of the profits of
company which he gave up soon after the accounts were finalized but before they
were passed by general meeting of the shareholders, etc. The assessee
claimed that such amount is not liable to be included in his total income,
because the amount had not accrued to him at all and even if it had accrued, it
is not taxable as ‘salary’ in his hands
u/ S15(1).
Observation & Decisions
Test: On behalf of the assessee, it
was contended that in order to assess the income as salary it must be held that
there was a relationship of master and servant between the company and the
assessee. For such a relationship to exist, it must be shown that the
employee must be subject to the supervision and control of the employer in
respect of the work that the employee has to do. Where, however, there is no such
supervision or control it will be a relationship of principal and agent or an
independent contractor. Applying these tests, it is submitted that the
appointment of the assessee as a Managing Director is not that of a servant but
as an agent of the company and accordingly the commission payable to him is income from business and
not salary. It was held that income of
MD was salary.
Citations:-
Morvi Industries Ltd v CIT ***
Piyare Lal Adishwar Lal v CIT – Kapur J
laid down a test
It is difficult to lay down any one test
to distinguish the relationship of master and
servant from that of an employer and independent contractor. In many cases the
test laid down is that in the case of master and servant, the master can order
or require what is to be done and how it is to be done but in the case
of an independent contractor an employer can only say what is to be done but
not how it shall be done. But this test also does not apply to all
cases, e.g. in the case of ship's master, a chauffeur or a reporter of a
newspaper. In certain cases it has been laid down that the indicia of a
contract of service are (a) the master's power of selection of the servant;
(b) the payment of wages or other remunerations; (c) the master's
right to control the method of doing the work; and (d) the master's
right to suspension or dismissal."
Lakshminarayan Ram Gopal v Govt of Hyd
Held that the assessee under the managing agency agreement having
regard to certain indicia discernible from that agreement was an agency. At p.458 the functions of the assessee which were inconsistent with
his being a servant were specified. They were :-
1. The power to assign the
agreement and the rights of the appellant there under;
2. The right to continue in
employment as the agents of the company for a period of 30 years until the
appellants of their own will resign;
3. The remuneration by way of
commission of 2-1/2 per cent of the amount of sale proceeds of the produce of
the company; and
4. The power of sub-delegation of
functions given to the agent tinder Art. 118.
All these circumstances went to
establish that the appellants were the agents of the company and not merely the
servants remunerated by wages or salary.
CIT Bombay
CIT v Negi Reddy
Madras High Court was considering
the case of a Managing Director of a film company who was also the
ManagingDirector of another film company on similar terms and
remuneration, namely, that
he was to get a monthly remuneration of
Rs. 500/- and in addition a commission of net profits. The question there was, whether the remuneration received by him as Managing Director from
these two companies was income from business assessable under s. 10 of the Act.
(15) CIT v. L.W. Russel AIR 1965 SC 49
Facts and Issue- The respondent
is an employee of the English and Scottish Joint Co-operative Wholesale Society
Ltd. incorporated in England India
The Tribunal referred to the High
Court the following three questions of law:-
(1) Whether the contribution paid
by the employer to the assessee under the terms of a trust deed in respect of a
contract for a deferred annuity on the life of the assessee is a perquisite as
contemplated by s. 7(1) of the Income-tax Act?
(2) Whether the said
contributions were allowed to, or due to the applicant by or from the employer
in the accounting year?
(3) Whether the deferred annuity
aforesaid is annuity hit by s. 7(1) and para (v) of Explanation 1 thereto.
The High Court held that the employer's
contribution under the terms of the trust deed was not a perquisite as
contemplated by s. 7(1). The employer's contributions were not allowed
to or due to the employee in the accounting year. The legislature not
having used the word "deferred" with annuity in s. 7(1) and the statute being a taxing one, the deferred annuity would not hit para (v) of
Explanation 1 to s. 7-(1) of the Act. Against the decision of High Court, the appellant came to this Court by special
leave. Dismissing the appeal,
Held: The answers to the questions of law as given by the High Court were correct.
Unless a vested interest in the sum
accrues to an employee, it is not taxable. In the present case. No
interest in the sum contributed by the employer under the scheme vested in the
employee, as it was only a contingent interest depending upon his reaching the
age of superannuation. It is not a
perquisite allowed to him by the employer or an amount, due to him from the
employer within the meaning of s. 7(1) of the Act. A perquisite is only that amount of money which is allowed to the
employee by or is due to him from the employer or is paid to him to effect an insurance
on his life.
(1) Whether the contributions paid
by the employer to the assessee under the terms of a trust deed in respect of a
contract for a deferred annuity on the life of the assessee is a 'perquisite'
as contemplated by s.7(1) of the Indian Income-tax Act?
(2) Whether the said contributions
were allowed to or due to the applicant by or from the employer in the
accounting year?
(3) Whether the deferred annuity
aforesaid is an annuity hit by section 7(1) and para. (v) of Explanation 1
thereto?
SC observed that perquisites are “causal emoluments, fee or profit
attached to an office or position in addition to salary or wages”. Essentially, they are
non-cash benefits given by an employer to employees in addition to cash salary
or wages. However, these may include
cases where the employer reimburses expenses or pays for obligations incurred
by the employee. The term is defined in the Section 17(2) of the
Income-tax Act as including:
(1)
Value of rent-free or concessional rent accommodation provided by
the employer.
(2)
Value of any benefit/amenity granted free or at concessional rate
to specified employees etc.
(3)
Any sum paid by employer in respect of an obligation, which was
actually payable by the assessee.
Head B - (Omitted by Finance Act, 1988
with effect from 1-4-1989)
Head C - Income from House property (Ss 22 - 27) - Ingredients of
S22- Annual Value how to be determined - Deductions under S24 - Deemed Owner
S27
Section 22. INCOME FROM HOUSE PROPERTY.
The annual value of property consisting of any buildings or lands appurtenant thereto of which the
assessee is the owner other than
such portions of such property as he may occupy for the purposes of any
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".
Section 23. ANNUAL VALUE HOW DETERMINED
(1) For the purposes of section
22, the annual value of any property shall be deemed to be -
(a) The sum for which the
property might reasonably be expected to let from year to year; or
(b) Where the property is let and
the annual rent received or receivable by the owner in respect thereof is in
excess of the sum referred to in clause (a), the amount so received or receivable:
Provided that where the property is
in the occupation of a tenant, the taxes levied by any local
authority in respect of the property shall, to the extent such taxes are
borne by the owner, be deducted (irrespective of the previous year in which the
liability to pay such taxes was incurred by the owner according to the
method of accounting regularly employed by him) in determining the
annual value of the property of that previous year in which such taxes are
actually paid by him:
Provided further that the annual
value as determined under this sub-section shall, - (a) In the case of a
building comprising one or more residential units, the erection of which is
begun after the 1st day of April, 1961, and completed before the 1st day of
April, 1970, for a period of three years from the date of completion of the
building, be reduced by a sum equal to the aggregate of -
(i) In respect of any residential
unit, whose annual value as so determined does not exceed six hundred rupees,
the amount of such annual value;
(ii) In respect of any
residential unit whose annual value as so determined exceeds six hundred
rupees, an amount of six hundred rupees;
(b) In the case of a building
comprising one or more residential units, the erection of which is begun after
the 1st day of April, 1961, and completed after the 31st day of March, 1970,
but before the 1st day of April, 1978, for a period of five years from the date
of completion of the building, be reduced by a sum equal to aggregate of -
(i) In respect of any residential
unit whose annual value as so determined does not exceed one thousand two
hundred rupees, the amount of such annual value;
(ii) In respect of any
residential unit whose annual value as so determined exceeds one thousand two
hundred rupees, an amount of one thousand two hundred rupees;
(c) In the case of a building
comprising one or more residential units, the erection of which is completed
after the 31st day of March, 1978 but before the 1st day of April, 1982, for a
period of five years from the date of completion of the building, be reduced by
a sum equal to the aggregate of -
(i) In respect of any residential
unit whose annual value as so determined does not exceed two thousand four
hundred rupees, the amount of such annual value;
(ii) In respect of any residential
unit whose annual value as so determined exceeds two thousand four hundred
rupees, an amount of two thousand four hundred rupees;
(d) In the case of a building
comprising one or more residential units, the erection of which is completed
after the 31st day of March, 1982 but before the 1st day of April, 1992, for a
period of five years from the date of completion of the building, be reduced by
a sum equal to the aggregate of - (i) In respect of any residential unit whose
annual value as so determined does not exceed three thousand six hundred
rupees, the amount of such annual value;
(ii) In respect of any residential
unit whose annual value as so determined exceeds three thousand six hundred
rupees, an amount of three thousand six hundred rupees.
Explanation: For the purposes of
this sub-section, "annual rent" means - (a) In a case where
the property is let throughout the previous year, the actual rent received or
receivable by the owner in respect of such year; and
(b) In any other case, the amount
which bears the same proportion to the amount of the actual rent received or
receivable by the owner for the period for which the property is let, as the
period of twelve months bears to such period.
Explanation 2 : For the removal
of doubts, it is hereby declared that where a deduction in respect of
any taxes referred to in the first proviso to this sub-section is allowed in
determining the annual value of the property in respect of any previous year
(being a previous year relevant to the assessment year commencing on the 1st
day of April, 1984 or any earlier assessment year), no deduction shall be
allowed under the first proviso in determining the annual value of the property
in respect of the previous year in which such taxes are actually paid by the
owner.
(2) Where the property consists of -
(a) A house or part of a house in the occupation of the owner for the
purposes of his own residence, - (i) Which is not actually let during
any part of the previous year and no other benefit there from is derived by the
owner, the annual value of such house or part of the house shall be taken to be
nil; (ii) Which is let during any part or parts of the previous year,
that part of the annual value (annual value being determined in the same manner
as if the property had been let) which is proportionate to the period during
which the property is in the occupation of the owner for the purposes of his
own residence, or, as the case may be, where such property is let out in parts,
that portion of the annual value appropriate to any part which was occupied by
the owner for his own residence, which is proportionate to the period during
which such part is wholly occupied by him for his own residence shall be
deducted in determining the annual value.
