N.A.D.T.

, Nagpur
JAN, 2009

INTROD UC TION
to In co me-t ax Act
SEC . 2,3,6, 7,8 & 9
by
Dr Vinay Kumar Singh

2
Joint Director (Faculty),
NATIONAL ACADEMY OF DIRECT
TAXES, NAGPUR
 Introduction to Income-
tax .
PREVIOUS YEAR / ASSESSMENT YEAR
Sec 2 (34) Sec 3

Sec 3 Previous year

defined.
3. For the purposes of this Act,
previous year means the
financial year immediately
preceding the assessment
year :
Provided that, in the case of a
business or profession
newly set up, or a source of
income newly coming into
Sec 2 (9) assessment year existence, in the said
means the period of twelve financial year, the previous
months commencing on the 1st year shall be the period
day of April every year ; beginning with the date of
setting up of the business
or profession or, as the 2
 Introduction to Income-
tax .
PREVIOUS YEAR / ASSESSMENT YEAR

Financial Act Part 1 , First

schedule of Finance
Act

Sec 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 :
e.g..
Sec 158B, Provided that where by virtue of any provision of this Act
Sec 174(1) 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), 3
income-tax shall be deducted at the source or paid in
 Introduction to Income-
tax .
INCOME
Sec 2 (24)

SALARIES Sec 17
HOUSE Sec 22
PROPERTY Sec 28
HEADS OF BUSINESS OR
INCOME PROFESSION
CAPITAL GAINS Sec 45
Sec 14 OTHER Sec 56
SSOURCES
4
 Introduction to Income-
tax .
INCOME
Sec 2(24) income
includes
• profits and gains ;
• …….and gains of business or profession.
Profits
Sec 28. The following income shall be chargeable to
income-tax under the head Profits and gains of business or
profession,
(iii)the profits and gains of any business or profession which
was carried on by the assessee at any time during the
Sec 2 (13)
previous business
year ;……….. includes any trade, commerce or
manufacture or any adventure or concern in the nature
of trade, commerce or manufacture ;
Sec 2 (36) profession includes vocation
Sec 45(1) Any profits or gains arising from the transfer of a
capital asset effected in the previous year shall, save as
otherwise provided in sections 54, 54B, 54D, 54E, 54EA,
54EB, 54F , 54G and 54H, be chargeable to income-tax under
the head Capital gains, and shall be deemed to be the 5
 Introduction to Income-
tax .
BUSINESS
Sec 2 (13) business includes any trade, commerce or
manufacture or any adventure or concern in the nature
of trade, commerce or manufacture ;
The term ‘business’ is a word of wide import and in fiscal
statutes it must be constructed in a broad rather than a
restricted sense… [1958]34 ITR 368(SC)

Profit motive is not an essential ingredient … [1946] 14 ITR 488

(CAL.)

One cannot enter into a business transaction with oneself.

However, there can be a business transaction between
partnership and a limited company in which all the partners
of a company are shareholders as the firm is a legal entity
distinct from company … [1969] 72 ITR 603 SC)

Trade in its primary meaning is the exchange of goods for

goods or goods for money; in its secondary meaning it is
repeated activity in the nature of business carried on with
6
profit motive, the activity being manual or mercantile, as
 Introduction to Income-
tax .
BUSINESS
Sec 2 (13) business includes any trade, commerce or
manufacture or any adventure or concern in the nature of
trade, commerce or manufacture ;
When sec 2(13) refers to an adventure in the nature of trade, it
clearly suggests that the transaction cannot be regarded as
trade or business. It is allied to transactions that constitute
trade or business, but may not be trade or business itself …
[1959] 35 ITR 594 (SC)

Facts to be considered are : first, whether the transaction was in

the line of the assessee’s business and, secondly whether it
was an isolated transaction or there was a series of similar
transactions … [1980] 123 ITR 343 (All.)

Even a single and isolated transaction can be held to be capable

of falling within the definition of “business” if it bears clear
indicia of trade. However a stray activity of a non-
businessman would not be business … [1971] 82 ITR 804 (SC)

A transaction of purchase of land cannot be assumed, without 7

more, to be a venture in the nature of trade. Transaction in
 Introduction to Income-
tax .
PROFESSION
Sec 2 (36) profession includes vocation
A company being an artificial person cannot be said to possess
any personal skills. A company does not have mind and body
and, therefore, cannot be engaged in profession.It can neither
have an intellectual skill nor manual skill … [2006] 9 SOT 61
(Delhi) (URO)

Distinction between “business”, “profession” and “vocation” does

not have ant material significance while computing taxable
income. What does not amount to “profession” may amount to
“business” and what does not amount to “business” may
amount to “vocation” … [1947] 15 ITR 263 (All.)

