[SEC. 4]


Aggregation of agricultural income for rate purposes is valid - The clubbing of agricultural income with the non-agricultural income for rate purposes as provided by the Finance Acts is not unconstitutional - Union Home Products Ltd. v. Union of India [1995] 215 ITR 758 (Kar.).


Notification is not retrospective - Notification dated 31-3-1983 extending provisions of 1961 Act to Continental Shelf and Exclusive Economic Zone of India with effect from 1-4-1983 was not retrospective and, hence, did not apply to assessment year 1983-84 - Oil & Natural Gas Corpn. Ltd. v. Atwood Oceanic International, S.A. [2008] 170 Taxman 203 (SC).


Rule-making authority has no plenary powers - No tax can be imposed by any bye-law or rule or regulation unless the statute under which the subordinate legislation is made specially authorises the imposition. The basis of the statutory power conferred by the statute cannot be transgressed by the rule-making authority. A rule-making authority has no plenary power. It has to act within the limits of the power granted to it - Bimal Chandra Banerjee v. State of Madhya Pradesh [1971] 81 ITR 105 (SC).

Estoppel and any other equitable doctrine cannot be applied - The doctrine of ‘approbate and reprobate’ is only a species of estoppel; it applies only to the conduct of parties. As in the case of estoppel it cannot operate against the provision of a statute. If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in the tax law; a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the ITO has no power to impose tax on the said income - CIT v. V.MR.P. Firm, Muar [1965] 56 ITR 67 (SC).

Obligations of assessing authorities - The authorities under the Act are under an obligation to Act in accordance with law. Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only due legitimate taxes are collected. If a particular levy is not permitted under the Act, tax cannot be levied by applying the doctrine of estoppel. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law - Balmukund Acharya v. Dy. CIT [2009] 176 Taxman 316 (Bom.).

Even if wrong person has been taxed, ITO can tax the right person - When section 4(1) speaks of levy of income-tax on the total income of every person, it necessarily means the person who is liable to pay income-tax in respect of that total income according to law. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This is so irrespective of the fact which course is more beneficial to the revenue - ITO v. Ch. Atchaiah [1996] 84 Taxman 630/218 ITR 239 (SC).

If computation provisions cannot apply, charging provisions will also not apply - The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section - CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC).

Charging provision must clearly impose tax obligation - The subject is not to be taxed unless the charging provision clearly imposes the obligation - CIT v. Ajax Products Ltd. [1965] 55 ITR 741 (SC).

Where real assessable entity is doubtful protective assessment is permissible - Banyan & Berry v. CIT [1996] 84 Taxman 515 (Guj.).

Rate of tax cannot be varied by ITO - The ITO has no power to vary the rate at which the income of the previous year is to be assessed. The rate of tax is fixed by the Finance Act every year. By section 3 of the 1922 Act [corresponding to section 4 of the 1961 Act] the tax is levied at that rate for an assessment year. Once the length of the previous year is fixed and the income of the previous year is determined, that income must be charged at the rate specified in the Finance Act and at no other rate - Esthuri Aswathaiah v. CIT [1966] 60 ITR 411 (SC).

Income cannot be taxed in vacuo - It is true that under the Income-tax Act it is income that is taxed but it cannot be taxed in vacuo. It is taxed in the hands of a person - CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC).

Levy of tax, and not chargeability of income, is dependent on Finance Act - Under the scheme of the Income-tax Act, the income of an assessee attracts the quality of taxability with reference to the standing provisions of the Act but the payability and the quantification of the tax depend on the passing and the application of the annual Finance Act. Thus, income is chargeable to tax independent of the passing of the Finance Act but until the Finance Act is passed, no tax can be actually levied - Chatturam Horilram Ltd. v. CIT [1955] 27 ITR 709 (SC).

There can be no assessment on a dead person - The assessee under the Act has ordinarily to be a living person and cannot be a dead person because his legal personality ceases on his death. Therefore, there can be no assessment on a dead person - CIT v. Amarchand N. Shroff [1963] 48 ITR 59 (SC).

Company cannot be assessed on income prior to its incorporation - A company becomes a legal entity in the eye of law only when it is incorporated. Prior to its incorporation, it simply does not exist. Therefore, the pre-incorporation profits could not be included in the assessment of the assessee-company - CIT v. City Mills Distributors (P.) Ltd. [1996] 85 Taxman 352/219 ITR 1 (SC).

What is not otherwise taxable cannot become taxable because of admission of the assessee - The chargeability is not dependent on the admission of or waiver by the assessee. Chargeability is dependent on the charging section which needs to be strictly construed. What is not otherwise taxable cannot become taxable because of admission of the assessee. Nor there can be any waiver of the right otherwise admissible to the assessee in law - SAIL DSP VR Employees Association 1998 v. Union of India [2003] 128 Taxman 704/262 ITR 638 (Cal.).

Sikkim - Indian Income-tax Act, inter alia, taxes income which accrues or arises in India, it is immaterial whether the petitioner-company has its head office in Sikkim or may be carrying on business activities there - Alankar Commercial (P.) Ltd. v. Asstt. CIT [2000] 244 ITR 31/113 Taxman 115 (SC).


‘Income-tax’ includes surcharge and additional surcharge - The expression ‘income-tax’ used in the Finance Act and the Income-tax Act includes surcharge and additional surcharge wherever provided in the Act. The surcharge, the special surcharge and the additional surcharge form part of the income-tax and super-tax and are not separate taxes by themselves - CIT v. K. Srinivasan [1972] 83 ITR 346 (SC).


Each year is a self-contained accounting period - For income-tax purposes, each year is a self-contained accounting period and the revenue authorities can take into consideration income, profits and gains made in that year and they are not concerned with potential profits which may be made in another year any more than they are concerned with losses which may occur in future - Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC).


Taxpayer must fall under the letter of the law - The income-tax law seeks to put in the net certain class of income, and can only successfully do so if it frames a provision appropriate to meet that end. If the law fails and the taxpayer cannot be brought within its letter, no question of unjustness as such arises - CIT v. Jalgaon Electric Supply Co. Ltd. [1960] 40 ITR 184 (SC).

Ultimate destination/utilisation of income is not relevant - Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits - N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 (SC).

It is well-settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability.

