Law of Taxation unit-2.pdf

By
Smt.Sowmya.K
PRINCIPAL
SBRR Mahajana Law College
Mysore

INCOME TAX ACT 1961
Origin of taxation in india dates back to ancient india as
found mentioned in ancient books such as artha shastra and
manusmriti. According to manusmriti artisans used to pay
1/5th of their profits as tax whereas agriculturist were required
to pay 1/6th, 1/8th or 1/10th of their produce depending upon
the circumstances.
This Income Tax, later considered as “War Tax”, it had
been born of the war. And it had sustained the war. But when
the war was over, it was understandable that the government
should be subject to the strongest pressure to redeem an
implied promise, that war tax should not continue in time of
peace and repeal the Income Tax Act. Income tax was first
introduced in India in 1860 by the British ruler James Wilson
(who become 1st India’s Finance Member), in order to meet
heavy expenses and losses suffered by the rulers due to India’s
first freedom movement of 1857. It was introduced as a
temporary revenue measure only for five years.
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At present, the Income Tax Act 1961 is force in
India. The present Income tax act was enacted in
1961, which came into force on 1st April 1962. In
1956, the government referred the Income Tax Act to
the Law commission which submitted its report in
1958. Direct Taxes Administration Enquiry
Commission was appointed in 1995 under the
Chairmanship of Shri Mahavir Tyagi. On the basis of
recommendations of both these bodies the present IT
Act was enacted. This Act of 1961 has since been
amended number of times.
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“Income Tax is levied on the total income
of the previous year of every person”.
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An Income Tax Act contains 298 sections and
14 schedules with numerous subsections.
Under the Income Tax Act, every person, who
is an assessee and whose income exceeds the
maximum exemption limit, shall be chargeable to
the income tax at the rate or rates prescribed in the
Finance Act, such income tax will be paid on the
total income of the previous year in the relevant
assessment year.
Indian government presents a Finance budget
every year during the month of February. The
budget brings in various amendments to the
Income Tax Act.
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DEFINITIONS.
2. In this Act, unless the context otherwise requires,—
(1A) "agricultural income"
 K. LAKSHMANAN AND CO. v. CIT(1999)
Income from sale of silk cocoons obtained from silk worms fed on mulberry leaves grown by assessee.
Appellant-assessee growing mulberry leaves--- Purchasing silk worm eggs and when they are hatched
principally feeding the worms mulberry leaves—Obtaining silk cocoons from the silk worms and selling
them in the market—Income derived from sale of silk cocoons, whether can be regarded as agricultural
income—Held, No.
 Income connected with land but not agricultural income –
1. Profit earned on purchasing the standing crop.
2. Income from mines
3. Income from self grown grass, trees/bamboos
4. Divided from a company engaged in Agricultural
5. Income from warehouses and godowns.
6. Income from land used for brick making
7. Income from supply of water for irrigation purposes.
8. Remuneration for managing agricultural property.
9. Income from dairying.
10. Interest accrued on promissory notes executed for arrears of rent.
 Agricultural Income and Tax Liability –
Though agricultural income is exempt and it is not included in computation of total income of an
assessee but from tax calculation point of view it is added to total income. The agricultural income is
integrated with non-agricultural income in those cases where assessee has both incomes. Such integration is
done only in the case of individual, HUF, AOP/BOI and Artificial juridical person.
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(7) "assessee";
(8) "assessment"
(9) "assessment year"
(13) "business"
(22AA) "document“
(24) "income
(31) "person"
(45) "total income
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Residential Status for Income Tax – Individuals & Residents
[Section-6]
The taxability of an individual in India depends upon his residential
status in India for any particular financial year. The term residential status
has been coined under the income tax laws of India and must not be
confused with an individual’s citizenship in India. An individual may be a
citizen of India but may end up being a non-resident for a particular year.
Similarly, a foreign citizen may end up being a resident of India for income
tax purposes for a particular year.
Also to note that the residential status of different types of persons viz
an individual, a firm, a company etc is determined differently.
Determination of residential status
For the purpose of income tax in India, the income tax laws in India classifies
taxable persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)
The taxability differs for each of the above categories of taxpayers.
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Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following 2
conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days
or more in the relevant financial year
Resident Not Ordinarily Resident
If an individual qualifies as a resident, the next step is to determine if he/she is a
Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both
of the following conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years
and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an
NR for the year.
Taxability
Resident: A resident will be charged to tax in India on his global income i.e. income
earned in India as well as income earned outside India.
NR and RNOR: Their tax liability in India is restricted to the income they earn in
India. They need not pay any tax in India on their foreign income.
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PROCEDURE TO COMPUTE INCOME TAX
1. First, find out the income under all the five heads of
income.
2. Next, add all the incomes.
3. This amounts to “Gross Total Income”.
4. Deduct the deductions admissible under Section 80 (e.g.
Life Insurance Premium amount, Provident Fund
contribution, Health Insurance Premium, Interest on
Education Loan, House Rent when House Rent
Allowance (HRA) not admissible, Interest on Home loan
for first home buyers etc.).
5. Remainder amount is “Taxable Income”.
6. Calculate the Income Tax as per the Slab Rate.
7. Add Surcharge.
8. Add Health and Education Cess on (IT + Surcharge). This
is the final Tax payable.
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BROAD CATEGORIES OF INCOME
1) Income forming part of Total Income and subject to
Tax [From Section 14-80]
2) Income forming part of Total Income but entitled to
Rebate or Relief. [Section 86]
3) Income Exempted from tax- these incomes do not
form part of total income either fully or partially.
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INCOME EXEMPTED FROM TAX [SECTION-10]
For providing relief to the tax payers from payment of tax,
income tax law provisions contains concept of exemption and
deduction. Any income earned which is not subject to income
tax is called exempt income. Exempted income means the
income which is not at all charged to any taxes, while
calculating the Gross Total Income. Whereas deduction means
the amount which needs to be included in the income first then
it is allowed for deduction in full or in part on fulfillment of
certain conditions.
Under Section 10, 10AA, 11, 12, 12A, 13 and 13A of the
Income-tax Act, various items of income are totally exempt
from income-tax. Therefore, these incomes shall not be
included in the total income of an assessee, provided the
assessee proves that a particular item of income is exempt and
falls within a particular clause.
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MAIN PROVISIONS RELATING TO INCOME EXEMPT FROM TAX
1. Agricultural Income [Sec 10(1)]
2. Share income of HUF [Sec 10(2)]
3. Share of profit from partnership firm [Sec10 (2A)]
4. Gratuity [Sec 10(10)]
5. Pension and Leave salary [Sec 10(10A)]
6. Leave encashment
7. HRA
8. Commuted pension
9. Income of a mutual fund
10. Dividend Income from a domestic company
11. Income of religious institutions
12. Retrenchment compensation [Sec 10(10B)]
13. Interest on the following is exempt from tax
14. Education Scholarship [Sec 10(16)]
15. Awards [Sec 10(17A)]
16. Pension to Gallantry award winners [Sec10 (18)]
17. Family pension
18. Formers rulers of Indian states [Sec 10(19A)]
19. Income of pension fund [Sec 23(AAB)]
20. Income of a trade unions [Sec 10(23D)
21. Income of Minor [Sec 10(32)]
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 General Insurance Employees Association v. UOI [2000]
It was held that “Conveyance allowance paid to LIC employees is not
exempt u/s 10(14)”.
 Regional Computer Centre v. Commissioner Of Incometax [2009]
Charitable purposes – charitable institution – exemption – regional
computer centre manned by government officers – object of centre to promote
electronic data processing and disseminate knowledge about electronic data
processing systems – centre earning mainly through consultancy services –
business not carried on by beneficiaries – centre not a charitable institution –
not entitled to exemption under section 11 – Income-tax Act, 1961, s. 11.
 Commissioner of Income-Tax v. Maharaja Sawai Mansingh Ji Museum
Trust. [1988]
Exemption – Educational institution – Meaning of “education” –
Museum not an educational institution – Not entitled to exemption – Income-
tax Act, 1961, s. 10(22).
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Heads of Income [Section 14 of IT Act, 1961]
All income shall, for the purposes of charge of income-tax
and computation of total income, be classified under the
following heads of income:
Heads of income
 Income from salaries.
 Income from house property.
 Income from Profits and gains of business or profession.
 Income from Capital gains.
 Income from other sources.
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1. INCOME FROM SALARY( 15-21)