Explanation :- The deduction
under this sub-clause shall be made irrespective of whether the period during
which the property or, as the case may be, part of the property was used for
the residence of the owner precedes or follows the period during which it is
let;
(b) More than one house in the
occupation of the owner for the purposes of his own residence, the
provisions of clause (a) shall apply only in respect of one of such houses,
which the assessee may, at his option, specify in this behalf;
(c) More than one house and such
houses are in the occupation of the owner for the purposes of his own
residence, the annual value of the house or houses, other than the house in
respect of which the assessee has exercised an option under clause (b), shall
be determined under sub-section (1) as if such house or houses had been let.
Explanation :- Where any such
residential unit as is referred to in the second proviso to sub-section (1) is
in the occupation of the owner for the purposes of his own residence, nothing
contained in that proviso shall apply in computing the annual value of that
residential unit.
(3) Where the property referred
to in sub-section (2) consists of one residential house only and it cannot
actually be occupied by the owner by reason of the fact that owing to his
employment, business or profession carried on at any other place, he has to
reside at that other place in a building not belonging to him, the annual value
of such house shall be taken to be nil :
Provided that the following
conditions are fulfilled, namely:-
(i) Such house is not actually let, and
(ii) No other benefit there from is derived by the owner.
Section 24. DEDUCTIONS FROM INCOME FROM HOUSE PROPERTY.
(1) Income chargeable under the head
"Income from house property" shall, subject to the provisions of
sub-section (2), be computed after making the following deductions, namely:-
(i) In respect of repairs of, and
collection of rent from, the property, a sum equal to one-fourth of the annual
value;
(ii) The amount of any premium
paid to insure the property against risk of damage or destruction;
(iv) Where the property is
subject to an annual charge, (not being a charge created by the assessee
voluntarily or a capital charge), the amount of such charge;
(v) Where the property is subject
to a ground rent, the amount of such ground rent;
(vi) Where the property has been
acquired, constructed, repaired, renewed or reconstructed with borrowed
capital, the amount of any interest payable on such capital;
Explanation : Where the property has
been acquired or constructed with borrowed capital, the interest, if any,
payable on such capital for the period prior to the previous year in which the
property has been acquired or constructed, as reduced by any part thereof
allowed as a deduction under any other provision of this Act, shall be deducted
under this clause in equal instalments for the said previous year and for each
of the four immediately succeeding previous years;
(vii) Any sums paid on account of
land revenue or any other tax levied by the State Government in respect of
the property;
(ix) Where the property is let
and was vacant during a part of the year, that part of the annual value which
is proportionate to the period during which the property is wholly unoccupied
or, where the property is let out in parts, that portion of the annual value
appropriate to any vacant part, which is proportionate to the period during
which such part is wholly unoccupied.
Explanation : The deduction under
this clause shall be made irrespective of whether the period during which the
property or, as the case may be, part of the property was vacant precedes or
follows the period during which it is let;
(x) Subject to such rules as may be
made in this behalf, the amount in respect of rent from property let to a
tenant which the assessee cannot realise.
(2) No deduction shall be allowed
under sub-section (1) In respect of property of the nature referred to in
sub-clause (i) of clause (a) of sub-section (2), or sub-section (3) of section
23 :
Provided that nothing in this
sub-section shall apply to the allowance of a deduction under clause (vi) of
sub-section (1) of an amount not exceeding thirty thousand rupees in respect of
the property of the nature referred to in sub-clause (i) of clause (a) of
sub-section (2) of section 23 or sub-section (3) of section 23.
Provided further that where the
property is acquired or constructed with capital borrowed on or after the 1st
day of April, 1999 and such acquisition or construction is completed before the
1st day of April, 2001, the provisions of the first proviso shall have effect
as if for the words "thirty thousand rupees", the words
"seventy-five thousand rupees" had been substituted.
(3) The total amount deductible
under sub-section (1) in respect of property of the nature referred to in
sub-clause (ii) of clause (a) of sub-section (2) of section 23 shall not exceed
the annual value of the property as determined under that section.
Section 25. AMOUNTS NOT DEDUCTIBLE FROM INCOME FROM HOUSE PROPERTY.
Notwithstanding anything contained
in section 24, any annual charge or interest chargeable under this Act which is
payable outside India (not being interest on a loan issued for public
subscription before the 1st day of April, 1938), on which tax has not been paid
or deducted under Chapter XVII-B and in respect of which there is no person in India
Section 25A. SPECIAL PROVISION FOR
CASES WHERE UNREALISED RENT ALLOWED AS DEDUCTION IS REALISED SUBSEQUENTLY.
Where a deduction has been made
under clause (x) of sub-section (1) of section 24 in the assessment for any
year in respect of rent from property let to a tenant which the assessee cannot
realise and subsequently during any previous year the assessee has realised any
amount in respect of such rent, the amount so realised shall be deemed to be
income chargeable under the head "Income from house property" and
accordingly charged to income-tax (without making any deduction under section
23 or section 24) as the income of that previous year, whether the assessee is
the owner of that property in that year or not.
Section 26. PROPERTY OWNED BY CO-OWNERS.
Where property consisting of
building or buildings and lands appurtenant thereto is owned by two or more
persons and their respective shares are definite and ascertainable, such
persons shall not in respect of such property be assessed as an association
of persons but the share of each such person in the income from the property as
computed in accordance with sections 22 to 25 shall be included in his total
income.
Explanation : For the purposes of
this section, in applying the provisions of sub-section (2) of section 23 for
computing the share of each such person as is referred to in this section, such
share shall be computed as if each such person is individually entitled to the
relief provided in that sub-section.
Section 27. "OWNER OF HOUSE PROPERTY", "ANNUAL
CHARGE", ETC., DEFINED.
For the purposes of sections 22
to 26 - (i) An individual who transfers otherwise than for adequate
consideration any house property to his or her spouse, not being a transfer in
connection with an agreement to live apart, or to a minor child not being a
married daughter, shall be deemed to be the owner of the house property so
transferred;
(ii) The holder of an impartible
estate shall be deemed to be the individual owner of all the properties
comprised in the estate;
(iii) A member of a co-operative
society, company or other association of persons to whom a building or part
thereof is allotted or leased under a house building scheme of the society,
company or association, as the case may be, shall be deemed to be the owner of
that building or part thereof;
(iiia) A person who is allowed to take
or retain possession of any building or part thereof in part performance
of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that
building or part thereof;
(iiib) A person who acquires any
rights (excluding any rights by way of a lease from month to month or for a
period not exceeding one year) in or with respect to any building or part
thereof by virtue of any such transaction as is referred to in clause (f) of
section 269UA, shall be deemed to be the owner of that building or part
thereof; 426 ]
(iv) "Annual charge" means a
charge to secure an annual liability, but does not include any tax in
respect of property or income from property imposed by a local authority, or
the Central or a State Government;
(v) "Capital charge" means a charge
to secure the discharge of a liability of a capital nature;
(vi) Taxes levied by a local
authority in respect of any property shall be deemed to include service taxes
levied by the local authority in respect of the property.
(16) CIT West Bengal v. Biman Behari Shaw, Shebait (1968) 68 ITR 815 (Cal
Facts & Issue: Premises in
questions were properties dedicated to deities.
The will in respect of the property laid down that “no body save and except
the Brahmin performing the worship of the deity and servants shall ever be
competent to reside in the property”. ITO thus conducted the bona fide
annual value of the properties at the amounts which they were likely to fetch
if let out into the market. The assessee objected to the assessment of annual
value of the properties that they were not let out and no income accrued there
from. It was contended that in view
of injunction contained in the will the premises had no letting value.
Cal HC observed: -
(1) The tax shall be payable by
an assessee under the head income from property in respect of the bona fide
annual value of property consisting of any buildings or lands appurtenant
thereto of which he is the owner, other than such portions of such property as
he may occupy for the purpose of any business, profession or vocation carried
on by him the profits of which are assessable to tax, subject to the following
allowance, namely,......
(2) For the purposes of the section,
the annual value of the property shall
be deemed to be the sum for which the property might reasonably be expected to
let from year to year."
It is apparent from the section
quoted above that even where a property is not let and even where it does not
produce any income, the Income-tax Officer is to proceed on the basis of a
notional income, which the property might reasonably be expected to yield from
year to year. Now, where a property, is not actually let, even then there ought
to be included in the annual income of the owner a notional income from the
property. The letting value of property, whether let or not, can be objectively
ascertained on reasonably basis. If there be restrictions on the letting of the
premises, that may merely reduce letting value but it cannot be said, without
more, that because of the existence of a restrictive clause there can be no
notional annual income deemed to arise from the premises.
Citations:-
Kinaria J in DM Vakil v CIT (similar citing for Sir Currimbhoy
Ebrahim Baronetcy Trust v CIT)
"The legislature was therefore expressly
provided that the tax shall be payable by the assessee in respect of the bona
fide final value irrespective of the question whether he receives that value or
not. Section 9(2) provides that for the purposes of this section, the
expression annual value shall be deemed to mean the sum for which, the property
might reasonably be expected to let from year to year. It is again
significant to note that the word used is might and not can
or is. Reading these two
paragraphs of section 9 together, it is clear that the income from
property is thus an artificially defined income and the legibility arises from
the fact that the assessee is the owner of the property. It is further
provided in the section that if the owner occupies the property he has to pay
tax calculated in the manner provided therein. Therefore, by reason of
the fact that the property is not let out, the assessee does not escape
taxation.
(17) East India Housing & Land Development Trust Ltd v. CIT (1961) 42
ITR 49(SC)
Held that income from letting out house property is assessable under
the head ‘Income from house property’, even if it has been earned by a company
set up with an object of developing and setting up markets.
Citations:-
In United Commercial Bank Ltd. v. Commissioner of Income- tax this
court explained after an exhaustive review of the authorities that under the scheme of the Income-tax Act,
1922, the heads of income, profits and gains enumerated in the different
clauses of section 6 are mutually exclusive, each specific head covering
items of income arising from a particular source.
In Fry v. Salisbury House Estate Co. Ltd. a company formed to acquire, manage and deal with a block of buildings,
having let out the rooms as unfurnished offices to tenants, was held chargeable
to tax under Schedule A to the Income Tax Act. 1918, and not Schedule D.