The word profession implies professed attainments I special

knowledge as distinguished from mere skill; ‘special
knowledge’ which is to be acquired only after patient study and
application … United States vs. Laws[1896] 163 US 258

Whether a person in a given case carries on a profession is a

 Introduction to Income-
tax .
INCOME
Sec 2(24) income includes
• profits and gains
• …
• Profit & gains taxable u/s 10(1) of the IT Act, 1922 {similar to sec 28 of
IT Act 1961} are what are understood to be such according to the
ordinary commercial principles. … [1958] 34 ITR 10 (SC)
• Gain is really equivalent of profits. The profit of a trade or business is
the surplus by which the receipts from the trade or business exceeded
the expenditure necessary for the purpose of earning those receipts.
Tax is upon income not on receipts. … [1988] 170 ITR 522 (Pat.)
• Assessable profits must be real profits ….after deducting the liability /
payments out of gross profits. … [1971] 82 ITR 363(SC); [1975]98 ITR
209 (SC)
• Profits .. Requires two parties to the transaction. No profit where two
parties are identical. … [1974] 96 ITR 261 (AP)
• Profit imply a comparison between the state of the business at two
points of time. ..The increase at a later date represents the profit of 9
 Introduction to Income-
tax .
INCOME
Rs. Rs.
OPENING STOCK 100 SALE RECEIPTS 300
PURCHASES 200 CLOSING STOCK 200
ELECTRICITY 100
GROSS PROFIT 100
------ ------
500 500
------ ------

SALARIES GROSS PROFIT 100

30 INTEREST ON LATE PAYMENTS
RENT 20 10
TRAVELLING 10
OFFICE EXPENSES
10
NET PROFIT 40 -------
------ 110
110
Net profit as per accounting / books may be different from the ‘profit & gains’ referred
in IT Act as certain expenses clamed may not be allowable as deduction.
10
 Introduction to Income-
tax .
DIVIDEND
Sec 2(24) income
includes
(ii) dividend ;
Sec 2 (22) dividend includes
(a) any distribution by a company of accumulated profits, whether capitalised or
not, if such distribution entails the release by the company to its shareholders
of all or any part of the assets of the company ;
(b) any distribution to its shareholders by a company of debentures, debenture-
stock, or deposit certificates in any form, whether with or without interest, and
any distribution to its preference shareholders of shares by way of bonus, to
the extent to which the company possesses accumulated profits, whether
capitalised or not ;
(c) any distribution made to the shareholders of a company on its liquidation, to
the extent to which the distribution is attributable to the accumulated profits of
the company immediately before its liquidation, whether capitalised or not ;
(d) any distribution to its shareholders by a company on the reduction of its
capital, to the extent to which the company possesses accumulated profits
which arose after the end of the previous year ending next before the 1st day
of April, 1933, whether such accumulated profits have been capitalised or not ;
11
 Introduction to Income-
tax .
DIVIDEND
Sec 2(24) income
includes
(ii) dividend ;
Sec 2 (22) dividend includes …………………..(contd.)

(e) any payment by a company, not being a company in which the public are
substantially interested, of any sum (whether as representing a part of the assets of
the company or otherwise) made after the 31st day of May, 1987, by way of
advance or loan to a shareholder, being a person who is the beneficial owner of
shares (not being shares entitled to a fixed rate of dividend whether with or without
a right to participate in profits) holding not less than ten per cent of the voting
power, or to any concern in which such shareholder is a member or a partner and in
which he has a substantial interest (hereafter in this clause referred to as the said
concern) or any payment by any such company on behalf, or for the individual
benefit, of any such shareholder, to the extent to which the company in either case
possesses accumulated profits ;

Sec. 2 (32)

12
 Introduction to Income-
tax .
DIVIDEND
Sec 2 (22)(e) dividend includes …………………..(contd.)

(e) any payment by a company, not being a company in which the public are substantially interested, of any
sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of
May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of
shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in
profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder
is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as
the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such
shareholder, to the extent to which the company in either case possesses accumulated profits ;

ec 2 (32) person who has a substantial interest in the

company, in relation to a company, means a person who is the
beneficial owner of shares, not being shares entitled to a fixed
rate of dividend whether with or without a right to participate in
profits, carrying not less than twenty per cent of the voting
power;

person shall be deemed to have a substantial interest in a concern, if

he is (at any time of the previous year) entitled to at least 20 percent of
income of such concern (if such concern is a company, then he should 13
 Introduction to Income-
tax .
DIVIDEND
Company Capital
in which (original)
public are CAPITAL
substantially REDUCTION
interested
LIQUIDATION Capitalized DIVIDEND
profits
ALL MONEY
COMPANIES
Accumulated DEBENTURES
All
profits DEPOSITS shareholder
BONUS
Reserves PREF.SHARES

Shareholder
with 10%
shares (X)
LOAN
any other Concern
Accumulated ADVANCE
in which X has a
Company
profits Sec 2 (22) (e) substantial interest

PAYMENT ON BEHALF OF X
ANYONE
PAYMENT FOR BENEFIT OF X
14
DEEMED DIVIDEND
 Introduction to Income-
tax .
INCOME
Sec 2(24) income includes .................... Contd.
(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 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 sub-clause (iv) or
sub-clause (v) or by any university or other educational institution referred to in
sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution
referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section
10.
Indian
Explanation. For the purposes of this sub-clause, trust Trusts
includes anyAct, 1882
other
Seclegal
3. A obligation ; obligation annexed to the ownership of property, and
"trust" is an
arising out of a confidence reposed in and accepted by the owner, or declared
and accepted by him, for the benefit of another, or of another and the owner.