Liability arises at point of accrual - Under the Income-tax Act, liability to pay income-tax arises on the accrual of the income, and not from the computation made by the taxing authorities in the course of assessment proceedings; it arises at a point of time not later than the close of the year of account - Kalwa Devadattam v. Union of India [1963] 49 ITR 165 (SC).

Liability crystallizes on last day of accounting period - An income-tax liability crystallizes on the last day of the previous year relevant to an assessment year under the Income-tax Act - CWT v. K.S.N. Bhatt [1984] 145 ITR 1 (SC).


Accounting practice cannot override provisions of the Act - It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act - Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC).

When the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law, and not in accordance with accountancy practice. Accountancy practice cannot override the provisions of the Act - CIT v. Vaikundam Rubber Co. Ltd. [2000] 241 ITR 50 (Ker.).

Thus, if a person borrows money for business purposes but utilises that money to earn interest, however temporarily, the interest so generated will be his income, and merely because it was utilised to repay the interest on the loan taken by the assessee, it would not cease to be his income - Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC).


Income cannot be taxed twice - It is a fundamental rule of the law of taxation that, unless otherwise expressly provided, income cannot be taxed twice - Laxmipat Singhania v. CIT [1969] 71 ITR 291 (SC)/ITO v. Bachu Lal Kapoor [1966] 60 ITR 74 (SC).

Question of double taxation must be decided having regard to who the assessee is; if the assessee is different, the question of double taxation would not arise - ITO v . S. Radha Krishnan [2002] 122 Taxman 715/254 ITR 561 (SC).

Same income cannot be taxed in two different years - CIT v. Ram Sankar Prasad [1989] 45 Taxman 282 (Cal.).

Same income cannot be taxed repeatedly, whether against different persons or same person - Joti Prasad Agarwal v. ITO [1959] 37 ITR 107 (All.).

Same income cannot be taxed under two different heads - CIT v. Surat Cotton Spg. & Wvg. Mills (P.) Ltd. [1993] 202 ITR 932/71 Taxman 103 (Bom.).

Same person can be taxed separately as individual and HUF - The same person can be taxed both as an individual as well as the karta of his family. The two capacities are totally different. The individual and the HUF are totally different units of taxation; they are two different assessees - CIT v. Rameshwarlal Sanwarmal [1971] 82 ITR 628 (SC).

Where tax is imposed under different enactments - Where tax is imposed by two different Legislatures under different enactments, question of double taxation stricto senso does not arise - Mahaveer Kumar Jain v. CIT [2005] 142 Taxman 130 (Raj.).

Tax-borne income which passes to another person can be taxed again - T.N.K. Govindaraju Chetty & Co. (P.) Ltd. v. CIT [1964] 51 ITR 731 (Mad.).


Law in force on 1st April of financial year will apply for assessment - It is well-settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessment of that year. Any amendments in the Act or Rules which come into force after the first day of April of a financial year would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force - Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 (SC).

Amendment issued after 1st April will not apply to that assessment year - An amendment to the Act which is effective from a date later than first of April of the assessment year, does not apply to assessments for that assessment year - CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC).

Retrospective amendments apply to appellate/reference proceedings - If during pendency of appeal or reference, law is amended retrospectively, amended law is to be applied by authority deciding the appeal/reference - CIT v. Straw Products Ltd. [1966] 60 ITR 156 (SC).


Planning must be legitimate [Mc Dowell case] - Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges - McDowell & Co. Ltd. v. CTO [1985] 22 Taxman 11/154 ITR 148 (SC).

Court can go behind and look into substance of transaction - It is the duty of the Court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of a transaction - Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC)/Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [1985] 15 ITR 636 (Punj. & Har.).

Though a taxpayer may resort to a device to divert the income before it accrues or arises to him, the effectiveness of the device depends upon its genuineness. The substance of the transaction has to be assessed by applying the taxing statute so as to ascertain whether it is a sham or make-believe transaction or one which is genuine and, therefore, is eligible for deduction under the Act. Hence, Courts have to look into the form of the transaction to find out its substance so as to ensure that there is no avoidance of tax by a method impermissible in law. Where assessee-firm paid commission to a firm and partners of assessee-firm and payee-firm were same, as creation of payee-firm was nothing but a device adopted by assessee for siphoning off profits in form of commission as well as marketing and sales promotion expenses, Assessing Officer was right in not allowing said expenses - Onam Agarbathi Co. v. Dy. CIT [2009] 310 ITR 56 (Kar.).

McDowell decision does not rule out ignoring of genuine/real transactions - Decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), and the English decisions which adopted a new approach in the case of a scheme consisting of several transactions, do not rule out a transaction which is real and genuine from being ignored merely on the ground that it results in reducing the tax burden. Where there is a commercial or a business purpose in a transaction which only means that a transaction has the result of reducing the tax burden as a result of or a real deprivation of income as in the case of a family partition, that transaction would be a permissible attempt for reducing the tax burden - M.V. Valliappan v. ITO [1988] 170 ITR 238 (Mad.).

McDowell decision has only deprecated questionable and doubtful acts - Banyan & Berry v. CIT [1996] 84 Taxman 515 (Guj.).

McDowell decision does not say that taxpayer should arrange his affairs so as to attract maximum tax liability - Banyan & Berry v. CIT [1996] 84 Taxman 515 (Guj.).

Pre-McDowell decisions - Every person is entitled to so arrange his affairs as to avoid taxation, but the arrangement must be real and genuine and not a sham or a make-believe - Jiyajeerao Cotton Mills Ltd. v. CIT [1958] 34 ITR 888 (SC).

Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed, is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon consideration of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented - CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC)/Jiyajeerao Cotton Mills Ltd. v. CIT [1958] 34 ITR 888 (SC)/CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC).

It is well established that the income-tax authorities are entitled to pierce the veil of corporated entity and look at the reality of the transaction. The Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud - Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC).

Despite decision in McDowell’s case, principle laid down in Duke of Westminster case is very much ‘alive and kicking’ - One cannot agree with the view that IRC v. Duke of Westminster [1936] AC 1 is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so; the principle in Duke of Westminster’s case (supra) is very much alive and kicking in the country of its birth. And as far as India concerned, the observations of Shah, J., in CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC) are very much relevant even today.