The company provided a staff to operate the lifts and to act as porters and
watch and protect the building; and also provided certain services such as
heating and cleaning to the tenants at an additional charge. The taxing
authorities sought to charge the income from letting out of the rooms as
receipts of trade chargeable under Schedule D, but that claim was negatived by
the House of Lords holding that the rents were profits arising from the
ownership of land assessable under Schedule A and that the same could not be
included in the assessment under Schedule D as trade receipts.
In Commercial Properties Ltd. v. Commissioner of Income-tax income derived from rents by a company
whose sole object was to acquire lands, build houses and let them to tenants
and whose sole business was management and collection of rents from the said
properties, was held assessable under section 9 and not under section 10 of
the Income-tax Act. It was observed in that cases that, merely because the
owner property, was a company incorporated with object of owning property, the
incidence of income derived from the property owned could not be regarded as
altered; the income came more directly and specifically under the head
"property" than income from business.
(18) RB Jodhamal Kuthiala v. CIT. AIR 1972 SC 126
The assessee was a, registered
firm deriving income from securities,
property, business and other- sources. In 1946 it purchased a hotel in 'Lahore Pakistan ,
Lahore became a part of Pakistan Pakistan Pakistan
HELD : Under the Pakistan
Section 9 of the Income-tax Act,-
1922, brings to tax the income from
property and. not the interest of a.
person in the property. A property cannot
be owned by two persons, each one having independent and exclusive right over
it. Hence for the purpose of s. 9 the
owner must be that person who can exercise the rights of the owner, not on
behalf of the owner but in his own right. Accordingly the assessee was not the owner of the property in question during the
relevant assessment years for the purpose of s. 9 of the Act.
It is true that equitable
considerations are irrelevant in interpreting tax laws. But those laws
like all other laws have to be interpreted reasonably and in consonance with
justice. If the thousands of evacuee who left practically all their
properties as well as businesses in Pakistan had
been considered as the owners of those properties and businesses as long as the
'ordinance' was in force then those unfortunate persons would have had to pay
income-tax on the basis of the annual letting value of their properties and on
the income, gains and properties of the business left by them in Pakistan
though they did not get a paisa out of those properties and business.
Fortunately no one in the past interpreted the law in the manner suggested by
the assessee.
Citations:-
The Official Assignee of Bengal
(Estate of Jnanendra Nath Praminik)
Official assignee of insolvent estate to be considered owner under
provisons of S9 IT Act, 1961.
Sir Currimbhoy Ebrahim Baronetcy Trust v CIT
Privy Council made this
observation: "In their Lordships" opinion the effect of the Act creating these trusts is not to give
the baronet for the time being any right to any part of the interest or
property specifically or any right which, even granting that the legal title is
not the only thing that can ever be looked at, would make it true to say that
any proportion of the interest is not 'receivable' or any proportion of the
property is not 'owned' by the incorporated trustees."
The Commisioner of Inland Revenue v Fleming
Respondent contended that the tax the trustee paid during his insolvency was on
his behalf and he should have the right to deduct his personal allowance from
the annual value of the properties. Rejecting this contention Lord President
observed:
"It is obvious that, unless
during the years in question the annual value of the properties was income of
the Respondent, he cannot have any claim to abatement of it for income-tax
purposes; and accordingly everything depends upon the soundness of the
proposition that the income consisting in the annual value of these properties
was truly income of the Respondent. I do not see how it can possibly be
so described. It was part of the income arising from the sequestrated
estates vested in the trustee for the Respondent's creditors. Any income that
did arise from those estates was income of the trustee as such, and he (and he
alone) had the right to put it into his pocket as income. It was not income
that went or could go into the pocket of the Respondent as income in any of the
years in question. How then can it be said to have reached his pocket as income on his
subsequent reinvestiture." For determining the person liable to pay tax, the test laid down by the court was to
find out the person entitled to that income
Amur Singh v Custodian Evacuee Property Punjab
All evacuee property is vested in the Custodian. But the evacuee has not
lost his ownership in it. The law
recognised his ultimate ownership subject to certain limitations. The evacuee
may come back and obtain return of his property, as also an account of the
management thereof by the Custodian
In Stroud's Judicial Dictionary various meanings of the word
"owner" are given.' It is not necessary for our present
purpose to examine what the word "owner" means in different contexts.
The meaning that we give to the word "owner"
in s. 9 must not be such as to make that provision capable of being made an
instrument of oppression
Raja P C Lal Choudhary v CIT – receiver of a property appointed by
court whether owner u/S 9 of the IT Act. Held not owner.
Nawab Bahadur of Murshirabad v CIT WB - Properties held by Nawab – taken over by
British – Handed back to Nawab on a settlement deed which indicated that he
shall not alienate the property without the permission of Governor of Bengal
– Held that he was owner u/S 9 of the IT
Act and liable to be assessed for IT.
Head D - Profits & Gains of Business & Profession (Ss 28 to
44) - Applicability - Deductions - Bad debts
Confine sections to case material
Section 28. PROFITS AND GAINS OF BUSINESS OR PROFESSION.
The following income shall be
chargeable to income-tax under the head "Profits and gains of business
or profession", - (i) The profits and gains of any business or
profession which was carried on by the assessee at any time during the previous
year;
(ii) Any compensation or other
payment due to or received by, - (a) Any person, by whatever name
called, managing the whole or substantially the whole of the affairs of an
Indian company, at or in connection with the termination of his management or
the modification of the terms and conditions relating thereto;
(b) Any person, by whatever name
called, managing the whole or substantially the whole of the affairs in India
(c) Any person, by whatever name
called, holding an agency in India for any part of the activities relating to
the business of any other person, at or in connection with the termination of
the agency or the modification of the terms and conditions relating thereto;
(d) Any person, for or in
connection with the vesting in the Government, or in any corporation owned or
controlled by the Government, under any law for the time being in force, of the
management of any property or business;
(iii) Income derived by a trade,
professional or similar association from specific services performed for its
members
(iiia) Profits on sale of a
licence granted under the Imports (Control) Order, 1955, made under the Imports
and Exports (Control) Act, 1947 (18 of 1947);
(iiib) Cash assistance (by
whatever name called) received or receivable by any person against exports
under any scheme of the Government of India
(iiic) Any duty of customs or
excise re-paid or re-payable as drawback to any person against exports under
the Customs and Central Excise Duties Drawback Rules, 1971;
(iv) The value of any benefit or
perquisite, whether convertible into money or not, arising from business or the
exercise of a profession;
(v) Any interest, salary, bonus,
commission or remuneration, by whatever name called, due to, or received by, a
partner of a firm from such firm :
Provided that where any interest,
salary, bonus, commission or remuneration, by whatever name called, or any part
thereof has not been allowed to be deducted under clause (b) Of section 40, the
income under this clause shall be adjusted to the extent of the amount not so
allowed to be deducted;
(vi) Any sum received under a
Keyman insurance policy including the sum allocated by way of bonus on
such policy.
Explanation : For the purposes of
this clause, the expression "Keyman insurance policy" shall have
the meaning assigned to it in clause (10D) of section 10.
Explanation 1 : Where speculative
transactions carried on by an assessee are of such a nature as to constitute a
business, the business (hereinafter referred to as "speculation
business") shall be deemed to be distinct and separate from any other
business.
Section 29. INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION,
HOW COMPUTED.
The income referred to in section 28
shall be computed in accordance with the provisions contained in sections 30 to
43D.
Section 30. RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR
BUILDINGS
In respect of rent, rates, taxes,
repairs and insurance for premises, used for the purposes of the business or
profession, the following deductions shall be allowed - (a) Where the premises are occupied by the assessee -
(i) As a tenant, the rent paid
for such premises; and further if he has undertaken to bear the cost of repairs
to the premises, the amount paid on account of such repairs;
(ii) Otherwise than as a tenant,
the amount paid by him on account of current repairs to the premises;
(b) Any sums paid on account of
land revenue, local rates or municipal taxes;
(c) The amount of any premium
paid in respect of insurance against risk of damage or destruction of the
premises.
Section 31. REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE.
In respect of repairs and insurance
of machinery, plant or furniture used for the purposes of the business or
profession, the following deductions
shall be allowed -
(i) The amount paid on account of
current repairs thereto;
(ii) The amount of any premium
paid in respect of insurance against risk of damage or destruction thereof.
Section 32. DEPRECIATION.
(1) In respect of depreciation of -
(i) Buildings, machinery, plant or
furniture, being tangible assets;
(ii) Know-how, patents,
copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or
after the 1st day of April, 1998, owned, wholly or partly, by the assessee and
used for the purposes of the business or profession, the following deductions
shall be allowed - (i) In the case of assets of an undertaking engaged
in generation or generation and distribution of power, such percentage on the
actual cost thereof to the assessee as may be prescribed;
(ii) In the case of any block of
assets, such percentage on the written down value thereof as may be prescribed]:
Provided that no deduction shall
be allowed under this clause in respect of - (a) Any motor car manufactured
outside India, where such motor car is acquired by the assessee after the 28th
day of February, 1975, unless it is used - (i) In
a business of running it on hire for tourists; or
(ii) Outside India
(b) Any machinery or plant if the
actual cost thereof is allowed as a deduction in one or more years under an
agreement entered into by the Central Government under section 42 ]
Provided further that where an
asset referred to in clause (i) or clause (ii), as the case may be, is acquired
by the assessee during the previous year and is put to use for the purposes of
business or profession for a period of less than one hundred and eighty days in
that previous year, the deduction under this sub-section in respect of such
asset shall be restricted to fifty per cent of the amount calculated at the
percentage prescribed for an asset under clause (i) or clause (ii), as the
case may be :
Provided also that where an asset
being commercial vehicle is acquired by the assessee on or after the 1st day of
October, 1998 but before the 1st day of April, 1999 and is put to use before
the 1st day of April, 1999 for the purposes of business or profession, the
deduction in respect of such asses shall be allowed on such percentage on the
written down value thereof as may be prescribed.
Explanation : For the purposes of
this proviso, - (a) The expression "commercial vehicle" means
"heavy goods vehicle", "heavy passenger motor vehicle",
"light motor vehicle", "medium goods vehicle" and
"medium passenger motor vehicle" but does not include "maxi-cab",
"motor-cab", "tractor" and "road-roller";
(b) The expression "heavy
goods vehicle", "heavy passenger motor vehicle", "light
motor vehicle", "medium goods vehicle", "medium passenger
motor vehicle", "maxi-cab", "motor-cab",
"tractor" and "road roller" shall have the meanings
respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988
(59 of 1988).