A salary is a form of periodic payment from an employer to an
employee, which may be specified in an employment contract.
Salary is basically a fixed amount of money agreed every year as pay
for an employee, usually paid directly into his or her bank account
every month.
Income can be charged under this head only if there is an
employer employee relationship between the payer and payee. Salary
includes basic salary or wages, any annuity or pension, gratuity,
advance of salary, leave encashment, commission, perquisites in lieu
of or in addition to salary and retirement benefits.
CIT v. S.C. Wadhwa, Development Officer, LIC of India [2006]
Development Officers working in Life Insurance Corporation
of India, are whole-time employees, who are employed for
promoting and developing life insurance business and not doing
work in a different capacity while working in field. Incentive bonus
received by Development Officers are assessable under the head
“Salary”.
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“Salaries”[SECTION 15]
a. Any salary due from an employer or a former employer to an assessee in the previous year,
whether paid in that previous year 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 in that previous year 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 in any earlier previous year.
1. Wages are treated just like salary and are taxable on the same basis as salary.
2. As per section 17(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;
vi. Any payment received by an employee in respect of any period of leave not availed by him;
vii. Employer's contribution to Recognized Provident Fund (RPF) in excess of 12% of employee's
salary and interest credible to recognized provident fund in excess of 9.5% p.a.;
viii. The aggregate of all sums that are comprised in the transferred balance of an employee
participating in a recognized provident fund to the extent to which it is chargeable to tax;
ix. The contribution made by the Central Government or any other employer in the previous
year, to the account of an employee under a notified pension scheme referred to in section
80CCD.
3. All these above incomes are taken in Gross Salary after considering the deductions under section
16, i.e.,
 Deduction for entertainment allowance [section 16(ii)]; and
 Deduction on account of any sum paid towards tax on employment [section 16(iii)]
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Specific deductions
16(ia)Standard Deduction Rs. 50,000 or the amount of salary, whichever is
lower.
16 (ii)Entertainment Allowance
received by the Government
employees (Fully taxable in case of
other employees)
Least of the following is deductible :
a) Rs 5,000
b) 1/5th of salary (excluding any allowance,
benefits or other perquisite)
c) Actual entertainment allowance received
16(iii)
Employment Tax/Professional Tax.
Amount actually paid during the year is
deductible. However, if professional tax is paid
by the employer on behalf of its employee than
it is first included in the salary of the employee
as a perquisite and then same amount is allowed
as deduction.
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SCHEME OF TAXATION-INCOME FROM SALARY
Particulars Amount
 Basic items:
o Basic pay XXXX
o Special pay XXXX
o Bonus XXXX
o Fees XXXX
o Commission XXXX
o Advance salary XXXX
o Arrear salary XXXX
 Allowances:
o Fully Taxable allowance XXXX
o Partly taxable allowance XXXX
o Fully exempted allowance XXXX
 Perquisites:
o Taxable for all XXXX
o Taxable for specifies employees only XXXX
o Exempted for all XXXX
 Special items:
o Gratuity XXXX
o Pension XXXX
o Leave encashment XXXX
o Provident fund XXXX
 Deductions under Sec16
o Standard deduction [N.A from AY 2006-07] NIL
o Entertainment allowance XXXX
o Professional tax XXXX
 Income from salary XXXXXX
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PERQUISITES
A perquisite is a non-cash benefit granted by an employer to the
employee. When an employee obtains a perquisite during the course of
employment, the perquisite is taxable as a part of the assessment of the
employee. On account of the perquisites, the taxable income of the
employee may exceed the basic exemption limit. When the taxable income
crosses the basic exemption limit, the requirement for Tax Deducted at
Source (TDS) arises. The taxpayer should note that perquisites are non-cash
consideration, whereas the TDS on the salary of the employee is a cash
withholding. When the income crosses the basic exemption limit and TDS
withholding is made, it becomes mandatory for the taxpayer to file an
income tax return. Thus, while perquisites offer benefits to the taxpayer,
they also come with tax-implications. Hence, it is up to the taxpayer to
choose between various perquisites, keeping in mind the tax implications of
each.
Classification of Perquisites
1. Perquisites that are taxable only when the employee belongs to a
specified group.
2. Perquisites which are taxable in the hands of all categories of employees.
3. Tax-free Perquisites
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Income from house property(22-27):
House property consists of any building or land appurtenant thereto of
which the assessee is the owner. The buildings include residential buildings
(whether self occupied or let out for any purpose), office building, factory
building, godowns, flats, etc. as long as they are not used for business or
profession by owner.
BASIS OF CHARGE
Section 22 of the Act provides as follows:
“The annual value of a property consisting of any buildings or lands
appurtenant thereto of which the assessee is owner, other than such portions
of such property as he may occupy for the purposes of business or profession
carried on by him the profits of which are chargeable to income tax, shall be
chargeable to income tax under the head Income from House Property”.
Thus, the annual value of a property is taxable under this head if all the
following conditions are satisfied:
1. The property should consist of any building or land appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business
or profession carried on by him, the profits of which are chargeable to income
tax.
Unless all the aforesaid conditions are satisfied, the property income
cannot be charged to tax under the head ‗Income from House Property‘.
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Deductions in Income from House Property
To arrive at the actual taxable income from house property, two
deductions are allowed, under Section 24 of the Income Tax Act :
Statutory Deduction: 30% of the Net Annual Value [NAV] is allowed as a
deduction towards repairs, rent collection, etc. irrespective of the actual
expenditure incurred. This deduction is not allowed if the Annual Value is
nil.
Interest on borrowed capital: is allowed as a deduction on accrual basis if
the money was borrowed to buy/construct the house. Deduction is allowed
on whichever is lesser between Rs.1,50,000 or the actual interest amount (in
case the construction was completed within 3 years of taking the loan, on or
after 1-April-1999.) In other cases, it’s between Rs.30,000, and the actual
interest, whichever is less.
Annual Value: Annual Value = NAV – Deductions.
Owner/deemed owner: Income from house property is taxable to the owner
of the property. The owner is the person who is entitled to receive income
from property. This means that income is chargeable to the person who
receives financial benefit from the property, even if the property is not
registered to him, i.e. deemed owner. A deemed owner is an owner by
implication and not necessarily documented registration.
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How to compute your income from house property.
Income from house property contains the income generated by the owned
property of an individual.
Let’s assume you have a property and are charging Rs. 15,000 per
month as rent. Let’s also assume that you have paid Rs. 10,000 in municipal
taxes for that year, and have Rs. 50,000 as interest on borrowed capital.
Income of House Property Amounts (in Rs.)
Total annual rental income value 15,000 x 12 = 1,80,000
Less: Municipal Taxes 10,000
Net Annual Value (NAV) 1,70,000
Deductions under Section 24
Standard deduction (30% of NAV) 1,70,000 – 51,000 = 1,19,000
Interest on borrowed capital (if applicable) 50,000
Income from House Property 69,000
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CIT VS. PODDAR CEMENT LTD. (SC)
In the context of section 22 of the I.T. Act- an owner
of House property is the person who is entitled to receive
the income in his own right (and not on behalf of others).
Sec 22 does not require registration of sale deed and hence
power of attorney holder will also be owner U/s 22.
P. N. SHUKLA VS. CIT (ALL.) 2005
Income from house property – Deductions u/s.23(1)
are applicable only when the property is house for
residential purposes.
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PROFITS AND GAINS OF BUSINESS OR PROFESSION (28-44D)
Under the Income Tax Act, 'Profits and Gains of Business or Profession'
are also subjected to taxation. The term "business" includes any (a) trade,
(b)commerce, (c)manufacture, or (d) any adventure or concern in the nature of
trade, commerce or manufacture. The term "profession" implies professed
attainments in special knowledge as distinguished from mere skill; "special
knowledge" which is "to be acquired only after patient study and application".
The words 'profits and gains' are defined as the surplus by which the receipts
from the business or profession exceed the expenditure necessary for the
purpose of earning those receipts. These words should be understood to include
losses also, so that in one sense 'profit and gains' represent plus income while
'losses' represent minus income.
Section 2 ( 13 ) : Business Business includes any trade, commerce or manufacture
or any adventure or concern in the nature of trade, commerce or manufacture.
 Lakshminarayan Ram Gopal v. Govt. of Hyderabad [1954]
s/c held that activities which constitute carrying of business need not
necessary carry activities by way of trade or profession or vocation . they may