Not only is the principle in Duke of Westminster’s case (supra) alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell & Co. Ltd.’s case (supra). If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non est based upon some hypothetical assessment of the ‘real motive’ of the assessee. The court must deal with what is tangible in an objective manner and cannot afford to chase a will-o’-the-wisp. One could not accept the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests - Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706 (SC).

Solitary business transaction which is not genuine - Where the assessee purchased units of a Mutual Fund at higher price and sold the same at lower price after it became ex-dividend just four days after the purchase, and the result of the single transaction was that the assessee by investing merely a sum of Rs. 5 lacs for five days wanted to enjoy tax-free income of Rs. 29,02,226 (by way of dividend declared by Mutual Fund) and further claim a sum of Rs. 31,94,194 as business loss on account of loss on sale of units, such manipulations are not permissible under the law. Hence, the loss was to be disallowed - Vaneet Jain v. CIT [2007] 158 Taxman 410 (Punj. & Har.).

Lawful deferment of tax liability is not tax evasion - What is material in tax jurisprudence is evasion of tax, not beneficial lawful adjustment thereof. Where assessee-company following mercantile system of accounting had transferred its industrial unit to its subsidiary company ‘E’ Ltd. for certain consideration with effect from 1-3-1977 and in terms of sale agreement, part of sale consideration was to be paid in eight equal instalments starting from 1-10-1979 and interest was payable at rate of 11 per cent per annum on balance sale consideration which would remain unpaid from time to time, merely because by subsequent resolution dated 30-6-1978, assessee had agreed to defer payment of interest, to a future date it would not mean that it had tried to evade tax - CIT v. Sarabhai Holdings (P.) Ltd. [2008] 175 Taxman 82/307 ITR 89 (SC).


[SEC. 4]


Assessee must prove the source of receipt - It is well established that the onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the ITO is entitled to treat it as taxable income - Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC).

Burden is on department to prove that receipt is taxable - It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income - Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC).

Burden can shift to assessee also - The burden to establish that an income is taxable is of course on the revenue; but it is not immovable in the sense that it never shifts to the assessee. When sufficient evidence, either direct or circumstantial, in respect of its contention was disclosed by the revenue, an adverse inference could be drawn against the assessee if he failed to put before the department material which was in his exclusive possession. This process is described in the law of evidence as shifting of the onus in the course of a proceeding from one party to the other. There is no reason why the said doctrine is not applicable to income-tax proceedings - CIT v. Chari & Chari Ltd. [1965] 57 ITR 400 (SC)/CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 (SC)/Estate Investment Co. Ltd. v. CIT [1980] 121 ITR 580 (Bom.).

Burden to prove that income is exempt is on assessee - In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the Act lies upon the assessee - Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC)/H.E.H. Nizam’s Religious Endowment Trust v.CIT [1966] 59 ITR 582 (SC)/Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC)/Dr. K. George Thomas v. CIT [1985] 156 ITR 412 (SC)/Sir Shadilal Sugar & General Mills Ltd. v.CIT [1987] 168 ITR 705 (SC)/ Smt. Charu Sila Desai, In re [1946] 14 ITR 362 (Cal.)/Chunilal Murarka v. CIT [1970] 76 ITR 49 (Cal.).


‘Income’ is a fairly regular periodical return from a definite source - Income connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Thus, income has been likened pictorially to the fruit of a tree or the crop of a field - CIT v. Shaw Wallace & Co. 6 ITC 178 (PC)/A.K.T.K.M. Vishnudatta Antharajanam v. CAIT [1970] 78 ITR 58 (SC)/Rani Bhubneshwari Kaur v. CIT [1940] 8 ITR 550 (Pat.).

‘Income’ need not be recurrent and it can assume innumerable multiple forms - It is not correct to regard as an essential element in any of the definitions of income a reference to the analogy of fruit, or increase or sowing or reaping or periodical harvests. But it is clear that such picturesque similies cannot be used to limit the true character of income in general. Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which ‘income’ may assume is beyond enumeration - Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC)/S. N. D. P. Yogam v. CIT [1985] 154 ITR 624 (Ker.).

What one saves is also income - Even in its ordinary economic sense, the expression ‘income’ includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. That which can be converted into income can reasonably be regarded as giving rise to income - Bhagwan Dass Jain v. Union of India [1981] 128 ITR 315 (SC).

Income may even be in kind - Income may be received in kind as well as in cash and the receipt of an equivalent of cash may be a receipt of income. The essence of the matter is that there must be an actually realized or realisable profit or loss. Receipt of a new and substituted security is not enough - Raja Raghunandan Prasad Singh v. CIT [1933] 1 ITR 113 (PC)/CIT v. Central India Industries Ltd. [1971] 82 ITR 555 (SC)/ Seth Kishori Lal Babulal v. CIT [1963] 49 ITR 502 (All.).


There must be an identifiable source - Before a particular amount can be characterised as an income, there should be definite source which can be an identifiable one, maybe an individual or an institution, or a body of people or any other source - CIT v. Ramdeo Samadhi [1986] 160 ITR 179 (Raj.).

Source need not be legal - There is nothing to indicate that the source must be one which is recognised under the law for if that were so, then the income derived from illegal business could not be liable to tax - CIT v. Smt. Shanti Meattle [1973] 90 ITR 385 (All.)/Addl. CIT v. Ram Kripal Tripathi [1980] 125 ITR 408 (All.).

Illegal income - Primary function of Income-tax Act is to bring income of various kinds into tax net and tax authorities are not concerned about manner or means of acquiring income. Income might have been earned illegally or by resorting to unlawful means, but illegality tainted with earning has no bearing on its taxability and income earned by an offender still would be an income liable for assessment. Thus, income earned by assessee from income-tax refunds collected by him illegally by producing bogus TDS certificates would be assessed under Act - CIT v. K. Thangamani [2009] 177 Taxman 499/309 ITR 15 (Mad.).

Legal effect prevails over substance of the transaction - In taxing a receipt to income-tax, the authorities are only concerned with the legal effect or character of the transaction and not the substance of the transaction - Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790 (SC).

True legal relation must be determined and applied, instead of substance of the transaction- The taxing authorities are not entitled in determining whether a receipt is liable to be taxed to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as ‘the substance of the matter’ - CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC)/CIT v. Puran Das Ranchoddas & Sons [1988] 169 ITR 480 (AP).