Provided also that, in respect of
the previous year relevant to the assessment year commencing on the 1st day of
April, 1991 the deduction in relation to any block of assets under this clause
shall, in the case of a company, be restricted to seventy-five per cent of the
amount calculated at the percentage, on the written down value of such assets,
prescribed under this Act immediately before the commencement of the Taxation
Laws (Amendment) Act, 1991.
Provided also that the aggregate
deduction, in respect of depreciation of buildings, machinery, plant or
furniture, being tangible assets or know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of similar nature,
being intangible assets allowable to the predecessor and the successor in the
case of succession referred to in clause (xiii) and clause (xiv) of section 47
or section 170 or to the amalgamating company and the amalgamated company in
the case of amalgamation, as the case may be, shall not exceed in any previous
year the deduction calculated at the prescribed rates as if the succession had
not taken place, and such deduction shall be apportioned between the
predecessor and the successor, or the amalgamating company and the amalgamated
company, as the case may be, in the ratio of the number of days for which the
assets were used by them.
Explanation 1 : Where the business or profession of the assessee is carried on
in a building not owned by him but in respect of which the assessee holds a
lease or other right of occupancy and any capital expenditure is incurred by
the assessee for the purposes of the business or profession on the construction
of any structure or doing of any work in or in relation to, and by way of
renovation or extension of, or improvement to, the building, then, the
provisions of this clause shall apply as if the said structure or work is a
building owned by the assessee.
Explanation 2 : For the purposes of this clause "written down value of the
block of assets" shall have the same meaning as in clause (c) of
sub-section (6) of section 43;
Explanation 3 : For the purposes of this sub-section, the expressions
"assets" and "block of assets" shall mean - (a) Tangible
assets, being buildings, machinery, plant or furniture;
(b) Intangible assets, being
know-how, patents, copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature.
Explanation 4 : For the purposes of this sub-section, the expression
"know-how" means any industrial information or technique likely to
assist in the manufacture or processing of goods or in the working of a mine,
oil-well or other sources of mineral deposits (including searching for
discovery or testing of deposits for the winning of access thereto);
(iii) In the case of any
building, machinery, plant or furniture in respect of which depreciation is
claimed under clause (i) and which is sold, discarded, demolished or destroyed
in the previous year (other than the previous year in which it is first brought
into use), the amount by which the moneys payable in respect of such building,
machinery, plant or furniture, together with the amount of scrap value, if any,
fall short of the written down value thereof:
Provided that such deficiency is
actually written off in the books of the assessee.
Explanation : For the purposes of
this clause, - (1) "Moneys payable" in respect of any building,
machinery, plant or furniture includes - (a) Any insurance, salvage or
compensation moneys payable in respect thereof;
(b) Where the building,
machinery, plant or furniture is sold, the price for which it is sold, so,
however, that where the actual cost of a motor car is, in accordance with the
proviso to clause (1) of section 43, taken to be twenty-five thousand rupees,
the moneys payable in respect of such motor car shall be taken to be a sum
which bears to the amount for which the motor car is sold or, as the case may
be, the amount of any insurance, salvage or compensation moneys payable in
respect thereof (including the amount of scrap value, if any) the same
proportion as the amount of twenty-five thousand rupees bears to the actual
cost of the motor car to the assessee as it would have been computed before
applying the said proviso;
(2) "Sold" includes a
transfer by way of exchange or a compulsory acquisition under any law for the
time being in force but does not include a transfer, in a scheme of
amalgamation, of any asset by the amalgamating company to the amalgamated
company where the amalgamated company is an Indian company.
(2) Where in the assessment of
the assessee full effect cannot be given to any allowance under clause (ii) of
sub-section (1) in any previous year owing to there being no profits or
gains chargeable for that previous year or owing to the profits or gains being
less than the allowance, then, the allowance or the part of allowance to which
effect has not been given (hereinafter referred to as unabsorbed depreciation
allowance), as the case may be, - (i) Shall be set off against the
profits and gains, if any, of any business or profession carried on by him and
assessable for that assessment year;
(ii) If the unabsorbed
depreciation allowance cannot be wholly set off under clause (i), the amount
not so set off shall be set off from the income under any other head, if any,
assessable for that assessment year;
(iii) If the unabsorbed
depreciation allowance cannot be wholly set off under clause (i) and clause
(ii), the amount of allowance not so set off shall be carried forward to the
following assessment year and - (a) It shall be set off against the profits and
gains, if any, of any business or profession carried on by him and assessable
for that assessment year;
(b) If the unabsorbed
depreciation allowance cannot be wholly so set off, the amount of unabsorbed
depreciation allowance not so set off shall be carried forward to the following
assessment year not being more than eight assessment years immediately
succeeding the assessment year for which the aforesaid allowance was first
computed :
Provided that the business or
profession for which the allowance was originally computed continued to be
carried on by him in the previous year relevant for that assessment year :
Provided further that the time
limit of eight assessment years specified in sub-clause (b) shall not apply in
the case of a company for the assessment year beginning with the assessment
year relevant to the previous year in which the said company has become a sick
industrial company under sub-section (1) of section 17 of the Sick Industrial
Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the
assessment year relevant to the previous year in which the entire net worth of
such company becomes equal to or exceeds the accumulated losses.
Explanation : For the purposes of
this clause, "net worth" shall have the meaning assigned to it in
clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies
(Special Provisions) Act, 1985 (1 of 1986).
32A Investment
Allowance.
32AB Investment
deposit account.
33 Development
Rebate.
33A Development
Allowance.
33AB Tea
Development Account.
33ABA Site Restoration fund.
33AC Reserves
for Shipping Business.
33B Rehabilitation
Allowance.
34 Conditions
for depreciation allowance and development rebate.
34A Restriction
on unabsorbed depreciation and unabsorbed investment allowance for limited
period in case of certain domestic companies.
35 Expenditure
on scientific Research.
35A Expenditure
on Acquisition of Patent Rights or Copyrights.
35AB Expenditure
on Know-How.
35ABB Expenditure for Obtaining licence to operate Telecommunication
Services.
35AC Expenditure
on Eligible projects or schemes.
35B Omitted.
35C Omitted.
35CC Omitted.
35CCA Expenditure by way of payment to associations and institutions for
carrying out rural development programmes.
35CCB Expenditure by way of payment
to association and institutions for carrying out programmes of
conservation of natural resources.
35D Amortisation
of certain preliminary expenses.
35DD Amortisation
of expenditure in case of amalgamation or demerger.
35E Deduction
for expenditure on prospecting, etc., for certain minerals.
36 Other
Deductions.
37 General.
(1) Any expenditure (not being
expenditure of the nature described in sections 30 to 36 and not being in the
nature of capital expenditure or personal expenses of the assessee), laid out
or expended wholly and exclusively for the purposes of the business or
profession shall be allowed in computing the income chargeable under the head
"Profits and gains of business or profession".
Explanation : For the removal of
doubts, it is hereby declared that any expenditure incurred by an assessee for
any purpose which is an offence or which is prohibited by law shall not be
deemed to have been incurred for the purpose of business or profession and no
deduction or allowance shall be made in respect of such expenditure.
(2B) Notwithstanding anything
contained in sub-section (1), no allowance shall be made in respect of
expenditure incurred by an assessee on advertisement in any souvenir, brochure,
tract, pamphlet or the like published by a political party.
38 Building,
etc., Partly used for business, etc., or not exclusively so used.
39 Omitted.
40 Amounts
not Deductible.
40A Expenses
or Payments not deductible in certain circumstances.
41 Profits
chargeable to tax.
42 Special
provision for deductions in the case of business for prospecting, etc., for
mineral oil.
43 Definitions
of certain terms relevant to income from profits and gains of business or
profession.
43A Special
provisions consequential to changes in rate of exchange of currency.
43B Certain
deductions to be only on actual payment.
43C special
provision for computation of cost of acquisition of certain assets.
43D Special
provision in case of income of public financial institutions, etc.
44 Insurance
Business.
(19) B.D. Bharucha v. CIT., AIR 1967 SC 1505
The appellant, who was carrying on
the business of financing film producers
and distributors, had advanced a sum of Rs. 1,00,000 to a firm of film
distributors. Clause 3 of the agreement between the parties provided
that the appellant was not entitled to any interest but that he was to share
with the distributors their profit and loss; and cl. 7 provided that in case the picture was not
released within the stipulated time, the distributors would return to the appellant
all the moneys advanced by
him together with interest at 9% per annum. There was delay in releasing
the picture and a dispute arose between the appellant and the distributors,
which was settled. The appellant found that a sum of Rs. 80,759 was
irrecoverable. He accordingly wrote it off as a bad debt and claimed it as a revenue loss which
should be deducted under s. 10(2)(xi) of the Income-tax Act, 1922. The department,
the Appellate Tribunal, and the High
Court on reference, held against the appellant, on the basis of cl. 3 of
the agreement, that the loss suffered by the appellant was a capital
loss.
In appeal to this Court,
HELD : Since all payments reduce capital one is apt to consider a loss
as a capital loss. But losses in the
running of a business cannot be said to be of capital. To find out
whether an expenditure is on the capital account or on revenue account, one
must consider the expenditure in relation to the business. In the present case,
the debt was in respect of and
incidental to the business of the appellant in the relevant accounting year,
and the accounts of his business were kept on mercantile basis. If cls. 3 and 7 of the agreement are read together, the transaction would be a money-lending transaction or a transaction in the nature of a financial
deal in the course of the
appellant's business, resulting in a loan repayable with interest.