even consist of rendering services to others of a variegated character.
 CIT v/s Dharma Reddy [1969 ]
Held definition of business being an inclusive ,so subject of expansion
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BASIS OF CHARGE: [SECTION 28 ]
Under Section 28 following are the income chargeable to tax under the head
Profits or Gains from Business or profession: ‐
1) Profits and Gains of any business or profession that is carried on by the
assessee at any time during the previous year.
2) Any compensation or other payment due to or received by an assessee for
loss of agency due to termination or modification of terms.
3) Income derived by a trade, professional or a similar association for
specific services performed for its members.
4) Any profit on sale of a license granted under Imports (controls) Order
1955 made under Imports & Exports (control) Act of 1947.
5) Any cash assistance (by whatever name called) received or receivable
against exports under any scheme of Government of India.
6) Any duty of customs or excise repaid or repayable as drawback to any
person against exports under the Customs and Central Excise Duty’s
Drawback Rules 1971.
7) Any profit on the transfer of the Duty entitlement pass book scheme
under export import policy.
8) Any profit on the transfer of the Duty free replenishment certificate under
export import policy.
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9) Any interest, salary, bonus, commission or remuneration due to or
received by partner of a firm from such firm.
10) Sum received or receivable in cash or in kind under an agreement
for not carrying out any activity in relation to any business or not
sharing any know how, patent, copyright, trade mark, license
franchise or any other business or commercial right of similar
nature or information or technique likely to assist the manufacture
or processing of goods or provision of services.
11) Any sum received including bonus under Keyman Insurance Policy.
12) Any sum received (or receivable) in cash or kind, on account of any
capital asset (other than land or goodwill or financial instrument)
being demolished, destroyed, discarded or transferred, if the whole
of the expenditure on such capital asset has been allowed as a
deduction under section 35AD.
13) Income from a speculative business.
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 Commissioner of Income Tax 4, Mumbai Versus Prime Broking Company (I) Ltd.
[2016]
Bombay High Court: “Payment on account of service tax - allowable as business
expenses - Held that:- It is undisputed that the obligation under the Finance Act, 1994 to
pay the service tax is on the Respondent-Assessee being the service provider. This
obligation has to be fulfilled by the service provider whether or not it receives the service
tax from its clients/customers. Non payment of such service tax into the treasury would
normally result in demand and penalty.”
 Soham Trading and Investments Private Limited Versus Assistant Commissioner of
Income Tax-7 (2) , Mumbai [2016]
Held that:- The assessee in our considered view is involved in a systematic
activity of exploiting its asset, which in turn it had taken on lease , is thus involved in
carrying on business activity. Thus, the income arising there from such business activity
is to be assessed to tax in the hands of the assessee under the head income from business
and profession
 CIT v. Faith Real Estate (P.) LTD. [2008](DELHI)
Where assessee had given out on rent premises owned by it and assessee was to
receive 2 percent commission on sales made by lessee by use of premises and Tribunals
finding was that arrangement was not a sham and it was not a mere rent agreement but, in
fact, required involvement of assessee in management of lessee’s store, amount received
by assessee could not be treated as ‘income from house property’ and was to be treated as
‘business income’.
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INCOME FROM CAPITAL GAINS
SEC 45(1)-CHDEFINITION OF CAPITALASSETS SEC 2(14)
Capital asset is defined to include property of any kind, whether or not connected with
the business or profession of the assessee.
EXCEPTIONS TO CAPITALASSETS
a) Any stock-in-trade, consumable stores or raw material held for the purposes of business or
profession.
b) Personal Effects ,that is to say, Movable property of the Assessee including wearing apparel
and furniture held for his personal use or for the use of any member of his family dependent
on him. But excludes–
(a)Jewellery excep
(b) Archaelogical collections
(c ) drawings
(d) paintings
(e)sculptures
(f) any work of art.
c) Agricultural land in India provided it is not situated in urban area.i.e Rural agricultural land
d) 6 ½ % Gold Bonds, 7% Gold Bonds or National Defence Gold Bonds, issued by the central
government.
e) Special Bearer Bonds, and
f) Gold Deposit bonds issued under Gold Deposit Scheme of 1999.
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CHARGING SECTION “Any profit or gains arising from the
transfer of capital assets is taxable under the head capital
gains in the previous year in which the transfer has taken
place.”
Conditions for Gains to be charged under Capital Gains
1. There should be a capital asset.
2. The capital asset should be transferred by the assessee.
3. Such transfer should take place during the previous year.
4. The profits or gains should arise as a result of this
transfer.
5. Such profit or gain should not be exempted from tax
under sections 54, 54B, 54D, 54EC, 54F and 54G &
54GA.
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Capital gains exempt from tax
1) Section 54 Capital gains arising from transfer of residential house.
2) Section 54B capital gains arising from the transfer of land used for
agriculture purpose.
3) Section 54D Capital gains on compulsory acquisition of land and
building forming part of industrial undertaking .
4) Section 54 EC Capital gains not to be charged on investment in
certain bonds.
5) Section 54ED Capital gains on transfer of certain listed securities /
units not to be charged to tax in certain cases.(up to assessment
year 200708).
6) Section 54 F Capital gains on transfer of a long term capital asset
other than a house property .
7) Section 54G capital gains on transfer of assets in case of shifting of
industrial undertaking from urban area.
8) Section 54GA Capital gains on transfer of assets in cases of
shifting of industrial undertaking from urban area to any special
economic zones .
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Types of Capital Gain
Depending on the tenure of holding an asset, gains against
an investment can be broadly divided into the following types –
1. Short term capital gain
If an asset is sold within 36 months of acquisition, then
the profits earned from it is known as short term capital gains.
For instance, if a property is sold within 27 months of
purchase, it will come under short term capital gains.
However, tenure varies in the case of different assets. For
Mutual Funds and listed shares, Long term capital gain
happens if an asset is sold after holding back for 1 year.
2. Long term capital gain
The profit earned by selling an asset that is in holding for
more than 36 months is known as long-term capital gains.
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COMPUTATION OF CAPITAL GAINS
Computation Of Short Term Capital Gains
1. Find out full value of consideration
2. Deduct the following
a. Expenditure incurred wholly and exclusively in connection with such
transfer
b. Cost of acquisition
c. Cost of improvement
3. Balance amount is short term capital gain
Computation of long term capital gains
1. Find out full value of consideration
2. Deduct the following
a. Expenditure incurred wholly and exclusively in connection with such
transfer
b. Indexed cost of acquisition
c. Indexed cost of improvement
3. Balance amount is long term capital gain
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INCOME FROM OTHER SOURCES
Meaning
“Income from other sources” is the residual head of income. Hence, any income which is not
specifically taxed under any other head of income will be taxed under this head.
Under 56(2) Income chargeable to tax under this head which are specifically stated are:
1) Dividend.
2) Any winnings from lottery, 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.
3) Any sum received by assessee from his employees by way of contribution to P.F.,
Super Annuation fund or any other fund if it cannot be charged under head profits and
gains of business profession.
4) Income by way of interest on securities if it cannot be charged under the head profits
or gains from business or profession.
5) Income from machinery, plant or furniture belonging to the assessee and let on hire if
such income is not chargeable under head profit or gains from business or profession.
6) Where machinery, plant or furniture is let out along with building & letting of building
is inseparable from letting of other assets, then income from such assets shall be treated
as income from other sources if it is not chargeable under head income from business
or profession.
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7) Any sum received under a Keyman Insurance Policy, if such income is not
chargeable to tax under the head ‘Profits & Gains of Business or
Profession’ or ‘Salary’.
8) Any sum of money exceeding ` 50,000 received without consideration by
an individual or HUF from any person. Exception to this clause: -
a) Money received from any relative i.e. spouse, brother, sisters, parents, in-
laws, brother/sister of parents, any lineal ascendant or descendent of the
individual & spouses of above mentioned persons.
b) Money received on the occasion of marriage.
c) Money received under will or inheritance.
d) Money received in contemplation of death of the payer.
e) Money received from a local authority.
f) Money received from any fund, foundation, university, other educational
institution, hospital, medical institution, any trust or institution referred to
in section 10(23C).
g) Money received from a charitable institute registered under section
12AA.
Smt.Sowmya.K 36