“Author of the trust": the person who reposes or declares the confidence is called the
“ author of the trust": the person who accepts the confidence is called the "trustee":
the person for whose benefit the confidence is accepted is called the "beneficiary": the
subject-matter of the trust is called "trust-property" or "trust-money": the "beneficial
interest" or "interest" of the beneficiary is his right against the trustee as owner of the
trust-property; and the instrument, if any, by which the trust is declared is called the
15
"instrument of trust"
 Introduction to Income-
tax .
INCOME
Sec 2(24) income includes .................... Contd.
(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 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 sub-clause
(iv) or sub-clause (v) or by any university or other educational institution
referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other
institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of
section 10.
Explanation. For the purposes of this sub-clause, trust includes any other
legal obligation ;
ec 2 (15) charitable purpose includes relief of the poor, education,
medical relief, and the advancement of any other object of general public
utility:

rovided that the advancement of any other object of general public utility
shall not be a charitable purpose, if it involves the carrying on of any
activity in the nature of trade, commerce or business, or any w.e.f.
activity of
1.4.09
rendering any service in relation to any trade, commerce or business, 16 for
 Introduction to Income-

INCOME tax .

Sec 2(24) income includes .................... Contd.

(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 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 sub-clause (iv) or sub-clause (v) or by
any university or other educational institution referred to in sub-clause
(iiiad) or sub-clause (vi) or by any hospital or other institution referred
to in sub-clause (iiiae) or sub-clause (via) 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 ;

17
 Introduction to Income-

SALARY tax .

Sec 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;
(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;
(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; and (viii) the
contribution made by the Central Government or any other 18
 Introduction to Income-

SALARY tax .

Sec 17 (1) salary includes ………………………………..

(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;
[Explanations …]
(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; and
19
(vi) the value of any other fringe benefit or amenity (excluding ……
 Introduction to Income-

SALARY tax .

Sec 17 (1) salary includes ………………………………..

(2) perquisite includes ………………………………..
(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 or 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;
(iii) any amount due to or received, whether in lump sum or 20
 Introduction to Income-

INCOME tax .

Sec 2(24) income includes .................... Contd.

(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 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 sub-clause (iv) or sub-clause (v) or by
any university or other educational institution referred to in sub-clause
(iiiad) or sub-clause (vi) or by any hospital or other institution referred
to in sub-clause (iiiae) or sub-clause (via) 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 allowanceRefer Secto10
granted (14)
the r.w. Rule
assessee 2 BB
either to meet his personal
21
expenses at the place where the duties of his office or employment of
 Introduction to Income-

INCOME tax .

Sec 2 (32)
Sec 2(24) income includes ………contd.

(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,
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 the22
beneficiary ;
 Introduction to Income-
tax .
REPRESENTATIVE ASSESSEE
Sec160. (1) For the purposes of this Act, representative assessee
means
• in respect of ......non-resident ..........agent of the non-
resident.........
• in respect of ......minor, lunatic or idiot............ the guardian
or manager who is entitled to receive or is in receipt of such
income on behalf of such minor, lunatic or idiot;
• in respect of income which the Court of Wards, the
Administrator- General, the Official Trustee or any receiver
or manager ........appointed by or under any order of a court,
receives or is entitled to receive, on behalf or for the benefit of
any person, such Court of Wards, Administrator-General, Official
Trustee, receiver or manager;
• in respect of income which a trustee appointed under a trust
declared by a duly executed instrument in writing whether
testamentary or otherwise ........ receives or is entitled to receive
on behalf or for the benefit of any person, such trustee or
trustees; 23
 Introduction to Income-
tax .
REPRESENTATIVE ASSESSEE
Sec160. (1) For the purposes of this Act, representative assessee
means
Explanation 1.A trust which is not declared by a duly executed instrument
in writing [including any wakf deed which is valid under the
Mussalman Wakf Validating Act, 1913 (6 of 1913),] shall be deemed,
for the purposes of clause (iv), to be a trust declared by a duly
executed instrument in writing if a statement in writing, signed by the
trustee or trustees, setting out the purpose or purposes of the trust,
particulars as to the trustee or trustees, the beneficiary or
beneficiaries and the trust property, is forwarded to the Assessing]
Officer,
(i) where the trust has been declared before the 1st day of June, 1981,
within a period of three months from that day; and
(ii) in any other case, within three months from the date of declaration
of the trust.
Explanation 2.For the purposes of clause (v), oral trust means a trust
which is not declared by a duly executed instrument in writing
[including any wakf deed which is refer
Also valid to
under the Mussalman Wakf
Sec 159(3)
Validating Act, 1913 (6 of 1913),] and which is not deemed under
24
Explanation 1 to be a trust declared by a duly executed instrument in
 Introduction to Income-

INCOME tax .