Therefore, the loss suffered was a
revenue loss and the appellant was entitled to claim the deduction of the
amount as a bad debt under s. 10(2) (xi) of the Act
Citations:-
Reid's Brewery Co Ltd v Male
The Brewery Company carried on, in addition to the business of a brewery, a
business of bankers and moneylenders making loans and advances to their
customers. This helped the customers
in pushing sales of the product of the brewery company. Certain sums bad to be written off and the amount
was held to be deductible. In the course of his judgment Pollock B. said : "Of course, if it be capital invested, then
it comes within the express provision of the Income-tax Act, that no deduction is to be made on that
account." but held that :
Business can doubt that this is not capital invested. It is capital used by the Appellants but used only in the sense
that all money which is laid out by persons who are traders, whether it be in
the purchase of goods be they traders alone, whether it be in the purchase of
raw material be they manufacturers, or in the case of money-lenders, be they
pawnbrokers or money- lenders, whether it be money lent in the course of their
trade, it is used and it comes out of capital, but it is not an investment in
the ordinary sense of the word."
(20) CIT v. Mysore Sugar Co. Ltd., AIR 1967 SC 723
The assessee company used to
purchase sugarcane from the sugarcane growers to prepare sugar in its factory,
in which a very large percentage of shares
was owned by the Government of Mysore. As a part
of its business operation it entered into written agreements with the sugarcane
growers and advanced them seedlings, fertilizers, and also cash. The cane growers entered into these
agreements known as "oppige"
by which they agreed to sell sugarcane exclusively to the assessee company at
current market rates and to have the advances adjusted towards the price. An
account of each "Oppigedar" was opened by the company. These
agreements were entered into for each crop. In the year 1948-49 due to
drought, the assessee company could not work its mills and the
"oppigedar" could not grow or deliver the sugarcane and thus the
advances made in the year remainded unrecovered. The-Mysore Government realising
the hardship appointed a committee to investigate the matter and make a report.
The Committee recommended that the assessee company should ex-gratia forgo some
of its dues, and in the year of account ending June 30, 1952, the company
waived its rights in respect of Rs. 2,87,422/-. The Company claimed this as a deduction
under s. 10 (2) (xi) and s. 10 (2) (xv) 'but the Income-Tax Officer declined to
make the deduction and the appeal before the Appellate Assistant Commissioner
also failed. The Tribunal was also of the opinion that these advances
were made to ensure to steady supply of quality surgarcane and the loss, if
any, must be taken to represent a capital loss and not a trading loss but
the tribunal referred the. question thereby arising for the decision of the
High Court. The High Court relying upon a decision of this Court in Badridas Daga v. Commissioner of Income-tax
held, that the expenditure was not in
the nature of a capital expenditure, but was a revenue expenditure and that
this amount was deductible in computing. the profits of the business for the
year in question under s. 10 (1) of the Income-tax Act.
The central point for decision in
the present case, was whether the money which was given up, represented a loss
of capital or must be treated as a revenue, expenditure. Held, that s. 10 (2) does not deal
exhaustively with the deductions which must be made to arrive at the true
profits and gains. It mentions certain deductions in cls. (i) to (xiv) and
if an expenditure comes within any of the enumerated classes of allowance the
case has to be considered under the appropriate class. Clause (xv) is a general
clause which allows an expenditure to be deducted, if laid out or expended
wholly and exclusively for the purpose of such business, which is not in the
nature of capital expenditure or personal expenses of the assessee. But the
general scheme of the section is that profits or gains must be calculated after
deducting outgoings reasonably attributable as business expenditure but not so
as to deduct any part of a capital expenditure. To find out whether an.
Expenditure is on the capital account or on revenue, one must consider the
expenditure in relation to the business. The questions to consider in
this connection are for what was the money laid out ? Was it to acquire an
asset of an enduring nature for the
benefit of the business, or was it an outgoing in the doing of business ?
If money be lost in the first circumstance it, is a loss of capital, but it
lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an
investment, but in the second, it bears the character of current expenses.
Held, in this case, there was hardly any element of investment which
contemplate more than payment of advance price. The resulting loss to the
assessee company was just as much a loss on the revenue side as would have
been, if it had paid for the ready crop which was not delivered,
Citations:-
Badridas Daga v CIT – Case on which
the decision of the present case was relied on.
English Crown Spelter Co Ltd v Baker
The English Crown Spelter Co.
carried on the business of zinc smelting for which it required large
quantities of 'blende'. To get supplies of blende, a new Company called
the) Welsh Crown Spelter 'Company was
formed, which received-assistance from the English Company in the shape of
advances on loan. Later, the English Company was required to write off
pound 38,000 odd. The question arose whether the advance could be said
to be an investment of capital, because if they were, the English
Company would have no right to deduct the amount. If on the other hand, it
was money employed for the business it could be deducted... Bray, J. who considered these questions, observed: "If this were an
ordinary business transaction of a contrary by which the Welsh Company were to
deliver certain trend, it may be at prices to be settled hereafter, and that
this was really nothing more than an advance on account of the price of that
blend, there "would be a great deal to be said in favour of the Appellants
It is impossible to look upon this as an
ordinary business transaction of an advance against goods to be delivered I can
come to no other conclusion but that this was an investment of capital in the
Welsh Company and was not an ordinary trade transaction of an advance against
goods."
Charles Marsden & Sons Ltd v Commissioner of Inland Revenue
is under the Excess Profits Duty in England
Reid's Brewery Co Ltd v Male
The Brewery Company carried on, in addition to the business of a brewery, a
business of bankers and moneylenders making loans and advances to their
customers. This helped the customers
in pushing sales of the product of the brewery company. Certain sums bad to be written off and the amount
was held to be deductible. In the course of his judgment Pollock B. said : "Of course, if it be capital invested, then
it comes within the express provision of the Income-tax Act, that no deduction is to be made on that
account." but held that :
Business can doubt that this is not capital invested. It is capital used by the Appellants but used only in the sense
that all money which is laid out by persons who are traders, whether it be in
the purchase of goods be they traders alone, whether it be in the purchase of
raw material be they manufacturers, or in the case of money-lenders, be they
pawnbrokers or money- lenders, whether it be money lent in the course of their
trade, it is used and it comes out of capital, but it is not an investment in
the ordinary sense of the word."
It was thus held to be a use of
money in the course of the Company's business, and not an investment of capital
at all
Business Expenditure - Allow
ability - Test of distinctions bw Business expenditure & Capital
Expenditure ( Sec 37(1) )
(21) CIT v. Travancore Sugar &
Chemicals Ltd., AIR 1973 SC 982 (Omitted)
(22) Empire Jute Co. v. CIT., AIR 1980 SC 1946
Jute manufacturer association – Sale
(i) Purchase of loom hours
enabled assessee to work its loom for longer hours than permitted under the
‘Working Time Agreement’ & thus increase its profitability, but no
new assets were created, nor was there addition to or expansion of
profit making apparatus. The income earning machine remained what it was
before the purchase of loom hours, only it enabled the assessee to operate them
for more number of hours – this advantage was clearly not of a enduring nature.
(ii) The payment made by the
assessee for such purchase of loom hours would also form part of the cost of
operating the profit making structure and hence revenue in character. The amount paid was a consideration for
being able to work looms for longer hours therefore the payment was not of a
capital nature.
(iii) A common test to
distinguish between capital and revenue expenditure is the “test of enduring benefit”. Expenditure made to bring into existence an
asset advantage of enduring benefit is usually treated as capital expenditure.
(iv) There may be cases where
expenditure, even if incurred for obtaining an advantage of enduring benefit
may nonetheless be on revenue account and the test of enduring benefit may
break down.. What is material is the nature of the advantage in a
“commercial sense” and it is only
when the advantage is in the capital field that the expenditure would be
capital in nature. The advantage consists of merely in facilitating the
assessee’s trading operations (day to day) or enabling the management and
conduct of his business to be carried on more efficiently/profitably, while
leaving the fixed capital untouched then the expenditure would be on revenue
account even though the advantage may endure for an indefinite nature.
1. An expenditure incurred by an
assessee can qualify for deduction under section 10(2)(xv) only if it is
incurred wholly and exclusively for the purpose of his business, but even
if it fulfills this requirement, it is not enough; it must further be of
revenue as distinguished from capital nature
2. Maheshwari Devi Jute Mills' case was a converse case where the question was whether an amount received
by the assessee for sale of loom hours was m the nature of capital receipt or
revenue receipt and the Supreme
Court took the view that it was in the nature of capital receipt and hence not
taxable. The decision in Maheshwari Devi Jute Mills' case cannot on this
account be regarded as an authority for the proposition that payment made by an
assessee for purchase of loom hours would be capital expenditure, because it is
not a universally true proposition that what may be capital receipt in the
hands of the payee must necessarily be capital expenditure in relation to the
payer. The fact that a certain payment constitutes income or capital
receipt in the hands of a recipient is not material in determining whether the
payment is revenue or capital disbursement qua the payer. Whether it is
capital expenditure or revenue expenditure would have to be determined having
regard to the nature of the transaction and other relevant factors.
CIT v Maheshwari Devi Jute Mills – receipt on account of sale of
loom hours is a capital receipt.
Atherton v British Insulated Halsby Cables Ltd - test of enduring benefit.
John Smith & Son v Moore- Lord Haldane :- "Fixed capital(is)
what the owner turns to profit by keeping it in his own possession; circulating
capital (is) what he makes profit of by parting with it and letting it change
masters."
Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd
The facts of this case were that three
companies which were engaged in the business of copper mining formed a group
and consequent on a steep fall in- the price of copper in the world market,
this group decided voluntarily to cut its
production by 10 % which for the three companies together meant a cut of 27000
tons for the year in question. It was agreed between the three companies
that for the purpose of giving effect to this cut, company should cease
production for one year and that the assesses company and company R should
undertake between them the whole group programme for the year reduced by the
overall cut of 27000 tons and should pay compensation to company for the
abandonment of its production for the year. Pursuant to this agreement the
assessee paid to company 1,384,565 by way of its proportionate share of the
compensation and the question arose whether this payment was in the nature of
capital expenditure or revenue expenditure. The Privy Council, held that the compensation paid by the
assessee to company in consideration of the latter agreeing to cease production
for one year was in the nature of revenue expenditure and was allowable as a
deduction in computing the taxable income of the assessee.
Hallstrom's Property Ltd v Federal Commissioner of Taxation: Dixon J Ã "What
is an outgoing of capital and what is an outgoing on account of revenue depends
on what the expenditure is calculated to effect from a practical and business point of view rather
than upon the justice classification of the legal rights, if any, secured,
employed or exhausted in the process."