SCHEME OF TAXATION [INCOME FROM OTHER SOURCES]
Particulars Amou
nt
Amount
Dividend from foreign company
Less: collection charges
Interest on securities
Less: reasonable expenses in connection with the
securities
Casual income[ winnings from lottery, crow puzzles etc]
Income from letting P&M, Building etc
Less: depreciation and other expenses related with it
Family pension
Less: 1/3rd or 15000 whichever is less
Any other income
Less: expenses related with the income
Income from other sources
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
Smt.Sowmya.K 37

SETOFF AND CARRY FORWARD OF LOSSES
Set off of losses means adjusting the losses against the
profit or income of that particular year. Losses that are not set off
against income in the same year can be carried forward to the
subsequent years for set off against income of those years.
After making the appropriate and permissible intra-head and
inter-head adjustments, there could still be unadjusted losses.
These unadjusted losses can be carried forward to future years for
adjustments against income of these years.
According to sections 70, 71 of the income tax Act, 1961,
loss for any assessment year in respect of any particular head of
income can be setoff against income from any other sources
under the same head of income or from other heads of income for
the same assessment year except loss from speculation business,
long term capital gains, loss from activity of owing and
maintaining race horses and no loss shall be setoff against casual
income which are to be setoff only against incomes from same
sources. An unadjusted loss can be carried forward for eight years
i.e., loss under house property, loss from business, loss from short
term capital assesses as per section 71B, 72, 73, 74, 32 of the
income tax act, 1961.
Smt.Sowmya.K 38

DEDUCTIONS
Chapter VI A of Income Tax Act contains various sub-sections of section 80
that allows an assessee to claim deductions from the gross total income on account
of various tax-saving investments, permitted expenditures, donations etc. Such
deductions allow an assessee to considerably reduce the tax payable.
The Chapter VI A of Income Tax Act contains the following sections:
80C: Deduction in respect of life insurance premium, deferred annuity, contributions to
provident fund (PF), subscription to certain equity shares or debentures, etc. The
deduction limit is Rs 1.5 lakh together with section 80CCC and section 80CCD(1).
80CCC: Deduction in respect of contribution to certain pension funds. The deduction
limit is Rs 1.5 lakh together with section 80C and section 80CCD(1).
80CCD(1): Deduction in respect of contribution to pension scheme of Central
Government – in the case of an employee, 10 per cent of salary (Basic+DA) and in
any other case, 20 per cent of his/her gross total income in a FY will be tax free.
Overall limit is Rs 1.5 lakh together with 80C and 80CCC.
80CCD(1B): Deduction up to Rs 50,000 in respect of contribution to pension scheme
of Central Government (NPS).
80CCD(2): Deduction in respect of contribution to pension scheme of Central
Government by employer. Tax benefit is given on 14 per cent contribution by the
employer, where such contribution is made by the Central Government and where
contribution is made by any other employer, tax benefit is given on 10 per cent.
Smt.Sowmya.K 39