Money recovered in respect of loss or expenditure or trading

Sec 2(24) income includes
liability claimed………contd.
as deduction under the head “income from
other sources’

(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 ;
Money recovered in respect of loss or expenditure or trading liability claimed as deduction

(ve)Money
anyrecovered
sum chargeable to income-tax
in respect of building, machine, plant under clause
or furniture (v) of
which exceed its written
down value
section 28 ;
Money received on sale of scientific asset for which deduction is claimed

25
 Introduction to Income-

Sec 28 tax .

Sec 28. 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 of any other company,
at or in connection with the termination of his office or the
modification of the terms and conditions relating thereto ;
(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, 26
 Introduction to Income-

Sec 28 tax .

Sec 28. The following income shall be chargeable to income-tax

under the head Profits and gains of business or profession,……
……. contd.
(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 ;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book
Scheme, being the Duty Remission Scheme under the
export and import policy formulated and announced under
section 5 of the Foreign Trade (Development and Regulation) 27
 Introduction to Income-

Sec 28 tax .

Sec 28. The following income shall be chargeable to income-tax

under the head Profits and gains of business or profession,……
……. contd.

(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 ………]
(va) any sum, whether received or receivable, in cash or kind,
under an agreement for (a) not carrying out any activity in
relation to any business; or
(b) not sharing any know-how, patent, copyright, trade-
mark, licence, franchise or any other business or commercial
right of similar nature or information or technique likely to
assist in the manufacture or processing of goods or provision28
for services: [Provided …………. ] [Explanation. ………..]
 Introduction to Income-

INCOME tax .

Sec 2(24) income includes ………contd.

(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 ;
(viia) the profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;

Sec 2 (19) co-operative society means a co-operative society registered under the
Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being
in force in any State for the registration of co-operative societies ;

The Co-operative Societies Act, 1912

Sec 4. Societies which may be registered. Subject to the provisions hereinafter
contained, a society which has as its object the promotion of the economic interests of
its members in accordance with co-operative principles, or a society established with
the object of facilitating the operations of such a society, may be registered under this
Act with or without limited liability: 29
 Introduction to Income-

INCOME tax .

Sec 2(24) income includes ………contd.

(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 ;
(viia) the profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;
(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.
Explanation. For the purposes of this sub-clause,
• lottery includes winnings from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever, under any scheme or arrangement by
whatever name called;
(ii) card game and other game of any sort includes any game show, an
entertainment programme on television or electronic mode, in which people
compete to win prizes or any other similar game ;
30
 Introduction to Income-
tax .
INCOME
Sec 2(24) income includes ………contd. )
(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 ;
(xi) 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 the Explanation to clause (10D) of
section 10 ;
(xii) any sum referred to in clause (va)] of section 28;
(xiii) any sum referred to in clause (v) of sub-section (2) of section 56;
(xiv) any sum referred to in clause (vi) of sub-section (2) of section 56;

Sec 10 (10D) Explanation. For the purposes of this clause, Keyman insurance
policy means a life insurance policy taken by a person on the life of another person
who is or was the employee of the first-mentioned person or is or was connected in any
31
manner whatsoever with the business of the first-mentioned person;
 Introduction to Income-
Sec 56 tax .

Sec 56 (2) In particular, and without prejudice to the generality of the

provisions of sub-section (1), the following incomes, shall be
chargeable to income-tax under the head Income from other sources,
namely :
(vi) where any sum of money, the aggregate value of which
exceeds fifty thousand rupees, is received without
consideration, by an individual or a Hindu undivided family, in
any previous year from any person or persons on or after the
1st day of April, 2006, the whole of the aggregate value of such
sum:
Provided that this clause shall not apply to any sum of money received
(a) from any relative; or (b) on the occasion of the marriage of the
individual; or (c) under a will or by way of inheritance; or (d) in
contemplation of death of the payer; or (e) from any local authority as
defined in the Explanation to clause (20) of section 10; or (f) from any
fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred
to in clause (23C) of section 10; or (g) from any trust or institution
registered under section 12AA.
Explanation
Sec .Forinthe
2 (41) relative, purposes
relation of this clause,
to an individual, meansrelative means
the husband, wife,(i) spouse
brother or
sisteroforthe
anyindividual; (ii) brother
lineal ascendant or sister
or descendant of of the
that individual;
individual ; (iii) brother or
32
sister of the spouse of the individual; (iv) brother or sister of either of
 Introduction to Income-
Sec 56 tax .