Whether income is figuring in exemption list or not - A receipt which is income does not cease to be income even if exempted from tax, and a receipt which is not income does not become income just because it is included as one of the item exempted from income-tax - Inter-national Instruments (P.) Ltd. v. CIT [1982] 133 ITR 283 (Kar.).

Legality or otherwise of activity - Under the Indian Income-tax Act, the authorities are not concerned with whether the activities of an assessee are legal or illegal - Harinder Singh v. ITO [1987] 166 ITR 763 (All.).

The income-tax law is not concerned with any illegality in respect of the earning of any income- Satyanarayan Rungta v. CIT [1978] 115 ITR 382 (Cal.).

Name/label given - Name or label given by a party to a particular amount is not conclusive - CIT v. J.D. Italia [1983] 141 ITR 948 (AP).

Whether activity falls under ‘business’ or ‘other sources’ - If an amount represents income of the assessee of the previous year, it is liable to be included in the total income of the assessee. An enquiry whether, for the purpose of bringing the amount of tax, the income is from a business activity or from other source, is not relevant - CIT v. Durga Prasad More [1969] 72 ITR 807 (SC).

Where source is a wasting property - If the receipts are income, it is not material for tax purposes that for which they are paid comes from a wasting property. If the payment ceases because the source ceases, so does the tax - Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC).

How assessee has treated the receipt is not relevant - It is not how an assessee treats any monies received but what is the nature of the receipt which is decisive of its being taxable - Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC).

Book entries - A mere book-keeping entry cannot be income unless income has actually resulted - CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC).

It is well-settled that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss - State Bank of India v. CIT [1986] 157 ITR 67 (SC).

The matter of taxability cannot be decided on the basis of the entries which the assessee may choose to make in his accounts but has to be decided in accordance with the provisions of law - CIT v. Mogul Line Ltd. [1962] 46 ITR 590 (Bom.).


Income of road transport corporations is not immune from tax - Income of Road Transport Corporation is not immune from tax under article 289(1) of the Constitution - Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524 (SC).

Clause (2) of article 289 presupposes that income sought to be taxed by Union is income of State; Industrial Area Development Authority, constituted under Bihar Industrial Area Development Authority Act, 1974 to provide for planned development of industrial area, for promotion of industries and matters appurtenant thereto, could not claim exemption from Union taxation under article 289(1) of Constitution as it could not be said that income of assessee was income of State Government - Adityapur Industrial Area Development Authority v. UOI [2006] 153 Taxman 107 (SC)


Earnings by social worker are not immune from tax - Where a man carries on social work as a self-employed man in that line, he can be taxed on his earnings even if the earnings do not partake of the character of salary or wages - CIT v. P.S. Chelladurai [1984] 145 ITR 139 (Mad.).


[SEC. 4]


Decided cases are not totally helpful - No infallible criterion or test can be, or has been, laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circumstances. Thus, the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income - CIT/CEPT v. South India Pictures Ltd. [1956] 29 ITR 910 (SC).

Accounting classification is not relevant - The classification of the receipts in the form of accounts is not of any importance in considering whether the receipt is taxable as revenue receipt - Hoshiarpur Electric Supply Co. v. CIT [1961] 41 ITR 608 (SC).

Non-reflection in account books is not relevant - It is the true nature and the quality of the receipt and not the head under which it is entered in the account books which would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as a trading receipt - Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC).

Distinction is to be made between stock-in-trade/circulating capital, and fixed capital - Distinction between revenue and capital in the law of income-tax is fundamental. Tax is ordinarily not levied on capital profits; it is levied on income. It is well-settled that sale of stock-in-trade or circulating capital or rendering service in the course of trading results in a trading receipt; sale of assets which the assessee uses as fixed capital to enable him to carry on his business results in capital receipt - CIT v. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 (SC).

Nature of receipt in recipient’s hands is more relevant than motive of payer - To constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person, it must be found out why the payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period - P.H. Divecha v. CIT [1963] 48 ITR 222 (SC).

Form and nomenclature are not relevant - It may be broadly stated that what is received for loss of capital is a capital receipt and what is received as profit in a trading transaction is taxable income. The form in which the transaction which gives rise to income is clothed and the name which is given to it are irrelevant in assessing the eligibility to tax, of a receipt arising from a transaction. It is again not predicated that the income must necessarily have a recurrent quality - Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC).

Variation in investments is not relevant - The mere fact that an investment company periodically varies its investment does not necessarily mean that the profits resulting from such variation are taxable under the Income-tax Act. Variation of its investments must amount to dealing in investments before such profits can be taxed as income under the Income-tax Act - Dalhousie Investment Trust Co. Ltd. v. CIT [1967] 66 ITR 473 (SC).

Profit motive is not relevant - Profit motive is not decisive of the question whether a particular receipt is capital or income. An accretion to capital does not become taxable income merely because an asset is acquired in the hope that it may be sold at a profit - A.K.T.K.M. Vishnudatta Antharjanam v. CAIT [1970] 78 ITR 58 (SC).

Distinction must be drawn between payments for services and compensation - It is now well-settled that a distinction has to be drawn between a payment made for past services or discharge of past liabilities, and that made for compensation for termination of an income-producing asset. The former does not lose its revenue nature, but the latter being a payment for destruction of a capital asset, must be considered as capital receipt - CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC).

Character of recipient’s business is relevant - Whether a sum is received on capital or revenue account depends or may depend upon the character of the business of the recipient and upon other factors related thereto - CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC).

Settled judicial principles - Some principles that can be deduced from various decisions for determining whether a particular amount received by the assessee is capital or revenue in nature, are these :

 (1)  the fact that a certain payment is measured by the estimated annual yield or profits does not make the payment an income receipt;

 (2)  the fact that the receipt is a periodic receipt or a single receipt is immaterial for the purpose of determining its nature; an income receipt is not necessarily recurring, nor a capital receipt necessarily single;

 (3)  the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. In such a situation, the question always is what is the real character of the payment, not what the parties call it - Eklingji Trust v. CIT [1986] 158 ITR 810 (Raj.).