80D: Deduction in respect of Health Insurance premium. Premium paid up to Rs
25,000 is eligible for deduction for individuals, other than senior citizens. For senior
citizens, the limit is Rs 50,000 and overall limit u/s 80D is Rs 1 lakh.
80DD: Deduction in respect of maintenance including medical treatment of a
dependent who is a person with disability. The maximum deduction limit under this
section is Rs 75,000.
80DDB: Deduction in respect of expenditure up to Rs 40,000 on medical treatment of
specified disease from a neurologist, an oncologist, a urologist, a haematologist, an
immunologist or such other specialist, as may be prescribed.
80E: Deduction in respect of interest on loan taken for higher education without any
upper limit.
80EE: Deduction in respect of interest up to Rs 50,000 on loan taken for residential
house property.
80EEA: Deduction in respect of interest up to Rs 1.5 lakh on loan taken for certain
house property (on affordable housing).
80EEB: Deduction in respect of interest up to Rs 1.5 lakh on loan taken for purchase of
electric vehicle.
80G: Donations to certain funds, charitable institutions, etc. Depending on the nature of
the donee, the limit varies from 100 per cent of total donation, 50 per cent of total
donation or 50 per cent of donation with a cap of 10 per cent of gross income.
Smt.Sowmya.K 40

80GG: Deductions in respect of rent paid by non-salaried individuals
who don’t get HRA benefits. Deduction limit is Rs 5,000 per month
or 25 per cent of total income in a year, whichever is less.
80GGA: Full deductions in respect of certain donations for scientific
research or rural development.
80GGC: Full deductions in respect of donations to Political Party,
provided such donations are non-cash donations.
80TTA: Deductions in respect of interest on savings bank accounts up
to Rs 10,000 in case of assessees other than Resident senior citizens.
80TTB: Deductions in respect of interest on deposits up to Rs 50,000
in case of Resident senior citizens.
80U: Deduction in case of a person with disability. Depending on type
and extent of disability maximum deduction allowed under this
section is Rs 1.25 lakh.
Smt.Sowmya.K 41

INCOME TAX AUTHORITY
In India, the Central Government has been empowered by Entry 82 of the Union
List of Schedule VII of the Constitution of India to levy tax on all income other than
agricultural income. The Income Tax Law comprises The Income Tax Act 1961, Income
Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct
Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by Supreme Court and
High Courts. The Government of India imposes an income tax on taxable income of
all persons including individuals, Hindu Undivided Families (HUFs), companies, firms,
association of persons, body of individuals, local authority and any other artificial judicial
person. Levy of tax is separate on each of the persons. The levy is governed by the Indian
Income Tax Act, 1961. Income tax is a key source of funds that the government uses to
fund its activities and serve the public. The Income Tax Department is the biggest
revenue mobilizer for the Government.
The Income Tax authorities are required to exercise their powers and perform their
functions so as to prevent harassment of assesses, tax-evasion, unnecessary
discrimination in collection of tax.
JURISDICTION OF INCOME-TAX AUTHORITIES:
Income Tax authorities are required to exercise their powers and perform their
functions in accordance with directions given by the Board. Tax authority higher in rank,
if directed by Board, shall exercise the powers and perform tie functions of the Income-
Tax authority lower in rank. The directions of CBDT include direction to authorize any
Income Tax authority to issue instructions to their subordinates.
Smt.Sowmya.K 42

Conti….
VARIOUS TAX AUTHORITIES UNDER THE INCOME TAX:
The Government of India has constituted a number of authorities to execute the
Income Tax Act and to control the Income Tax Department efficiently. There shall be the
following classes of income-tax authorities for the purposes of the Act as given under
Section 116, namely:
1) The Central Board of Direct Taxes constituted under the Central Boards of Revenue
Act, 1963 (54 of 1963),
2) Directors-General of Income-tax or Chief Commissioners of Income-tax,
3) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-
tax (Appeals),
4) Additional Directors of Income-tax or Additional Commissioners of Income-tax or
Additional Commissioners of Income-tax (Appeals),
5) Joint Directors of Income-tax or Joint Commissioners of Income-tax.
6) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy
Commissioners of Income-tax (Appeals),
7) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
8) Income-tax Officers,
9) Tax Recovery Officers,
10) Inspectors of Income-tax.
Smt.Sowmya.K 43

Contd…
APPOINTMENT OF INCOME TAX AUTHORITIES:
The Central Government can appoint those persons whom it thinks are fit to
become Income Tax Authorities. The Central Government can authorize the Board or a
Director-General, a Chief Commissioner or a Commissioner or a Director to appoint
income tax authorities below the ranks of a Deputy Commissioner or Assistant
Commissioner, According to the rules and regulations of the Central Government
controlling the conditions of such posts.
THE SCOPE OF EXERCISE OF THE POWERS GIVEN TO THE INCOME-TAX
AUTHORITIES:
1) Power to Transfer Cases [Section 127]
2) Opportunity of Being Reheard [Section 129]
3) Discovery, Production of Evidence etc. [Section 131]
4) Search and Seizure [Section 132]
5) Power to Requisition Books of Account etc. [Section 132A]
6) Application of Retained Assets [Section 132B]
7) Power to call for information [Sections 133]
8) Power of Survey [Section 133A]
9) Power to Collect Certain Information [Section 133B]
10) Power to Inspect Registers of Companies [Section 134]
11) Other Powers [Sections 135 and 136]
Smt.Sowmya.K 44

ASSESSMENT
Assessment of income relating to one PY starts in the succeeding financial
year, which is called AY. Assessment procedure begins when an assessee files his
return of income to the income tax department.
TYPES OF ASSESSMENT
1. Self assessment [Sec 140A]
When a return is furnished the assessee will have to pay tax, if any payable
on the basis of return. He has also to pay interest up to the date of filing the return
along with self-assessment of tax. The return of income is to be accompanied by
proof of payment of both tax and interest. Assessing officer may make an enquiry
for getting full information in respect of assesse’s income. The assessee shall be
given an opportunity of being heard in respect of any material gathered on the basis
of any enquiry so made. The assessing authority may also direct the assessee to get
his accounts audited by an accountant nominated by chief commissioner, even if the
accounts of the assessee have been audited under nay other provision.
2. Summery assessment [Sec 143(1)]
If on the basis of return filed, any tax or interest is due the A.O shall send
intimation to the assessee specifying the sum so payable. If any refund is due on the
basis of such return it shall be granted to the assessee. Such intimation shall be
deemed to be a notice of demand. Such an intimation should be send before the
expiry of 2 years from the end of the AY in which income was first assessable
Smt.Sowmya.K 45