Sec 56 (2) In particular, and without prejudice to the generality of the

provisions of sub-section (1), the following incomes, shall be
chargeable to income-tax under the head Income from other sources,
namely : ............ Contd.
(id) income by way of interest on securities, if the income is not
chargeable to income-tax under the head Profits and gains of
business or profession ;
Sec (28A) interest means interest payable in any manner in
respect of any moneys borrowed or debt incurred (including a
deposit, claim or other similar right or obligation) and
includes any service fee or other charge in respect of the
moneys borrowed or debt incurred or in respect of any credit
facility which has not been utilised ;

Sec(28B) interest on securities means,

(i) interest on any security of the Central Government or a State
Government ;
(ii) interest on debentures or other securities for money issued
by or on behalf of a local authority or a company or a
corporation established by a Central, State or Provincial Act 33
;
 Introduction to Income-

INCOME tax .

Sec 2(24) income includes ………contd.

(vi) any capital gains chargeable under section 45 ;

Sec 2 (47)

Sec 45(1) Any profits or gains arising from the transfer of a

capital asset effected in the previous year shall, save as
otherwise provided in sections 54, 54B, 54D, 54E, 54EA,
54EB, 54F , 54G and 54H, be chargeable to income-tax under
the head Capital gains, and shall be deemed to be the
income of the previous year in which the transfer took place.

34
 Introduction to Income-

TRANSFER tax .

ec 2 (47) Transfer, in relation to a capital asset, includes,

i) the sale, exchange or relinquishment of the asset ; or

ii) the extinguishment of any rights therein ; or

iii) the compulsory acquisition thereof under any law ; or Sec 2 (48)

iv) in a case where the asset is converted by the owner thereof

Sec into,
2 (26A) & or is treated
2(26B)
by him as, stock-in-trade of a business carried on by him, such conversion or
treatment ;or
Sec 2 (48) zero coupon bond means a bond
(a) issued by any infrastructure capital company or infrastructure capital fund or public
iva) the maturity or redemption of a zero coupon bond; or
sector company on or after the 1st day of June, 2005;
(b) in respect of which no payment and benefit is received or receivable before maturity
or redemption from infrastructure capital company or infrastructure capital fund or
public sector company; and
(c) which the Central Government may, by notification in the Official Gazette, specify in
this behalf. 35
 INFRASTRUCTURE CAPITAL COMPANY / tax .
Introduction to Income-

FUND
PORT / AIRPORT / INLAND
WATERWAY
ROAD / BRIDGE / RAIL
HIGHWAY
WATER SUPP / IRRIGATION /
SANITATION
BUSINE INFRASTRUCTUR
Sec 2(26A)
SS u/s E
INFRASTRUCT TELECOMMUNIC
80IA (4) ATION
URE CAPITAL INDUSTRIAL PARK
COMPANY /S.E.Z.
CAPITAL POWER GEN. &
DIST.
LONG TERM REVIVING POWER
Sec 2(26B) GEN. PLANT
DEBT
INFRASTRUCT S.E.Z. u/s/ 80 IAB (1)……..post
1.4.05
URE CAPITAL
FUND HOUSING PROJECT u/s/ 80
IB (10)
operating under a Trust
deed registered under ≥ THREE STAR HOTEL
Registration Act, 1908
≥ 100 BED HOSPITAL

36
 Introduction to Income-

TRANSFER tax .

ec 2 (47) Transfer, in relation to a capital asset, includes,

i) the sale, exchange or relinquishment of the asset ; or

ii) the extinguishment of any rights therein ; or

iii) the compulsory acquisition thereof under any law ; or

iv) in a case where the asset is converted by the owner thereof into, or is treated
by him as, stock-in-trade of a business carried on by him, such conversion or
treatment ;or

a zero couponpossession
iva) the maturity or redemption ofPROPERTY bond; or
TRANSFER TRANSFER
OR CONTRACT FOR SALE OF EE
v) any transaction involving the allowing of the possession of any immovable
PROPERTY
property to be taken or retained in part performance of a contract of the nature
PRICE
can not
referred evict
to in transferee
section 53A of the Transfer of PropertyWilling to pay
Act, 1882 the
(4 of price; or
1882)
37
 Introduction to Income-

TRANSFER tax .

ec 2 (47) Transfer, in relation to a capital asset, includes

(i)........................(iv)..............

vi) any transaction (whether by way of becoming a member of, or acquiring shares
in, a co-operative society, company or other association of persons or by way of
any agreement or any arrangement or in any other manner whatsoever) which has
the effect of transferring, or enabling the enjoyment of, any immovable property.

ec 269UA (d) immovable property means

xplanation. For the purposes of sub-clauses (v) and (vi), immovable property shall
have the same meaning as in clause (d) of section 269UA;
i) any land or any building or part of a building, and includes, where any land or
any building or part of a building is to be transferred together with any machinery,
plant, furniture, fittings or other things, such machinery, plant, furniture, fittings
or other things also.

xplanation. For the purposes of this sub-clause, land, building, part of a building,
machinery, plant, furniture, fittings and other things include any rights therein ;

ii) any rights in or with respect to any land or any building or a part of a building
(whether or not including any machinery, plant, furniture, fittings or other things
38
therein) which has been constructed or which is to be constructed, accruing or
 Introduction to Income-

INCOME tax .