Robert Aldie & Son's Callieries Ltd v I.R – Lord Clyde :- "Is it part of the company's working expenses, is it
expenditure laid out as part of the process of profit earning ? or, on the
other hand, is it a capital outlay, is it expenditure necessary for the
acquisition of property or of rights of permanent character, the possession of
which is a condition of carrying on its trade at all ?"
Commissioner of Taxes v Canon Company
***
(23) L.B. Sugar Factory & Oil Mills (P.) Ltd v. CIT
Facts n Issue- Company carrying
on a business of manufacture and sale of sugar contributed Rs 50,000 to the
State Government towards a meeting a ‘Sugar Development Scheme’ promoted by the
State Government. Under it the expenses on constructing the roads were
to be shared equally by the Central Govt , the
State Govt, and the sugarcane growers and sugar factory owners. Issue was whether the contribution made by
the assessee company may be treated as revenue expenditure or capital
expenditure.
Obserbations: Construction of road -> benefit of enduring nature but no acquiring
of any tangible or intangible asset by assessee. Expenditure on creation of a capital asset is capital expenditure only
when the capital asset belongs to the assessee. Thus roads built were acquired by the Government and the expenditure was of
the nature of revenue therefore deduction allowable u/S 37(1) IT Act.
Citations:-
British Insulated & Helsby
Cables Ltd v Atherton:- (discussed
above)
Commissioner of Taxes v Nchanga
Consolidated Copper Mines Ltd (discussed above)
Empire Jute Co. v. CIT: - discussed
above
Purchase of loom hours revenue expenditure.
Lakshmiji Sugar Mills Co v CIT - The
facts of this case were very similar to the facts of the present case. The assessee
in this case was also a limited company carrying on business of manufacture and
sale of sugar in the State of Uttar Pradesh and it paid to the Cane Development
Council certain amounts by way of contribution for the construction and development of roads between
sugarcane producing centres and the sugar factory of the assessee and the
question arose whether this expenditure was allowable as revenue expenditure
under S. 10(2)(xv). No doubt, in this case, there was a statutory obligation
under which the amount in question was contributed
by the assessee, but this Court did not rest its decision on the circumstance
that the expenditure was incurred under statutory obligation. This Court
analysed the object and purpose of the expenditure and its true nature and
held that it was of a revenue and not capital nature.
This Court observed : "In the present case, apart from the element of compulsion,
the roads which were constructed and developed were not the property of the
assessee nor is it the case of the revenue that the entire cost of development
of those roads was defrayed by the assessee. It only made certain contribution
for road development between the various cane producing centres and the mills.
The apparent object and purpose was to facilitate the running of its motor
vehicles or other means employed for transportation of sugarcane to the
factory. From the business point of view and on a fair appreciation of the whole situation the assessee considered
that the development of the roads in question could greatly facilitate the transportation
of sugarcane. This was essential for the benefit of its business which was of
manufacturing sugar in which the main
raw material admittedly consisted of sugarcane. These facts would bring it
within the second part of the principle mentioned before, namely, that the
expenditure was incurred for running the business or working it with a view to produce the profits without the assessee getting any
advantage of an enduring benefit to itself. These observations are
directly applicable in the present case and we must hold on the analogy of this
decision that the amount of Rs. 50,000 was contributed by the assessee
"for running the business or working it with a view to produce the profits without the assessee getting any
advantage of an enduring benefit to itself". This decision fully
supports the view that the expenditure of the amount of Rs. 50,000 incurred by
the assessee was on revenue account.
Travancore-Cochin Chemicals Ltd v CIT
- ***
(24) CIT v. Jalan Trading Co (Pvt)
Ltd (1985) 155 ITR 536 (SC) (Omitted)
Citations:-
Travancore-Sugar & Chemicals Ltd
v CIT
Assam Bengal Cement Co Ltd v CIT
Benarsidas Jagannath In Re
Seth Motilal Manekchand v CIT
(25) Bikaner Gypsons Ltd v. CIT., AIR 1991 SC 227
Facts n Issue: Mining lease given
to appellant company and there were railway station yard and quarters on the
area leased. There was a restriction in lease on mining operations near
areas occupied by the Railway. Appellant company paid Rs 3 Lakhs to
railway for relocation. Company claimed the sum paid as revenue
expenditure. TC & HC held it as capital expenditure. SC held it was revenue expenditure as
purpose was removal of disabilities & therefore a revenue expenditure. Observed
that when assessee has an existing right
to carry on a business for the removal of restriction or obstruction or
disability would be on revenue account, provided no capital asset
acquired in the process. Payments made for removal of restriction,
obstruction or disability may result in acquiring benefits to the business, but
that by itself would not acquire any capital asset. The test of enduring benefit is not always true & conclusive.
Assam Bengal Cement Co Ltd v CIT – Word enduring is not synonymous with the word
everlasting. Acquiring monopoly
rights for a period can also be capital expenditure. Also the expenditure incurred by the assessee
which gives him a right to carry on a particular business will be capital
expenditure.
K.T.M.T.M Abdul Kayoom v CIT
(a) None of the tests laid down in various authorities is exhaustive or
universal
(b) Each case depends on its own facts. To decide which side of the
line a case falls, its broad resemblance to another case is not at all decisive.
(c) To arrive at the correct decision,
regard must be had to
(i) nature of business of the assessee
(ii) nature of expenditure made by assessee
(iii) nature of right/advantage acquired by the expenditure and
(iv) Its relation to capital expenditure.
Bombay Steam Navigation Cp Pvt Ltd v
CIT
RB Seth Moolchand Suganchand v CIT – Exp
for acquiring mining rights for 20 years à capital expense but if
mineral already on surface – the right to acquire it will be of revenue
expenditure.
British Insulated & Helsby
Cables Ltd v Atherton (test given above)
Gotan Lime Syndicate v CIT
MA Jabbar v CIT – Expenditure incurred for acquiring right to take away sand from surface
of river beds has been treated as if sand was stock-in-trade(rev exp).
Commissioner of Inland Revenue v
Carron Company
Empire Jute Company v CIT
(26) CIT v. General Insurance Corporation, 2007 (1) SCJ 800
Are expenditure incurred by a company on account of stamp duty and
registration fees for the issue of bonus shares allowable as revenue
expenditure?
The Supreme Court observed that
there is no inflow of fresh funds or
increase in capital employed on account of issue of bonus shares. There is merely a reallocation of company’s fund
on account of issue of bonus shares by capitalization of reserves.
Therefore, the company has not acquired
a benefit or advantage of enduring nature. The total funds available
with the company will remain the same and there is no change in the capital
structure of the company consequent to the bonus issue. Thus, issue of bonus
shares does not result in the expansion of capital base of the company.
Therefore, the expenditure incurred by the company on account of stamp duty and
registration fees for the issue of bonus shares is allowable as revenue expenditure.
Note - While arriving at this decision,
the Supreme Court considered the effect of issue of bonus shares on the
capital employed i.e. share capital plus reserves and not merely on capital
alone. It may be noted that though bonus issue increases the capital of
the company, the capital employed is left intact. This decision of the Apex Court
Citations:-
Bombay Burma Trading Corp Ltd v CIT
***
Richardson Hindustan Ltd v CIT ***
Brooke Bond India Ltd v CIT – Issuance of shares by assessee company with
a view to increase its capital amounts to capital expenditure and not revenue
expenditure. In this case the assessee company issued fresh lot of
shares with the object of having more working funds and earning more profits.
Punjab State Industrial Development Corpn Ltd v CIT – Held that fee paid to
the registrar for expansion of capital base of the company was directly related to the capital base of the
company and was directly capital expenditure incurred by the company and
although incidentally that would help in the company’s business & may also
help in profit making, it still retains the character of a capital expenditure
since the expenditure was directly related to the expansion of the capital base
of the company.
CIT v Motor Industries Co. Ltd
CIT v Ajit Mills Ltd,
Gujarat Steel Tubes Ltd v CIT
Union Carbide India Ltd v CIT
CIT v Dalmia Investment Co Ltd – When bonus shares are issued in respect of
original shares held by a dealer in shares who values his stock at cost and the
bonus shares rank pari passu with the original shares, the correct method of
valuing the shares is to spread the cost of the original shares over the
original shares and the bonus shares collectively and ascertain the average
price of all the shares.
Wood Craft Products Ltd v CIT -
Empire Jute Co Ltd v CIT
Eisner v Macomber
Ahmedabad Mfg & Calico (P) Ltd v
CIT
Vazir Sultan Tobacco Co. Ltd v CIT
Head E - Capital Gains (Ss 45 to 55)
Definition of Capital assets [S2(14)];
Short Term Capital assets [S2(42A)];
Short Term Capital Gains [S2(42B)];
Long Term Capital assets & Long Term Capital Gains [S 2(29A)
& 2(29B)];
Meaning of Transfer [S 2(47)]
Computation (S45);
Transactions not amounting to transfer (Ss 46 & 47);
Mode of Computation (S48);
Meaning of 'adjusted', 'Cost of improvement' & 'Cost of
acquisition' (S 55)
(27) N. Bagavathy Ammal v. CIT., Madurai
Section 46(2), read with section 2(14), of the Income-tax Act, 1961 - Capital gains - Distribution of assets by companies in
liquidation - Assessment year 1970-71 - Whether word ‘assets’ in section 46(2)
means ‘capital assets’ as defined in section 2(14) - Held, no - Whether agricultural land would have been a ‘capital
asset’ but for exclusion from definition of ‘capital asset’ and what is not a
capital asset may yet be an asset for purposes of section 46(2) - Held, yes - Whether to extent that a
shareholder-assessee receives assets, whether capital or any other, from
company in liquidation, assessee is liable to pay tax on market value of assets
as on date of distribution as provided under section 46(2) - Held, yes - Words & phrases - ‘Asset’
as occurring in section 46(2) of Income-tax Act, 1961
FACTS
The assessees were shareholders
in a company which went into liquidation. Pursuant to a compromise decree in
litigation between the assessees and the company represented by the liquidator,
the assets of the company including agricultural lands were distributed to the
assessees. In the assessment proceedings, the assessees contended that in terms
of section 2(14) agricultural lands were to be excluded while computing capital
gains on assets received by the shareholder from a company in liquidation under
section 46(2). That contention was not accepted as, according to the
Assessing Officer, section 46(2) refers only to money received on liquidation
or the market value of the assets on the date of distribution and it was
immaterial whether the asset was agricultural land or otherwise. The value of
the share of agricultural lands transferred to each assessee was, therefore,
included as income subject to capital gains and subjected to tax. The Commissioner
(Appeals) allowed the assessees’ appeals. The Tribunal upheld the order of the
Commissioner (Appeals).