Contd……
3. Assessment in response to an order [Sec 143(2)]
Assessment of income after receiving a notice from income tax authorities is
called assessment in response to an order. A.O can send notice if he considers it necessary
to ensure that the assessee has not understated the income or has not underpaid tax. After
hearing such evidence as the assessee may produce in response to the notice and after
taking into account all relevant materials, which the A.O has gathered, he shall pass an
assessment order in writing determining the total income of the assessee and the sum
payable or refund due to the assessee on the basis of such assessment order.
4. Best Judgment Assessment [Sec 144]
In the following situation the A.O can make a best judgment assessment after
considering all relevant materials, which he has gathered.
a. if the assessee has not filed a return or a belated return or a revised return
b. if he fails to comply with the terms of the notice or fails to comply with the direction to
get his account audited
c. if he fails to comply with the terms of the notice requiring the presence or production of
evidence and documents
d. if the A.O is not satisfied with the correctness or completeness of the accounts of the
assessee
The best judgment assessment can be made only after giving the assessee a
reasonable opportunity of being heard. Assessee has a right to file an appeal or to make
an application for revision to the commissioner.
Smt.Sowmya.K 46

Contd
5. Income escaping assessment or reassessment [Sec 147]
If the AO has reason to believe that any income chargeable to tax has escaped
assessment for any AY he may assess or re assess such income. If an assessee has
not furnished a return of income although total income is above the taxable limit or
where a return of income has been made but assessee is found to have understated
his income where an assessment is made but income chargeable to tax has been
under assessed, reassessment can be made.
Rectification of mistakes [Sec 154]
The AO may amend any order passed by it or amend nay intimation sent by it
if he finds that a mistake apparent from record is made. This is called rectification of
mistake. Where a rectification has the effect of enhancing tax liability or educing the
refund, the AO is required to issue a notice of its intention to do so the assessee and
give the assessee a reasonable opportunity of being heard. Rectification of mistakes
may be made either on it’s own motion or on the application of the assessee.
Rectification can be made only within 4 years from the end of financial year in
which the order sought to be rectified was passed.
Smt.Sowmya.K 47

PERMANENT ACCOUNT NUMBER (PAN)
This is number allotted by income tax department to a person who files return of
income. Every person whose taxable income exceeds Rs.1,50,000 or Rs.1,85,00(for women
assessee )or Rs.2,25 ,000(for senior citizen) during an accounting year is required to obtain
PAN. Every person who has been allotted PAN should quote such number in all his returns or
correspondence with income tax authorities, quote such number in all challans for payment of
any sum, quote such number in all documents pertaining to such transactions as may be
prescribed by the board. New series of Pan contains ten alphanumeric characters and is issued
on a laminated card.
Persons who should have PAN compulsorily:
1. Exporter or importer
2. Assessee under the Central Excise Act
3. Service tax assessee
4. Persons registered under the CST Act or value added tax act
5. Any employer who is required to file return of fringe benefits
Important point related with PAN
1. PAN should be quoted in all correspondence to income tax department
2. Any person who is receiving any sum of money or income on which TDS is to collected have to
furnish the PAN to the person who is responsible for deducting TDS
3. Persons who do not have a PAN should furnish Form60 while entering into any of the specific
transactions
4. If person fails to apply for PAN or to quote PAN in specified documents or transaction is liable
to pay a penalty of Rs.10,000/-
Smt.Sowmya.K 48

E-FILING
Any return of income submitted through electronic media is E-filing . Under
E-filing the following three concepts can be dealt
Filing of returns on computer readable medium
A person who is to furnish return of income can submit his return of income on or
before the due date in the prescribed manner in any of the following methods
Floppy
Diskette
Magnetic catridge
Tape
CD
Any other computer readable media
Electronic furnishing of return of income scheme, 2004
An assessee at his option can furnish his return of income to an e-return
intermediary who in turn will digitalise the data and transmit the same electronically to e-
return administrator on or before the due date.
Furnishing of return of income on internet scheme, 2004.
An assessee having PAN and who has income from salary but does not have
income from business and profession and who is assessed in a specified city may furnish
his return under this scheme at his option before the due dates of return.
www.incometaxindiaefiling.gov.in
Smt.Sowmya.K 49

PROVISIONS RELATING TO COLLECTION AND
RECOVERY OF TAX[220-232]
An amount of tax as determined by the AO as per
notice shall be paid within 30 days of the service of the
notice at the place and to the person mentioned in the
notice. This period may be extended by the AO and allow
payment in installment if the assessee makes an
application on reasonable grounds. If the amount specified
in the notice of demand is not paid within the period stated
in the notice, the assessee shall be liable to pay simple
interest @ 1% for every month or part thereof from the
date of expiry of the aforesaid time. When an assessee is
in default he shall be liable to pay by way of penalty, an
amount that the AO may direct. Before levying any such
penalty the assessee shall be given a reasonable
opportunity of being heard.
Smt.Sowmya.K 50

Steps for recovery and collection of Tax
(a) Notice of Demand (Section 156)
When any tax, interest penalty, fine or any other sum is payable in consequence of any order passed
under this Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed
form specifying the sum so payable.
(b) Intimation of loss (Section 157)
When in the course of the assessment of the total income of any assessee, it is established that a
loss has taken place which the assessee is entitled to have carried forward and set off against the income
in subsequent years, the Assessing Officer shall notify to the assessee by an order in writing the amount
of the loss as computed by him for the purposes of carry forward and set off.
(c) Assessee in Default
The amount specified in the notice of demand shall be paid within 30 days of the service of the
notice at the place and to the person mentioned in the notice. If the Assessing Officer has any reason to
believe that it will be detrimental to revenue if the full period of 30 days is allowed he may, with the prior
approval of the Joint Commissioner reduce the period as he thinks fit (Section 220).
If the amount specified in the notice of demand is not paid within the period mentioned in the
notice, the assessee shall be liable to pay simple interest at one and one-fourth per cent for every month
or part of a month comprised in the period commencing from the day immediately following the end of
the 30 days or shorter period, as allowed, and ending with the date of payment of the tax. If the amount is
not paid as mentioned above, the assessee shall be deemed to be in default and shall be liable to pay in
addition to the amount of the arrears and the amount of interest, by way of penalty such amount as the
Assessing Officer may direct. In the case of continuing default, he shall be liable to pay such further
amount as the Assessing Officer may, from time to time, direct. However, the total amount of penalty
shall not exceed the amount of tax in arrears.
Smt.Sowmya.K 51

Where an assessee is in default or is deemed to be in default in making a
payment of tax, the Tax Recovery Officer may draw up under his signature a
statement in the prescribed form specifying the amount of arrears due from
the assessee and shall proceed to recover from such assessee the amount
specified in the certificate (being the statement referred to above) by one or
more of the modes mentioned below, in accordance with the rules laid down
in the Second Schedule.
(A) (i) attachment and sale of the assessee’s movable or immovable property;
(ii) arrest of the assessee and his detention in prison; and
(iii) appointing a receiver for the management of the assessee’s movable and
immovable properties (Section 222).
(B) The Assessing Officer may also recover the tax by any one or more of the
following modes of recovery:
(i) attachment of salary;
(ii) garnishee order from a court ; Lesson 10 Collection and Recovery of Tax 475
(iii) sale of movable property (Section 226);
(C) Through State Government (Section 227);
(D) In pursuance of agreement with foreign countries (Section 228A);
(E) By suit or under other law (Section 232).
Smt.Sowmya.K 52