Sec 2(24) income includes ………contd.

(vi) any capital gains chargeable under section 45 ;

Sec 2 (14)

Sec 45(1) Any profits or gains arising from the transfer of a

capital asset effected in the previous year shall, save as
otherwise provided in sections 54, 54B, 54D, 54E, 54EA,
54EB, 54F , 54G and 54H, be chargeable to income-tax under
the head Capital gains, and shall be deemed to be the
income of the previous year in which the transfer took place.

39
 Introduction to Income-
CAPITAL ASSET tax .

Sec 2 (14) capital asset means property of any kind held by an

assessee, whether or not connected with his business or
profession, …..
Property is not defined in I T Act / General Clauses Act /
Constitution / Transfer of Property Act

The Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002
Sec 2(t) "property" means-
(i) immovable property;
(ii) movable property;
(iii) any debt or any right to receive payment of money, whether secured or
unsecured;
(iv) receivables, whether existing or future;
(v) intangible assets, being know-how, patent, copyright, trade mark,
licence, franchise or any other business or commercial right of similar
nature;
40
 Introduction to Income-
CAPITAL ASSET tax .

Sec 2 (14) capital asset means property of any kind held by an

assessee, …..

 The word ‘property’ does not mean merely physical property,

but also means the right, title or interest in it. In the case of a
mortgage or lease, different persons will have different rights
in the same property. When a person who has mortgaged a property
transfers it to another person, what he transfers is only those rights that
which he possesses.… [1992] 197 ITR 123(Guj)
 A property is a bundle of rights which the owner can lawfully
exercise to the exclusion of all others … [1978]113ITR 37(Cal);
AIR 1954 SC119.
 The word property should be given a liberal and wide
connotation so as to extend to those well-recognised types of
interest which have the insignia or characteristic of property
right … AIR 1963 SC 540.
 The term property is a term of the widest import and subject to
any limitation which the context may require, it signifies every
possible interest which a person can clearly hold and enjoy … 41
 Introduction to Income-
CAPITAL ASSET tax .

Sec 2 (14) capital asset means property of any kind held by an

assessee, …..

EXAMPLE OF PROPERTY
 Share of a partner in a partnership concern … [1957] 31 ITR
711 (Mad)
 Goodwill of a business … [1981] 128 ITR 294 (SC)
 Leasehold rights in mines … [1988] 172 ITR 311 (SC)
 License for manufacturing vanaspati products … [1979] 119
ITR 583 (Mad)
 Rights to subscribe for shares in a company … [1967] 63 ITR
651 (SC)
 Route permits … [1979] 116 ITR 493 (Mad.)
 Right of tenancy under the Tenancy Act … AIR 1965 SC 414
 A business undertaking [1992] 193 ITR (St.) 105 (SC)
 Shade trees in a coffee estate … [1996] 222 ITR 197 (Ker)

EXAMPLE OF ‘Not a property’ 42

 Introduction to Income-
CAPITAL ASSET tax .

Sec 2 (14) capital asset means property of any kind held by an

assessee, whether or not connected with his business or
profession, but does not include
• any stock-in-trade, consumable stores or raw materials held for
the purposes of his business or profession ;
• personal effects, that is to say, movable property (including
wearing apparel and furniture) held for personal use by the
assessee or any member of his family dependent on him, but
Explanation. For the purposes of this sub-
excludes
clause, jewellery includes
(a) jewellery;
(a) ornaments made of gold, silver,
(b) archaeological platinum or any other precious metal
collections; or any alloy containing one or more of
(c) drawings; such precious metals, whether or not
(d) paintings; containing any precious or semi-
precious stone, and whether or not
(e) sculptures; or worked or sewn into any wearing
(f) any work of art. apparel;
(b) precious or semi-precious stones,
whether or not set in any furniture, 43
 Introduction to Income-
CAPITAL ASSET tax .