Determining factors - It is well-settled that what is capital asset in the hands of one person may be trading asset in the hands of another. The determining factor is the nature of the trade in which the asset is employed. If forest leases are merely stock-in-trade and payments are made for taking over the stock-in-trade, then no question of capital receipt arises. The sum would represent payment of revenue nature or trading receipts. But compensation received for immobilisation, sterilisation, destruction or loss, total or partial, of a capital asset would be capital receipt. If a sum represents profit in a new form, then that is income but where the agreement relates to the structure of the assessee’s profit-making apparatus and affects the conduct of the business, the sums received for cancellation or variation of such agreement would be capital receipt - CIT v. Bombay Burmah Trading Corpn. [1986] 161 ITR 386 (SC).

Nature of venture is decisive factor - Where the venture is only for the purpose of carrying on the existing business by taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt - CIT v. Manoranjan Pictures Corporation (P.) Ltd. [1997] 228 ITR 202 (Delhi).

When assessee is statutorily prevented from carrying on business - Where a person who is carrying on business is prevented from doing so by an external authority in exercise of a permanent power and is awarded compensation therefor, whether that receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade - CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC).

When business premises are compulsorily requisitioned - Where the assessee’s business premises were compulsorily requisitioned by Government on payment of compensation, such compensation would constitute a capital receipt only if injury caused was to the assessee’s capital assets; if the injury was to the assessee’s trading, it would be a revenue receipt - CIT/CEPT v. Shamsher Printing Press [1960] 39 ITR 90 (SC).

When there is an agreement to refrain from competing in business - Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of which the agency was terminated, or for loss of goodwill would, prima facie, be of the nature of a capital receipt - Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 (SC).

When there is loss of office or agency - Ordinarily compensation for loss of office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in the case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business, that existing agencies may not be terminated, and fresh agencies may be taken. But it is for the Income-tax Department to clearly establish that the case fell within the exception to the ordinary rule - Karam Chand Thaper & Bros. (P.) Ltd. v. CIT [1971] 80 ITR 167 (SC)/Peirce Leslie & Co. Ltd. v. CIT [1960] 38 ITR 356 (Mad.).

Where there is loss of source of income - Where certain amount was received because the assessee had given up its right to purchase and/or to operate certain hotel and it was loss of source of income to the assessee, amount received by assessee would be a capital receipt - Oberoi Hotel (P.) Ltd. v. CIT [1999] 103 Taxman 236/236 ITR 903 (SC).

When a contract is cancelled - Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaving him free to carry on his trade though freed from the contract terminated, the receipt is revenue; where by the cancellation of contract, the trading structure of the assessee is impaired or such cancellation results in loss of what may be regarded as the source of the assessee’s income, the payment made to compensate for cancellation of the agreement is normally a capital receipt - CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC)/CIT v. Balaji Chitra Mandir [1985] 154 ITR 777 (AP)/CIT v. State Trading Corporation [2001] 247 ITR 114 (Delhi).

When business activity is snapped for any reason - If a businessman sets up for himself a reservoir of commercial activity which he intends to exploit and gain profits and if by any reason the activity is snapped and the reservoir is involuntarily dried up and in lieu thereof the tradesman receives compensation, such a compensation being incompatible with the character of profits or gains and not being a surrogatum for income is undoubtedly a capital receipt - CIT v. South India Flour Mills (P.) Ltd. [1970] 75 ITR 147 (Mad.).

When insured assets were partly damaged - Where the assessee’s insured building and plant and machinery were partly damaged and it received compensation and part of the compensation was utilised for restoring the buildings, etc., to working condition, it was held that the remainder of the compensation was a capital receipt - CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 (SC).

Additional insurance money is revenue receipt - Where the assessee received additional insurance money for loss of cargo, its stock-in-trade, on account of devaluation of rupee, it was held that the said amount was taxable as revenue receipt - Indian Aluminium Co. Ltd. v. CIT [1983] 140 ITR 114 (Cal.).

Amount received by assessee on termination of its distributorship agreement is capital receipt - When the entire source of the income earning apparatus of the assessee has been transferred to the companies, pursuant to the termination agreement, the amount received for such transfer would be in the nature of a capital receipt only. If the amount accrued is to compensate the assessee for cancellation of the distributor agreements, which does not affect or impair the trading structure of the assessee’s business or does not deprive the assessee of the very source of income, then the termination of the contract being an incident of business left the assessee to carry on his trade, and the receipt would be regarded as a revenue receipt. When the termination of the distribution agreement impairs the trading apparatus or trading structure of the assessee and the prohibitory clause contained in the termination agreement totally sterilises the assessee from gaining any income, then the payment received by the assessee for such impairment and sterilisation would be characterised only as capital receipt - CIT v. T.I. & M. Sales Ltd. [2003] 129 Taxman 444/259 ITR 116 (Mad.).

Compensation received for damaged machinery - Where the assessee’s machinery was damaged in fire and the assessee received compensation by waiving insurance contract for reinstatement of machinery and the assessee installed a manually operated machine in the place of automatically operated machine, the amount received by the assessee was to be treated as capital receipt - CIT v. Loyal Textile Mills Ltd. [2006] 284 ITR 658 (Mad.).

Compensation for delay in procurement of capital asset - Amount received by assessee towards compensation for delay in procurement of capital asset amounts to sterilization of capital asset of assessee and, therefore, is a capital receipt in its hands - CIT v. Saurashtra Cement Ltd. [2010] 192 Taxman 300 (SC).

Compensation for infringement of copyright - Where assessee, a publisher firm, had received a sum for infringement of copyright which was credited to profit and loss account, it was revenue receipt and not capital receipt - CIT v. Eastern Book Company [2010] 322 ITR 605 (All.).


Damages for delay in supply of machinery - Where the assessee ordered for the supply of machinery and later received in terms of the contract liquidated damages from the supplier on account of delay caused in the supply of machinery, the said damages which had a direct nexus to the delay caused in the delivery of a capital asset could not be treated as revenue receipt, since the terms of the contract made it clear that the liquidated damages were measured having regard to time (i.e., period of delay) and price of machinery. The position may be otherwise if it could be established that the amount of damages was paid on account of the delay caused in initiating the process of manufacture and it was on account of loss in profits - CIT v. Saurashtra Cement & Chemicals Industries Ltd. [2002] 253 ITR 373 (Guj.).


Surplus must be ‘income’ under the Act - Surplus in consequence of devaluation of the currency is undoubtedly a receipt, but the liability to pay tax on it can arise only if it is income for purposes of the Act and is not liable to be excluded from computation under the provisions of the Act or the rules framed thereunder - Universal Radiators v. CIT [1993] 68 Taxman 45 (SC).