REFUND OF TAX [Section 237 &238]
If, any assessment year an assessee pays the tax which is more than
the amount for which he is actually chargeable and if the assessee proves
excess payment before the Assessing Officer, section 237 empowers the
assessee to claim a refund of the excess. Once the Assessing Officer is
satisfied about the excess payment made by the assessee, he can allow the
claim or refund.
Under the following cases a claim to refund may arise –
1) When tax is deducted at source from salary, interest on securities or
debentures, dividend at a rate higher than the rate applicable to the total
income of an assessee.
2) When tax paid in advance exceeds the amount of tax actually payable as
determined at the time of regular assessment.
3) When tax calculated was higher due to some mistake and later on tax
liability is reduced on account of rectification of a mistake.
4) When tax was calculated at the higher rate on the payment given to non-
residents whereas they were actually chargeable at a lower rate of income
tax.
5) When due to double taxation , the assessee is entitled to a double taxation
relief. Smt.Sowmya.K 53

The person can Claim Refund of Tax [ Sec. 238(1) ]
 Where the income of one person is included in the total income of any other person, the latter
alone shall be entitled to a refund in case of excess payment of tax in this case.
 In the case of death, incapacity, insolvency, liquidation or other cause, a person is unable to
claim or receive any refund due to him, his legal representative or the trustee or guardian or
receiver, as the case may be, shall be entitled to claim or receive such refund for the benefit of
such person or his estate.
The quickest and easiest method of filing your income tax refund is to declare your
investments in Form 16. Your investments may include life insurance premiums paid, house
rent being paid, investments in equity/NSC/mutual funds, bank FDs, tuition fees, etc.
While filing your IT return, submit all necessary and relevant proofs. In case you have failed to
do so and have been paying extra taxes that you think you could have avoided, you will need
to fill out Form 30.
 Form 30 is basically a request that your case be looked into and analyzed, so that the excess
tax you have paid is refunded. Your income tax refund claim should be submitted before the
end of the financial year.
 The claim for refund may be presented by the claimant or through an agent or may be send by
post.
Time Limit for Claiming Refund of Tax [ Sec. 239(2) ]
Before 1967 -4 yrs, 1968- 3 yrs- now it is for 1 yr.
Smt.Sowmya.K 54

APPEAL
Appeal refers to an act of referring the
case/matter/situation to a higher authority against the order
passed by a lower authority in respect of that case or matter. It
implies a complaint to a higher authority against the order or
judgment (alleged to be erroneous) of an administrative
authority or appellate authority. The complex nature of Income
Tax Act and the various rules often, create a situation where
there is difference of opinion among the assessee and the
assessing officer (i.e.,Income tax department). Quite often, an
assessee is not satisfied by an assessment order/any other order
issued by any income tax authority and such an aggrieved
assessee can present his case before specified authorities
prescribed under Income Tax Act. Such prescribed authorities
constitute ‘appellate machinery’ or ‘appellate authorities’.
Smt.Sowmya.K 55

Final
Appeal
Supreme Court
u/s 261
Third Appeal High Court
u/s 260A [till05/01/2006]
within 120 days
Appeal to National Tax
Tribunal.[w.e.f .06/01/2006]
Second Appeal Appellate Tribunal
( Filed u/s 253 in form 36 within 60days
of order passed by CIT (appeals)
First Appeal Commissioner
( Filed u/s 246A electronically in form 35 within
30 days of order passed)
Assessment Order
(passed u/s 143(3), 144, 153A, 147 etc)
Smt.Sowmya.K 56

1. APPEALS BEFORE COMMISSIONER:
As provided by S. 246 of the IT Act, an assessee who is aggrieved by
an order, passed by Assessing Officer may prefer an appeal to the
Commissioner of Income- Tax. Such Commissioner may admit an appeal,
even beyond period of limitation, if satisfied that there was a sufficient
cause for not presenting the appeal. Within time.
An appeal to the Commissioner of Income-tax must be filed within 30
days from the date of service of notice of demand relating to assessment or
penalty order.
After hearing the case/arguments, the Commissioner of Income-tax
passes his order, and the same is recorded in writing. Where the order
passed is that for disposal of the appeal and the Commissioner must supply
reasons for the same. While disposing of an appeal, the Commissioner of
Income-tax may consider and decide any matter arising out of the
proceedings in which order appealed against was passed, even if such
matter was not raised by the taxpayer before the Commissioner of Income-
tax. The order should be issued within 15 days of last hearing.
Smt.Sowmya.K 57

2. APPEALS BEFORE INCOME TAX APPELLATE TRIBUNAL:
This body is constituted by the Central Government, and functions under the Ministry of
Law. It consists of 2 classes of member, i.e., Judicial and Accountant. An appeal to ITAT can be filed
either by the taxpayer or by the Assessing Officer. Any appeal to ITAT must be filed in 60 days of
the date on which order appealed against is communicated to the taxpayer or the Commissioner.
PROCEDURE FOR APPEAL:
 An appeal to ITAT must be in Form No. 36- in triplicate. The prescribed fees for any such appeal is
as under:
 Rs. 500, where the assessed income is Rs 1lakh or less
 Rs. 1,500, where assessed income is more than Rs. 1 lakh but less than Rs. 2 lakhs
 1% of assessed income, subject to maximum of Rs.10, 000, where assessed income is more than Rs.
2 lakhs
 Where the subject matter of appeal relates to any other matter, fee of Rs 500/- is to be paid. An
application for stay of demand is to be accompanied by fee of Rs. 500
The Appellate Bench comprises of one judicial member and one accountant member.
Appeals where total income computed by the Assessing Officer does not exceed Rs. 5lakh may be
disposed of by single member Bench.
3. APPEALS BEFORE HIGH COURT:
Where the High Court is satisfied that the case involves substantial question of law, an
appeal shall lie against the order/ judgment of ITAT. Such appeal may be filed either by the taxpayer
or the Chief Commissioner/Commissioner. An appeal against order of ITAT shall lie only within 120
days of receipt of such order and in the form of memorandum of appeal, precisely stating the
substantial question of law. The High Court then goes on to formulate the question. An appeal filed
before the High Court is heard by a bench of not less than two judges.
4. APPEALS BEFORE SUPREME COURT:
Appeal against an order of High Court in respect of Appellate Tribunal’s order lies with the
Supreme Court. Appeal lies only against cases, which are certified to be fit one for appeal to the
Supreme Court. Special leave can also be granted by the Supreme Court under Article 136 of the
constitution of India against the order of the High Court.
Smt.Sowmya.K 58