Sec 2 (14) capital asset means property of any kind held by an

assessee, whether or not connected with his business or
profession, but does not include
(iii) agricultural land in India, …..
 To qualify for ‘Agricultural land’, it is not necessary that the
land was once an agricultural land. It must be agricultural land
at the time of sale … [1957] 31 ITR 480 (Mad.)
 If it is used for agricultural purposes, or even if the agricultural
use has ceased, but it is apparent that the land was meant to
be used for agricultural purposes, it will be agricultural land …
[1971] 81 ITR 446 (Guj)
 Where land is agricultural land on the date of sale, it is taken
as ‘agricultural land’ and it matters very little how the
subsequent purchaser intends land in question to be put to use
… [2007] 292 ITR 481 (Mad)
 Factors to be considered : Whether land was classified as
agricultural lands in revenue records- not conclusive; Whether
actually used for agricultural purposes; Whether such use for a
long period; Whether income derived from the agricultural
operations carried on the land bore any rational proportion to 44
investment; Whether put to any alternate use on the relevant
 Introduction to Income-
CAPITAL ASSET tax .

Sec 2 (14) capital asset means property of any kind held by an

assessee, whether or not connected with his business or
profession, but does not include
(iii) agricultural land in India, not being land situate
(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, urbanisation of that area and other relevant considerations,
specify in this behalf by notification in the Official Gazette;]
(iv) 6 per cent Gold Bonds, 1977,or 7 per cent Gold Bonds,
1980,or National Defence Gold Bonds, 1980, issued by the 45
 Introduction to Income-
tax .
CAPITAL ASSET& CAPITAL GAIN
Sec 2(29A) long-term capital asset means a capital
asset which is not a short-term capital asset ;
Sec 2(29B) long-term capital gain means capital
gain arising from the transfer of a long-term capital
asset ;
Sec 2(42B) short-term capital gain means capital
gain arising from the transfer of a short-term capital
asset ;
Sec 2(42A) short-term capital asset means a
capital asset held by an assessee for not more than
thirty-six months immediately preceding the date of
its transfer :
Provided that in the case of a share held in a company or any
other security listed in a recognised stock exchange in
India or a unit of the Unit Trust of India established under
46
the Unit Trust of India Act, 1963 (52 of 1963) or a unit of a
 Introduction to Income-
.
tax .

Sec 2(42A) short-term capital asset ......

Explanation 1.(i) In determining the period for which any
capital asset is held by the assessee
(a) in the case of a share held in a company in liquidation, there
shall be excluded the period subsequent to the date on which
the company goes into liquidation ;
(b) in the case of a capital asset which becomes the property of
the assessee in the circumstances mentioned in sub-section
(1) of section 49, there shall be included the period for which
the asset was held by the previous owner referred to in the
said section ;

47
 Introduction to Income-
.
tax .

Sec 49. (1) Where the capital asset became the property of the assessee
(i) on any distribution of assets on the total or partial partition of a Hindu
undivided family;
(ii) under a gift or will;
(iii) (a) by succession, inheritance or devolution, or (b) on any distribution of assets
on the dissolution of a firm, body of individuals, or other association of persons, where
such dissolution had taken place at any time before the 1st day of April, 1987, or(c) on
any distribution of assets on the liquidation of a company, or (d)under a transfer to a
revocable or an irrevocable trust, or (e) under any such transfer as is referred to in
clause (iv)or clause (v)or clause (vi)or clause (via)or clause (viaa) or clause (vica) or
clause (vicb)of section 47;
(iv)such assessee being a Hindu undivided family, by the mode referred to in sub-
section (2) of section 64 at any time after the 31st day of December, 1969,
the cost of acquisition of the asset shall be deemed to be the cost for which the
previous owner of the property acquired it, as increased by the cost of any
improvement of the assets incurred or borne by the previous owner or the assessee, as
the case may be.
Explanation. In this sub-section the expression previous owner of the property in
relation to any capital asset owned by an assessee means the last previous owner of
the capital asset who acquired it by a mode of acquisition other than that referred to in
clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub-section. 48
 Introduction to Income-
.
tax .

PARTITION OF HUF
(i) (Bigger) HUF CA (Smaller ) HUF

[ Transfer ??] without consideration

GIFT / WILL
(ii) X CA Y
SUCCESSION / INHERITANCE / DEVOLUTION
(iii) X CA Y

DISSOLUTION OF FIRM / BOI / AOP

Firm / BOI / AOP / Co. CA Y
LIQUIDATION OF COMPANY
Sec 49 (1)

PARTITION OF HUF
(iv) INDIVIDUAL CA HUF
 Introduction to Income-
AMALGAMATION .
tax .

Sec 2(1B) amalgamation, in relation to companies, means the merger of one or

more companies with another company or the merger of two or more companies to
form one company (the company or companies which so merge being referred to as
the amalgamating company or companies and the company with which they merge
or which is formed as a result of the merger, as the amalgamated company) in
such a manner that
(i) all the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation ;
(ii) all the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of the
amalgamation ;
(iii) shareholders holding not less than three-fourths in value of the shares in the
amalgamating company or companies (other than shares already held therein
immediately before the amalgamation by, or by a nominee for, the amalgamated
company or its subsidiary) become shareholders of the amalgamated company by virtue
of the amalgamation,

otherwise than as a result of the acquisition of the property of one company by

another company pursuant to the purchase of such property by the other company
or as a result of the distribution of such property to the other company after the
winding up of the first-mentioned company ;
50
 Introduction to Income-
.
tax .