On reference, the High Court
reversed the decision of the Tribunal and held that the definition of ‘capital
assets’ under section 2(14) is not of any relevance for the purpose of
construing section 46(2), and the fact that agricultural lands to the extent
provided in section 2(14)(c) are excluded from the definition, did not have any
impact on the taxability of the market value of the agricultural lands received
by the assessee on the distribution of the assets of a company in liquidation.
HELD
Section 46(2) is in terms an
independent charging section. It also provides
for a distinct method of calculation of capital gains. The section does
not make any reference to capital assets either in connection with the
imposition of capital gains tax nor its computation.
Having referred to ‘capital asset’
in sections 45(1), 47 and 48, Parliament appears to have deliberately chosen
to use the word ‘asset’ in section 46(1) and (2), the ostensible intention
being to bring assets of all kinds within the scope of the charge. It is not
necessary to refer to a dictionary to hold that capital assets are a species of
the genus ‘assets’. If the words ‘capital assets’ and ‘assets’ as used in
sections 45(1) and 46, respectively, do not overlap, then there is no need to
provide for a non obstante clause in section 46(1) with reference to section
45. Agricultural land would have been a ‘capital asset’ but for the exclusion
from the definition of ‘capital asset’ and what is not a capital asset may yet
be an asset for the purposes of section 46(2).
Therefore, to the extent that a shareholder assessee receives assets, whether
capital or any other, from the company in liquidation, the assessee is liable
to pay tax on the market value of the assets as on the date of the distribution
as provided under section 46(2). That appears to be the plain meaning of the
section and there is no reason to construe it in any other fashion. The
invocation of section 2(14) which defines ‘capital asset’ is as such
unnecessary for the purpose of construing section 46(2).
Accordingly, the appeal was to be
dismissed.
Citations:-
CIT, Madras v Madurai Mills Co. Ltd
Held that when a shareholder
receives money representing his share on distribution of the net assets of the
company in liquidation, he receives that money in satisfaction of the right
which belonged to him by virtue of his holding the shares and not by operation
of any transaction which amounts to sale, exchange, relinquishment or transfer
within the meaning of section 12B of the Act.
Head F: Income from other sources (Ss 56 to 59)
(28) CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC)
Allowable expenditure-Whether interests on monies borrowed for
investment in shares is allowable expenditure, when the shares have not yielded
any return in the shape of dividend during the relevant assessment
year-Interpretation of Sec. 57(iii) of Income-tax Act. 1961.
The respondents assessees in the two
references are brothers and each of them had borrowed monies for the purpose of making investments in
shares of certain companies and during the assessment year 1965-66 for which the relevant accounting year ended on 10th
April 1965, each of the two assessees paid interest on the monies borrowed but
did not receive any dividend on the shares purchased with those monies. Each of
the two assessees made a claim for
deduction of the amount of interest paid on the
borrowed monies but this claim was
negatived by the Income Tax Officer and on appeal by the Appellate Assistant
Commissioner on the ground that during the relevant assessment year the shares did not yield any
dividend and, therefore, interest paid on the borrowed monies could not be
regarded as expenditure laid out or expended wholly and exclusively fo the
purpose of making or
earning income chargeable under the head "Income From Other Source"
so as to be allowable as a permissible deduction under Sec. 57(iii). The
Tribunal, however on further appeal, disagreed with the view taken by the
Taxing Authorities and upheld the claim of each of the two assessees for
deduction under Sec. 57(iii).
Answering in favour of the assessees and against the Revenue the
question in the references the Court, ^
HELD : (1) The plain and natural construction of the language of Sec.
57(iii) of the Income Tax Act 1961 irresistibly leads to the conclusion that to
bring a case within the section, it is not
necessary that any income should in fact have been earned as a result of the
expenditure. What Sec. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose
of making or earning income. It is the purpose
of the expenditure that is relevant in determining the applicability of Sec.
57(iii) and that purpose must be making or earning of income. Sec.
57(iii) does not require that this purpose must be fulfilled in order to
qualify the expenditure for deduction. It does not say that the
expenditure shall be deductible only if any income is made or earned. There
is in fact nothing in the language of Sec. 57(iii) to suggest that the
purpose for which expenditure is made should fructify into any benefit.
(2) The contention of the Revenue
that the expenditure would disqualify for deduction only if no income results
from such expenditure in a particular assessment year but, if there is some
income, however small or meagre, the expenditure would be eligible for
deduction, would lead to a strange and highly anomalous result and the
legislature could never have intended to produce such illogicality.
Moreover when a profit and loss account is cast in respect of any source of
income what is allowed by the statute as proper expenditure would be debited as
an outgoing and income would be credited as a receipt and the resulting income
or loss would be determined. It would make no difference to this process
whether the expenditure is x or y or nil; whatever is the proper expenditure
allowed by the statute would be debited. Equally, it would make no difference whether there is any income and
if so, what, since whatever it be, x or y or nil would be credited. And the
ultimate profit or loss would be found. Whatever is proper outgoing by way of expenditure must be debited irrespective
whether there is receipt of income or not. That is the plain requirement
of proper accounting and the interpretation of Sec. 57(iii) cannot be different.
The deduction of the expenditure cannot, in the circumstances be held to be
conditional upon the making or earning of the income.
(3) It is true that the language
of Sec. 37(i) of the Act is a little wider than that of Sec. 5(iii). But
that cannot make any difference in the true interpretation of Sec. 57(iii).
The language of Sec. 57(iii) is clear and unambiguous and it has to be construed according to the plain natural meaning and merely
because a slightly wider phraseology is employed in another section which may
take in something more it
does not mean that Sec. 57(iii) should be given a narrow and constricted meaning not warranted by the language
of the section and in fact
contrary to such language. This view also accords with the principles of
commercial accounting.
Citations:-
Eastern Investment Ltd v CIT
Interpreting the corresponding
provision in section 12(2) of the Income Tax Act,
1922 which was ipsissima verba in
the same terms as section 57(iii), Bose,
J., speaking on behalf of the Court observed: "It is not necessary to show that the expenditure was a profitable
one or that in fact any profit was earned". It is indeed difficult
to see how, after this observation of the Court, there can be any scope for
controversy in regard to the interpretation of section 57(iii).
Lord Thankerton in Hughes v. Bank
of New Zealand where the learned Law Lord
said: "Expenditure in the course of the trade which is unremunerative
is none the less a proper deduction, if wholly and exclusively made for the
purposes of the trade. It does not require the presence of a receipt on
the credit side to justify the deduction of an expense."
Maharajadhiraj Sir Kameshwar Singh v
CIT (overruled in this judgment)
Sohanlal v Madanlal CIT (overruled
in this judgment)
---
Topic 5 - Income of Other Persons included in Assessee's Total
Income (Ss 60 to 64)
Concept of Clubbing of Income - Justifiability - throwing of
separate property into the common stock of JHF & subsequent partition of the
same (S 64(2))
Section 60- TRANSFER OF INCOME WHERE THERE IS NO TRANSFER OF ASSETS.
All income arising to any person by
virtue of a transfer whether revocable or not and whether effected before or
after the commencement of this Act shall, where there is no transfer of the
assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be
included in his total income.
Section 61- REVOCABLE TRANSFER OF ASSETS.
All income arising to any person by
virtue of a revocable transfer of assets shall be chargeable to income-tax as
the income of the transferor and
shall be included in his total income.
Section 62- TRANSFER IRREVOCABLE FOR A SPECIFIED PERIOD.
(1) The provisions of section 61
shall not apply to any income arising to any person by virtue of a transfer -
(i) By way of trust which is not
revocable during the lifetime of the beneficiary, and, in the case of any other
transfer, which is not revocable during the life time of the transferee; or
(ii) Made before the day of April,
1961, which is not revocable for a period exceeding six years :
Provided that the transferor
derives no direct or indirect benefit from such income in either case.
(2) Notwithstanding anything
contained in sub-section (1), all income arising to any person by virtue of
any such transfer shall be chargeable to income-tax as the income of the
transferor as and when the power to revoke the transfer arises, and shall then
be included in his total income.
Section 63- "TRANSFER" AND "REVOCABLE TRANSFER"
DEFINED.
For the purposes of sections 60, 61
and 62 and of this section, -
(a) A transfer shall be deemed to be revocable
if -
(i) It contains any provision for the
re-transfer directly or indirectly of the whole or any part of the income or assets
to the transferor, or
(ii) It, in any way, gives the transferor a
right to re-assume power directly or indirectly over the whole or any part of
the income or assets;
(b) "Transfer" includes any
settlement, trust, covenant, agreement or arrangement
Section 64- INCOME OF INDIVIDUAL TO INCLUDE INCOME OF SPOUSE, MINOR
CHILD, ETC.
(1) In computing the total income of
any individual, there shall be included all such income as arises directly or
indirectly -
(ii) To the spouse of such
individual by way of salary, commission, fees or any other form of remuneration
whether in cash or in kind from a concern in which such individual has a
substantial interest:
Provided that nothing in this clause
shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional
qualification and the income is
solely attributable to the application
of his or her technical or professional knowledge and experience;
(iv) Subject to the provisions of
clause (i) of section 27, to the spouse of such individual from assets
transferred directly or indirectly to the spouse by such individual otherwise
than for adequate consideration or in connection with an agreement to live
apart;
(vi) To the son's wife, of such
individual from assets transferred directly or indirectly on or after the 1st
day of June, 1973, to the son's wife by such individual otherwise than for
adequate consideration;
(vii) To any person or
association of persons from assets transferred directly or indirectly otherwise
than for adequate consideration to the person or association of persons by such
individual to the extent to which the income from such assets is for the
immediate or deferred benefit of his or her spouse.
(viii) To any person or
association of persons from assets transferred directly or indirectly on or
after the 1st day of June, 1973, otherwise than for adequate consideration, to
the person or association of persons by such individual, to the extent to which
the income from such assets is for the immediate or deferred benefit of his
son's wife.