Dividend received out of capital receipt of company, is a capital receipt - Where assessee-shareholder received dividend from a company out of an amount which was capital receipt in the hands of the company, the amount received by the assessee was not taxable because its nature was of capital receipt in his hands - CIT v. Kamal Behari Lal Singha [1971] 82 ITR 460 (SC).


Deposit forfeited for breach of agreement is a capital receipt - Where assessee received, under an agreement to sell old unyielding rubber trees, earnest money and advance amount and sale did not materialise, in view of section 51 both amounts in question received and retained by assessee in respect of abortive sale transaction of rubber trees would be capital receipt not exigible to tax - Travancore Rubber & Tea Co. Ltd. v. CIT [2000] 109 Taxman 250/243 ITR 158 (SC).


Embezzled amount can be treated as income within meaning of section 2(24) - The money received or taken by the employee by embezzlement is not a money taken under an obligation to repay nor does he take the money as a debt to be paid back on the subsequent dates. One who uses another’s property or money to secure gain or profit therefrom, even though he did it wrongfully and holds it, is to be subjected to income-tax to that extent. Money embezzled is a gain to the embezzler and, therefore, falls within the wider definition of ‘income’ under the Act - CIT v. Troilakya Chandra Bora [2003] 128 Taxman 344/261 ITR 299 (Gau.).


Amounts received on encashment of bank guarantee would be assessable as trading receipt - CIT v. State Trading Corporation [2000] 112 Taxman 117 (Delhi).


Profits from exchange operations are taxable only if they are connected with business transactions - If by virtue of exchange operations profits are made during the course of business and in connection with business transactions the excess receipts arise on account of conversion of one currency into another, the same would be revenue receipts. But if the profit by exchange operations comes in, not by way of business of the assessee, the profit would be capital profit - CIT v. Canara Bank Ltd. [1967] 63 ITR 328 (SC).

In case of money raised through issue of equity shares - Since entire money raised through issue of equity shares is to be treated as capital receipt, gains on account of foreign exchange fluctuations, in the event such share capital has been collected in foreign exchange, would be capital receipt irrespective of end use of share capital - CIT v. Jagatjit Industries Ltd. [2010] 191 Taxman 54 (Delhi).


Income from sale of trees removed totally is revenue receipt - Where the object and business of the assessee-company were exploitation of the forest and, under a Government approved scheme to clear the forest, it cut and removed the trees together with roots leaving no trace of the stumps behind, it was held that the income from the sale of such trees had to be treated only as a revenue receipt in the assessee’s hands - Indian Timber & Plywood Corpn. Ltd. v. CIT [1981] 130 ITR 341 (Ker.).

Receipt from sale of trees of spontaneous growth which can regenerate, is revenue receipt - If a person sells merely leaves or fruit of the trees or even branches of the trees, it would be difficult to hold that the realisation is not of the nature of income. Where the trunks of trees of spontaneous growth are cut so that the stumps remain intact and are capable of regeneration, receipts from sale of the trunks would be in the nature of income. It is true that the tree is a part of the land. But by selling a part of the trunk, the assessee does not necessarily realise a part of his capital - V. Venugopala Varma Rajah v. CIT [1970] 76 ITR 460 (SC).


Bonus shares - There is no element of gift in a company issuing bonus shares - Khoday Distilleries Ltd. v. CIT [2009] 176 Taxman 142/[2008] 307 ITR 312 (SC).

Right shares - Where assessee-company had allotted rights shares only to seven shareholders because other existing shareholders did not subscribe for rights, it could not be said that such allotment constituted ‘transfer and there was a deemed gift within meaning of section 4(1)(a) of Gift Tax Act - Khoday Distilleries Ltd. v. CIT [2009] 176 Taxman 142/[2008] 307 ITR 312 (SC).

Amounts received by religious head - Where assessee, as a religious head, was not involving himself in any profession or vocation and also not performing any religious rituals/poojas for his devotees for some consideration or other but in fact, he was doing charitable and spiritual work and made his devotees to follow same for benefit of mankind, amounts/gifts received by assessee could not be said to have direct nexus with any of his activities as a religious head; hence, gifts received by assessee were not taxable - CIT v. Gopala Naicker Bangaru [2010] 193 Taxman 71 (Mad.).


Where the assessee carrying on business received insurance money towards loss of raw materials in a fire accident, the surplus amount received over and above the book value is a trading receipt liable to tax, and not a capital receipt, since the definition of capital asset in section 2(14) itself excludes raw-materials - CIT v. Needle Industries (India) Ltd. [2000] 245 ITR 556 (Mad.).



Interest is income - It is well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation - Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC).

Accounting practice cannot override section 56 or any other provision of the Act. Thus, where the assessee-company advanced loans out of borrowed funds, and received interest income, it is a revenue receipt and not a capital receipt. The mere fact that the company would have to pay interest on the money borrowed by it could not be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act - CIT v. Cochin Shipyard Ltd. [2000] 108 Taxman 112 (Ker.).

Investment of borrowed money - If a person borrows money for business purpose but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it would not cease to be his income. This would not be a case of diversion of income by overriding title - Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC).

Investment of idle money - If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income - Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC).

Where assessee borrowed certain amount from IDBI and deposited same in banks till it was used either in purchase of plant and machinery or in installing them or in running establishment, interest earned on such deposits would not go to reduce overall cost of project but was assessable to tax in assessee’s hands - CIT v. Autokast Ltd. [2001] 116 Taxman 244/248 ITR 110 (SC).

Interest earned prior to commencement of business - Interest earned on investment of funds prior to commencement of business would be assessable as ‘income from other sources’ and it would be wrong to say that such income was not liable to be assessed as income - CIT v. Petro-Fils Co-operative Ltd. [2000] 241 ITR 139 (Guj.).

Notional interest on loans to directors/sister concerns cannot be added, if no interest was charged - Where the assessee-company did not charge any interest on loan granted to a managing director or to a sister concern on business considerations, the Assessing Officer cannot compute interest on notional basis and treat it as income, since no provision in the Act has been brought to notice under which the income-tax authorities are empowered to include in the income, interest which was not due or not collected. If the assessee has not bargained for interest or has not collected interest, the income-tax authorities cannot fix a notional interest as due or collected by the assessee - B and A Plantations & Industries Ltd. v. CIT [2001] 117 Taxman 323 (Gauhati).