Sec 2(42A) short-term capital asset ......

Explanation 1.(i) In determining the period for which any
capital asset is held by the assessee
(c) in the case of a capital asset being a share or shares in an
Indian company, which becomes the property of the assessee
in consideration of a transfer referred to in clause (vii) of
section 47, there shall be included the period for which the
share or shares in the amalgamating company were held by
the assessee ;
SHARE IN AMALGAMATING AMALGAMATING CO.
Shareholder CA COMAPNY

SHARE IN AMALGAMATED
AMALGAMATING CO.
COMPANY

(d) in the case of a capital asset, being a share or any other

security (hereafter in this clause referred to as the financial
asset) subscribed to by the assessee on the basis of his right
to subscribe to such financial asset or subscribed to by the
person in whose favour the assessee has renounced his right
51
to subscribe to such financial asset, the period shall be
 Introduction to Income-
.
tax .

Sec 2(42A) short-term capital asset ......

Explanation 1.(i) In determining the period for which any capital asset is
held by the assessee

(e) in the case of a capital asset, being the right to subscribe to

any financial asset, which is renounced in favour of any other
person, the period shall be reckoned from the date of the offer
of such right by the company or institution, as the case may
be, making such offer ;
(f) in the case of a capital asset, being a financial asset, allotted
without any payment and on the basis of holding of any other
financial asset, the period shall be reckoned from the date of
the allotment of such financial asset ;
(g) in the case of a capital asset, being a share or shares in an
Indian company, which becomes the property of the assessee
in consideration of a demerger, there shall be included the
period for which the share or shares held in the demerged
company were held by the assessee ; 52
 Introduction to Income-
.
tax .

Sec 2(42A) short-term capital asset ......

Explanation 1.(i) In determining the period for which any capital asset is
held by the assessee

(h) in the case of a capital asset, being trading or clearing rights

of a recognised stock exchange in India acquired by a person
pursuant to demutualisation or corporatisation of the
recognised stock exchange in India as referred to in clause
(xiii) of section 47, there shall be included the period for
which the person was a member of the recognised stock
exchange in India immediately prior to such demutualisation
or corporatisation;
(ha) in the case of a capital asset, being equity share or shares
in a company allotted pursuant to demutualisation or
corporatisation of a recognised stock exchange in India as
referred to in clause (xiii) of section 47, there shall be
included the period for which the person was a member of
the recognised stock exchange in India immediately prior to
53
such demutualisation or corporatisation;
 Introduction to Income-
.
tax .

Sec 2(42A) short-term capital asset ......

Explanation 1.(i) In determining the period for which any capital asset is
held by the assessee
(hb) in the case of a capital asset, being any specified security or sweat
equity shares allotted or transferred, directly or indirectly, by the
employer free of cost or at concessional rate to his employees (including
former employee or employees), the period shall be reckoned from the
date of allotment or transfer of such specified security or sweat equity
shares;
(ii) ..........
Explanation 2. For the purposes of this clause, the expression security
shall have the meaning assigned to it in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956).
Explanation 3. For the purposes of this clause, the expressions specified
The Securities Contracts (Regulation) Act, 1956
security and sweat equity shares shall have the meanings respectively
Sec 2 (h) "securities" include-
assigned to them in the Explanation to clause (d) of sub-section (1) of
(iii)shares,
sectionscrips, stocks, bonds, debentures, debenture stock or other marketable
115WB;
securities of a like nature in or of any incorporated company or other body corporate;
(ii) Government securities;
(iia) such other instruments asSec may be of
2 (b) declared by the central
The Securities Government
Contracts toAct,
(Regulation) be 1956
securities; and
(iii) rights or interests in securities; 54
 Introduction to Income-
.
tax .

Sec 2(42A) short-term capital asset ......

Explanation 1.(i) In determining the period for which any capital asset is
held by the assessee
(ii) In respect of capital assets other than those mentioned in clause (i), (i) the
period for which any capital asset is held by the assessee shall be
determined subject to any rules which the Board may make in this
behalf.
Explanation 2. For the purposes of this clause, the expression security
shall have the meaning assigned to it in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956).
Explanation 3. For the purposes of this clause, the expressions specified
Secsecurity and sweat
115WB(1)(d )...........equity shares shall have the meanings respectively
assigned to the
Explanation.For them in the Explanation
purposes to clause (d) of sub-section (1) of
of this clause,
section
•specified 115WB;
security means the securities as defined in clause (h) of section 2 of
the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where
employees stock option has been granted under any plan or scheme therefore,
includes the securities offered under such plan or scheme;
(ii) 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.
55