Explanation 1 : For the purposes
of clause (ii), the individual in computing whose total income the income
referred to in that clause is to be included, shall be the husband or wife
whose total income (excluding the income referred to in that clause) is
greater; and where any such income is once included in the total income of
either spouse, any such income arising in any succeeding year shall not be
included in the total income of the other spouse unless the Assessing Officer
is satisfied, after giving that spouse an opportunity of being heard, that it
is necessary so to do.
Explanation 2 : For the purposes
of clause (ii), an individual shall be deemed to have a substantial interest in
a concern -
(i) In a case where the concern
is a company, if its shares (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in profits)
carrying not less than twenty per cent of the voting power are, at any time during
the previous year, owned beneficially by such person or partly by such person
and partly by one or more of his relatives;
(ii) In any other case, if such
person is entitled, or such person and one or more of his relatives are
entitled in the aggregate, at any time during the previous year, to not less
than twenty per cent of the profits of such concern.
Explanation 3 : For the purposes
of clauses (iv) and (vi), where the assets transferred directly or indirectly
by an individual to his spouse or son's wife (hereafter in this Explanation
referred to as "the transferee") are invested by the transferee,
-
(i) In any business, such
investment being not in the nature of contribution of capital as a partner in a
firm or, as the case may be, for being admitted to the benefits of partnership
in a firm, that part of the income arising out of the business to the
transferee in any previous year, which bears the same proportion to the income
of the transferee from the business as the value of the assets aforesaid as on
the first day of the previous year bears to the
total investment in the business
by the transferee as on the said day;
(ii) In the nature of
contribution of capital as a partner in a firm, that part of the interest
receivable by the transferee from the firm in any previous year, which bears
the same proportion to the interest receivable by the transferee from the firm
as the value of investment aforesaid as on the first day of the previous year
bears to the total investment by way of capital contribution as a
partner in the firm as on the said day, shall be included in the total income
of the individual in that previous year.
(1A) In computing the total
income of any individual, there shall be included all such income as arises or
accrues to his minor child not being a minor child suffering from any
disability of the nature specified in section 80U:
Provided that nothing contained
in this sub-section shall apply in respect of such income as arises or accrues
to the minor child on account of any
(a) Manual work done by him;
or
(b) Activity involving
application of his skill, talent or specialised knowledge and experience.
Explanation : For the purposes of
this sub-section, the income of the minor child shall be included, -
(a) Where the marriage of his
parents subsists, in the income of that parent whose total income (excluding
the income includible under this sub-section) is greater; or
(b) Where the marriage of his
parents does not subsist, in the income of that parent who maintains the minor
child in the previous year, and where any such income is once included in the
total income of either parent, any such income arising in any succeeding year
shall not be included in the total income of the other parent, unless the
Assessing Officer is satisfied, after giving that parent an opportunity of
being heard, that it is necessary so to do.
(2) Where, in the case of an individual
being a member of a Hindu undivided family, any property having been the
separate property of the individual has, at any time after the 31st day of
December, 1969 been converted by the individual into property belonging to the
family through the act of impressing such separate property with the character
of property belonging to the family or throwing it into the common stock of the
family or been transferred by the individual, directly or indirectly, to the
family otherwise than for adequate consideration (the property so converted or
transferred being hereinafter referred to as the converted property) then, notwithstanding
anything contained in any other provision of this Act or in any other law for
the time being in force, for the purpose of computation of the total income of
the individual under this Act for any assessment year commencing on or after
the 1st day of April, 1971, -
(a) The individual shall be
deemed to have transferred the converted property, through the family, to the
members of the family for being held by them jointly;
(b) The income derived from the
converted property or any part thereof shall be deemed to arise to the
individual and not to the family;
(c) Where the converted property
has been the subject-matter of a partition (whether partial or total) amongst
the members of the family, the income derived from such converted property as is
received by the spouse on partition shall be deemed to arise to the spouse or
minor child from assets transferred indirectly by the individual to the spouse
and the provisions of sub-section (1) shall, so far as may be, apply
accordingly:
Provided that the income referred to
in clause (b) or clause (c) shall, on being included in the total income of the
individual, be excluded from the total income of the family or, as the case may
be, the spouse of the individual.
Explanation 1 : For the purposes
of sub-section (2), - "Property" includes any interest in property,
movable or immovable, the proceeds of sale thereof and any money or investment
for the time being representing the proceeds of sale thereof and where the
property is converted into any other property by any method, such other
property.
Explanation 2 : For the purposes
of this section, "income" includes loss.
(29) Philip John Plasket Thomas v. CIT., AIR 1964 SC 587
Clubbing applies only if the relationship of husband and wife exists
both at the time of transfer of assets as well as at the time of accrual of
income
Citations:-
Bhogilal Laherchand v CIT
CIT v Sodra Dev
Lord Vestey's Executors and Vestey v Commissioners of Inland Revenue - One of the questions which was considered was whether for the
purpose of either s. 18 of the Finance Act, 1936 (in England) or s. 38 of the Finance Act, 1938 (in England)
"wife" included a "widow." Their Lordships had to
consider the earlier decision of the Court of Appeal in Commissioners of Inland
Revenue v.Gaunt (2), which held that the one word included the other. Their Lordships
ultimately held, overruling the decision in Gaunt's case (1), that the
word "wife" did not include
a "widow." The English decisions proceeded on the footing that
in England
Commissioners of Inland Revenue v Gaunt (overruled by Vestey
Executors Case above)
(30) Batta Kalyani v. CIT (1985) 154 ITR 59
Assessee runs a h/w & paint shop – appoints husband as manager – is husband’s
income includible in assessee’s income u/ S64(1)(ii) of the IT Act? – Held
that income of husband to be clubbed
with income of assessee.
But held technical or
professional degree from a recognized institute not the only criteria for
satisfying the proviso to S64(1)(ii) knowledge
and experience if established is also enough. But nothing in this case to prove that the assessee’s husband had the
knowledge and skills for the job he was in.
S.64(1)(ii) of the Act. It may be
relevant to extract the same :
"(1) In computing the total
income of any individual, there shall be included all such income as arises
directly or indirectly - .....
(ii) to the spouse of such individual by way of salary, commission, fees or
any other form of remunerations whether in cash or in kind from a concern in
which such individual has a substantial interest :
Provided that nothing in this clause
shall apply in relation to any income arising to the spouse where the
spouse possesses technical or
professional qualifications and the income
is solely attributable to the applications of his or her technical or
professional knowledge and experience."
(31) J.M. Mokashi v. CIT (1994) 207 ITR 252 (Bom)
Assessee Physician &
Cardiologist, wife had passed 1st year of BA and was employed as
receptionist cum accountant @8100 INR pm as salary.
Held that wife’s salary to be clubbed
with assessee’s income u/S S64(1)(ii) of IT Act.
Citations:-
Batta Kalyani v CIT ( discussed
above)
CIT v Madhubala Shrenik Kumar - Held
that the words "technical or
professional qualifications" occurring in the proviso cannot be construed to mean obtaining a
degree or diploma from a recognised body.
Black's Law Dictionary – defn of
“concern” - To pertain, relate or belong to; be of interest or
importance to; have connection with; to have reference to; to involve; to
affect the interest of." - Observed
that word concern was of a wide import
– conveys different ideas and meanings – in S64(1) (ii) r/w explanation there to its clear that concern
includes company, firm, individual or any other entity carrying on business or
professional activity.
Black's Law Dictionary – defn of “qualification” - The possession by an individual of the qualities, properties,
or circumstances, natural or adventitious, which are inherently or legally
necessary to render him eligible to fill an office or to perform public duty or
office. . . ." But, the word "qualification"
in the proviso to section 64(1)(ii) if qualified by the words "technical
or professional". In that view of the matter, its broad meaning
will not be relevant for the present purpose. We have, in fact, to
ascertain the true meaning of "technical qualifications" or
"professional qualifications".
Black's Law Dictionary – defn of “technical” belonging or peculiar
to an art or profession".
Random House Dictionary – defn of “technical” - Pertaining to or
suitable for an art. .
Black’s Law – ‘profession’ a vocation or occupation requiring
special, usually advanced education, knowledge, and skill, e.g., law or medical
profession
Halsbury Law's of England – definition
of “profession” A profession involves an idea of an
occupation requiring either purely intellectual skill, or if any manual skill
is involved, as in painting, sculpture, or surgery, skill controlled by the
operator's intellectual skill, as distinguished from an occupation which is
substantially a production or sale or arrangement for the production or sale of
commodities. The word 'profession' is certainly wider than the old
definition of the learned professions - the church, medicine and law.
A company cannot carry on a profession.
"Though the word profession
now has a broader and more comprehensive meaning than formerly was accorded to
it and its signification now extends far beyond the well-known classical
professions of earlier days and as the applications of science and learning are
extended to other departments or affairs other vocations also receive the same
treatment, persons engaged in executive and clerical aspects of business
organizations, brokers, insurance agents, etc., are not held to be engaged in
the practice of a profession. (See Corpus Juris Secundum, Vol. 72).
The word "profession" still
retains its distinct character and does not take within its ambit any and every
activity or employment undertaken by a person for his livelihood.
CIT v D Rajagopal – Karnataka HC - held that
both the conditions of the proviso must be satisfied for excluding the income
of the spouse from the operation of section 64(1)(ii) of the Act.
Kamlabai Gurji (Smt) v CIT Madhya Pradesh High Court also held
that it was solely for the assessee to show that the salary received by her was
solely attributable to the application of her professional knowledge and
experience.
(32) Mohini Thapar (dead) by Lrs v. CIT (Central) Calcutta
Indirect
transfers are also covered - The net cast by
section 64(1)(iv) includes not merely income that arises directly from
the assets transferred but also that which arises indirectly from the assets
transferred.
Return on investment from money gifted to wife,
also taxable under S64.
Citations:-
CIT v Prem Bhat Parakh held
inapplicable in this case – minors admitted to partnership – their
income was held not includable in assessee’s income.
CIT v Keshavlal Lallubhai Patt – Before an income can be held to come u/S
16(3) it must have been proved to arisen directly or indirectly from a transfer
of assets made by the assessee in favor of his wife or minor children.