Interest paid for delayed payment of land compensation is a revenue receipt - The statutory interest paid under section 34 of the Land Acquisition Act is interest paid for the delayed payment of the compensation amount and, hence, is a revenue receipt liable to tax - Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC).

The interest paid on compensation awarded for compulsory acquisition of land under section 28 of the Land Acquisition Act is not additional compensation representing capital receipt but a revenue receipt - K.S. Krishna Rao v. CIT [1990] 181 ITR 408 (SC).

In respect of interest on delayed payment on the acquisition of the immovable property under the Acquisition Act, the Courts have consistently taken the view that it is a revenue receipt. The amended definition of ‘interest’ was not intended to exclude the revenue receipt of interest on delayed payment of compensation from taxability. Once it is construed to be a revenue receipt, necessarily, unless there is an exemption under the appropriate provisions, the revenue receipt is exigible to tax - Bikram Singh v. Land Acquisition Collector [1996] 89 Taxman 119 (SC).


Interest awarded by arbitrator on compensation amount is income - Where a dispute arose between the assessee-contractor and the Government and the arbitrator awarded certain amount by way of compensation for the work done as also interest, interest awarded by arbitrator on compensation amount is income - CIT v. B.N. Agarwala & Co. [2003] 129 Taxman 78/259 ITR 754 (SC).


Interest received under a court decree is a revenue receipt - Interest granted under the decree of the Court from the date of the institution of the proceedings in the Court and calculated upon the footing that it accrued de die in diem, has the essential quality of recurrence which is sufficient to bring it within the scope of the Act, and, thus, such interest is an income. Such interest received by virtue of a court decree under section 34 of the Code of Civil Procedure, in a suit for refund of tax is paid to the claimant for the use of his money by the State and the statutory interest paid is, therefore, a revenue receipt liable to income-tax - RM. AR.AR. RM. AR.AR. Ramanathan Chettiar v. CIT [1967] 63 ITR 458 (SC).

Interest paid at discretion of Court is not income - Where interest is paid to an assessee under a statute like section 34 of the Code of Civil Procedure, 1908, same has to be treated as income of assessee for purpose of income-tax. However, where interest to be paid to an assessee is in discretion of Court, said payment would not amount to income for purpose of income-tax - CIT v. B. Rai [2004] 134 Taxman 643 (Punj & Har.).


When open payment is received, creditor can allocate it as between capital and interest to his best advantage - Where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the payment as between capital and interest, by either debtor or creditor, the presumption is that the payment is attributable to interest. But in a question with the revenue the taxpayer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself - CIT v. Maharajadhiraja Kameshwar Singh [1933] 1 ITR 94 (PC).

Accounting system is not relevant when receipt is not entered in books - Where a receipt has not been entered in the account at all, the system of apportionment of the receipt as between capital and interest would be wholly irrelevant - CIT v. T.S. PL. P. Chidambaram Chettiar [1971] 80 ITR 467 (SC).

When creditor has allocated receipt to capital, revenue cannot treat it as interest - A creditor-company has an option to allocate the amount received back from the debtors either towards the capital or towards interest and where it is allocated towards capital it is not open to revenue to treat repayment as towards the interest - CIT v. Modest Enterprises Ltd. [1994] 207 ITR 618/76 Taxman 508 (Cal.).


Advance tax - Interest paid by assessee for underestimation of advance tax cannot be set off against interest received by the assessee on the excess payment of advance tax in computing the assessee’s income - Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 (Bom.).

Provident fund contribution - Interest on his own contributions to an unrecognised provident fund, received by an assessee-employee on his retirement, is undoubtedly an income as defined in section 2(24) - CIT v. G. Hyatt [1971] 80 ITR 177 (SC).

Advances out of paid-up capital - Where assessee-company, which was engaged in the process of erection of its plant and machinery and construction of factory, received interest on advances made out of paid-up capital amounts, such interest was assessable as assessee’s income - CIT v. Arasan Aluminium Industries (P.) Ltd. [1996] 220 ITR 476/88 Taxman 515 (Mad.).

Excess sale price - Where in derogation of its contract with STC assessee charged a price for tractors which was higher than that fixed by STC and purchasers who had agreed to purchase tractors from assessee at a higher price were not entitled to claim refund of excess amount from assessee, excess amount charged by assessee would form part of sale price and be includible in total income of assessee - U.P. State Agro Industrial Corpn. v. Addl. CIT [1993] 69 Taxman 533/201 ITR 707 (SC).

Others - Interest earned on amount deposited to open letter of credit for purchase of machinery required for setting up plant is a capital receipt - CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC).

Interest receipts and hire charges from contractors would be in the nature of capital receipts which would go to reduce capital cost - CIT v. Karnataka Power Corporation [2000] 112 Taxman 629 (SC).


Nature of receipt depends on nature of transaction - If the imparting of know-how is really in the nature of services rendered without anything more, the receipt must be treated as a revenue receipt. But when consideration is received for imparting know-how in association with the disposal of a capital asset, then the receipt will have to be treated as a capital receipt - CIT v. Ralliwolf Ltd. [1983] 143 ITR 720 (Bom.).


Receipts from transfer of leasehold rights are normally capital receipts unless proved otherwise by revenue - Any payment received, whether by way of compensation or under any other nomenclature, for parting with the capital asset, namely, the demised premises, can only be described as a capital receipt and not a trading receipt. Ordinarily payment made for acquiring a capital asset would be a capital receipt unless shown otherwise. The burden is on the revenue to prove otherwise - Rajabali Nazarali & Sons v. CIT [1987] 163 ITR 7 (Guj.).


Mesne profits are also a species of taxable income - Having regard to characteristics of mesne profits, there can be no doubt that they are also a species of taxable income - CIT v. P. Mariappa Gounder [1984] 147 ITR 676 (Mad.).

Mesne profits are not revenue receipts - Since the mesne profits are only damages for loss of property or goods, these are not in the nature of revenue receipts - CIT v. Smt. Lila Ghosh [1993] 71 Taxman 72/[1994] 205 ITR 9 (Cal.).