REVISION [Section 263 &264]
Section 263: The Principal Commissioner or Commissioner may call for and
examine the record of any proceeding under this Act, and if he considers that any
order passed therein by the Assessing officer is erroneous in so far as it is prejudicial
to the interests of the revenue, he may after giving an opportunity of being heard
pass such order thereon as the circumstances of the case justify, including an order
enhancing or modifying the assessment, or cancelling the assessment and directing a
fresh assessment .
However, Assessee has an option to file an appeal in INCOME TAX
APPELLATE TRIBUNAL against the revision order passed by CIT u/s 263.
Section 264: The Principal Commissioner or Commissioner may, either of his
own motion or on an application by the assessee for revision, call for the record of
any proceeding under this act in which any such order has been passed and may
make such inquiry or cause such inquiry to be made and subject to the provisions of
this act, may pass such order thereon, not being an order prejudicial to the assessee,
as he thinks fit.
However, In this case income tax act does not provide any remedy for filling
appeal to higher income tax authority. But , assessee has an option , he can take the
benefit of Constitution of India. Article 226 provides every citizen of India remedy
to file WRIT petition in High Court against the order passed by income tax
department.
 Haryana State Small Industries and Export Corporation Ltd Vs CIT
It was held that if the revisional authority detects an error committed by the
subordinate officer, he has been given the right to correct it and pass such orders in
relation thereto, as he thinks fit.
Smt.Sowmya.K 59

Namdang Tea Co. Ltd. Vs. CIT (1982)
The following points should be remembered-
1) A fee of Rs.500/- shall accompany every application by an
assessee for revision u/s.264.
2) An order by the CIT declining to interfere shall be deemed not
to be an order prejudicial to the assessee.
3) Order u/s.264 is not appellable to Tribunal (u/s.253) or High
Court (u/s.260A). However, a petition for a writ under article
226 for quashing the order of the CIT is maintainable which
does not satisfy the well settled tests of “judicial acts”.
4) Power u/s.264 are much wider than those u/s.263. CIT is
empowered u/s.264 to entertain even fresh pleas and new
grounds and claims, which could not be made by the assessee
before the lower authorities.
5) The assessee can not claim the right of revision in respect of an
earlier year on the basis of a finding of tribunal from a
subsequent years
Smt.Sowmya.K 60

Concealment Penalty- Section 271(1)(c)
Penalty Provision under Income Tax Act-1961
 Penalty Proceedings u/s 271(1)(c) can be initiated by AO/CIT/PCIT/CIT(A) on fulfillment of
following conditions:
• Concealment of particulars of income or
• Furnishing of inaccurate particulars of income
 Penalty shall be levied not less than the amount sought to be evaded subject to maximum of 300%
of amount sought to be evaded.
 ‘amount sought to be evaded’ has been defined in Explanation 4
 Explanation 1 provides that amount added or disallowed shall be deemed to be income if:
• Failure to offer an explanation or offers an explanation which is found to be false
• Offers an explanation which the assesse is not able to substantiate
• Fails to prove that such explanation is bonafide
• Fails to prove that all facts which are material have been disclosed

221(1) Penalty for default in making a payment of tax
Not exceeding amount
equal to tax in arrears
271(1)(b)* Failure to comply with notice u/s 142(2), 142(2A), 143(2)
Rs 10,000 for each
failure
271(1)(c)*
Concealment of income or furnishing inaccurate
particulars
100% to 300% of tax
sought to be evaded
272A (1)*
Failure to answer questions or sign statements, furnish
information, returns etc
Rs 10,000 for each
failure
271AAB
Undisclosed income found during search intimation u/s
132
10% ;20% or 30% of
undisclosed income
271A* Failure to maintain books or documents u/s 44AA Rs 25000
Section Nature of Default Quantum of Penalty
* Sec 273B- no penalty shall be imposable if reasonable cause for such failure is proved

Penalty Provisions-Income Tax Act 1961
Summary
271B* Failure to get accounts audited u/s. 44AB.
0.5% of total sales, or
Rs.1,50,000 whichever
is less
271D* Taking loan in contravention of Sec. 269SS
Equal to amount of loan
taken
271E* Taking loan in contravention of Sec. 269T
Amount of loan or
deposit repaid
271F*
Failure to furnish return of income
Rs 5000
271AA*
Failure to keep and maintain information and documents
u/s 92D, fails to report, maintains or furnishes incorrect
information
2% of value of each
transaction
271BA*
Failure to furnish a report as required u/s 92E
Rs 1,00,000

271C/
271CA*
Failure to deduct/collect TDS in part or full
Equal to amount failed to
deduct/collect
272B/
272BB(1)*
Failure to apply for PAN/ TAN Rs 10,000/-
272A(2)* Failure to comply with notices etc Rs 100 for each day
272AA(1)* Failure to furnish information required u/s 133B Rs 1000
271GA Failure to furnish information or document u/s 285A
2% of value of
transaction or Rs 5000
271H* Failure to furnish TDS/TCS statements Rs 10000 to Rs 100000
271I*
Failure to furnish information/ accurate information u/s
195(6)
Rs 100000

“Imposition of penalty is not automatic . Levy of penalty is not only
discretionary in nature but such discretion is required to be exercised on
the part of the Assessing Officer keeping the relevant factors in mind….
The approach of the Assessing Officer in this behalf must be fair and
objective”
1
Is levy of penalty
discretionary?*
1. [Dilip N Shroff vs JCIT (2007) 166 Taxman 65 (SC)]

The penalty u/s 271(1)(c) is a civil liability. Wilful concealment is not an
essential ingredient for attracting civil liability.
1
Is Mens Rea
necessary for
imposing penalty ?
1. Union of India vs Dharmendra Textile [2008] 166 TAXMAN 65 (SC )

Reduction or waiver of Penalty
 Power rests with Principal Commissioner/Commissioner to reduce
or waive penalty u/s 271(1)(c )
 Full and true disclosure of particulars of income prior to detection
of concealment of income
 Payment or satisfactory arrangement to make payment of any tax
and interest
 Application made by the assessee and cooperation of assessee in
all enquiry relating to assessment, a prerequisite for waiver
 The assessee shall not be entitled to any relief under this section
in relation to any other assessment year
 Prior approval of Chief Commissioner or Director General if income
on which penalty is imposed is more than 5 lacs
Section 273A-Power to reduce or waive Penalty

 COMMISSIONER OF INCOME-TAX & ANOTHER v. U. MANOHAR
RAO [2010]325 ITR 402(Karn)
Penalty—delay in furnishing return –plea that assessee did not have funds
to pay tax –pleas found to be untrue—imposition of penalty valid-- Income-Tax
Act, 1961, s. 271(1)(a).
 COMMISSIONER OF INCOME-TAX v. RATTAN SINGH GREWAL
[2008]
Penalty was imposed for concealment of Income with relating to
unexplained investments. So explanation found unsatisfactory . The assessee
failed to discharge onus-penalty rightly levied under Income-Tax Act, 1961,
s.271(1)(c).
Smt.Sowmya.K 68

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