Interest on mesne profits is not a revenue receipt - Mesne profits itself being award of compensation in the nature of damages and not taxable, interest thereon which is an integral part of the mesne profits is also not revenue receipt and will not be taxable as income - CIT v. Mrs. Annamma Alexander [1991] 58 Taxman 47/191 ITR 551 (Ker.)/Smt. Annamma Alexander v. CIT [1993] 199 ITR 303 (Ker.).


Modvat credit is not an income - Merely because Modvat credit is an irreversible credit available to the manufacturer upon purchase of duty-paid raw material, it would not amount to income liable to tax - CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 130 Taxman 179/261 ITR 275 (SC).

MODVAT credit available to assessee in terms of provisions of Central Excise Act is not income liable to be taxed - CIT v. Unique Industries [2008] 307 ITR 350 (Guj.).

Where the MODVAT credit related to replacement of machineries and the cost of replacement was allowed as revenue expenditure, MODVAT credit was not chargeable as income - CIT v. L.S. Mills Ltd. [2006] 284 ITR 100 (Mad.).


Profits from sale of properties acquired in discharge of debts are profits of money-lending business - Where a person carries on a money-lending business and acquires properties in lieu of outstanding debts, those properties become part of the stock-in-trade of the money-lending business itself and the disposal of the properties and any consequent profits arising therefrom are transactions relevant to and forming part of the money-lending business. No separate business of any description as an adjunct or independent of the money-lending business comes into existence - K.S. A.A. Manickam Chettiar v. CIT [1963] 50 ITR 716 (Mad.).


In case assessee-NBFC, income relating to sub-standard assets/non-performing assets, which was outstanding for more than six months, is not to be treated as income/profits - CIT v. Kailash Auto Finance Ltd. [2010] 320 ITR 394 (All.).


Receipt from outright sale is capital receipt; receipt from exploitation is revenue receipt - Where there is an out and out sale of the patent by the patentee for a definite price, receipt of price even though payable in instalments would be capital in nature. If on the other hand, when the patentee has merely granted a ‘working licence’ for an annual payment, for a number of years, payment received would be ‘income’ and as such taxable - Anant Ram Khem Chand v. CIT [1937] 5 ITR 511 (Lahore).


Income derived by assessee during formative period of its business, from house property, its guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply, is to be adjusted against project cost of main business - Bongaigaon Refinery and Petrochemicals Ltd. v. CIT [2001] 119 Taxman 488/251 ITR 329 (SC).

Where the company was still in the stage of construction and had not gone for commercial production, receipts by way of sale of tender papers to contractors would go to reduce the capital cost and was not assessable as ‘Income from other sources’ in the hands of the company - CIT v. Indian Charge Chrome Ltd. 2005 Tax LR 697 (Ori.).


Receipts on specified items received during the course of setting up of plant are capital in nature - Where the assessee received during the pendency of the setting up of plant required for commencing its business, (i) interest on advances made to contractors, (ii) rent from employees for quarters let out, (iii) hire charges of plant and machinery from contractors, (iv) royalty on stones removed from assessee’s lands, all these receipts must be treated as capital receipts, since they were inextricably linked with the process of setting up its plant and machinery - CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC).


Money received by members of family, which owned majority shareholding in a company, for casting affirmative vote for resolution recognising extinction of marketing rights of said company, was not taxable as income within meaning of section 2(24) - CIT v. David Lopes Menezes [2010] 195 Taxman 131 (Bom.).


Rent/royalty received under a direct covenant is taxable income - It is common ground that the rent and royalty under a mining lease are income taxable under the Act, and an amount which is paid under a covenant directly related to the payment of rent and royalty would also be taxable as income - Chhatrasinhji Kesarisinhji Thakore v. CIT [1966] 59 ITR 562 (SC).


Sale of felled trees after they ceased to produce latex, gives rise to capital receipt - Where the assessee had purchased a rubber estate with a plantation of trees which were producing latex and he was getting income from them in the shape of latex, but after sometime when they stopped producing latex, the assessee felled them and sold them, it was held that the receipt was a capital receipt - CAIT v. Kailas Rubber & Co. Ltd. [1966] 60 ITR 435 (SC).

Sale of felled trees after cutting them completely with roots, is a capital receipt - Where the assessee cut the teakwood trees completely along with roots in order to plant rubber on the land, and sold the trees, it was held that the receipt from such sale was a capital receipt- A.K.T.K.M. Vishnudatta Antharjanam v. CAIT [1970] 78 ITR 58 (SC).


Substance of transaction should prevail over its form - When the interest of the lessor is parted with for a price the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties - CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC)/Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC).

Mere fact of lump sum payment is not conclusive - To treat salami as capital receipt, the fact that the payment was made in a single lump sum is not a conclusive test, for salami can be paid in a single payment or by instalments. The real test is whether the said amount paid in a lump sum or in instalments is the consideration paid by the tenant for being let into possession - CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC).

Intention of parties, as gathered from documents and surrounding circumstances is decisive- The nomenclature given to the document may not be decisive or conclusive. What is to be gathered is the intention of the parties. The probe must be full and attempt must be sincere to ascertain the true intention of the parties that is material and shall determine the nature of the transaction - Nagasuri Raghaveswara Rao v. CIT [1967] 66 ITR 496 (AP).

Onus is on revenue to prove revenue nature - Prima facie premium or salami is not an income and it is for the income-tax authorities to show that facts existed which would make it a revenue payment - Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC)/Promode Ch. Roy Chowdhury v. CIT [1962] 46 ITR 1064 (Cal.)/Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC).

Broad principles which are relevant - The broad principles relating to the term ‘salami’ are as follows :

 (1)  Prima facie salami or premium is not income; it is for the taxing authorities to prove that the facts exist which would make the same as income, if they seek to tax it.

 (2)  Where the premium represents payment of rent in advance, it is income. But if it represents the whole or part of the price of the land or the sale price of the leasehold interest, it is not income but capital.

 (3)  Salami to be income should be a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources.

 (4)  Salami or premium paid at the beginning of a mining lease for a long period ordinarily represents the purchase price of an out-and-out sale of the property and the sum received is capital and not income but rent or royalty paid periodically is income. The principle is the same, whether the premium is for a simple lease of land or for a lease of mineral rights. But royalty payable under the mining lease stands on a different footing from premium or salami.

 (5)  When a premium is received merely as an incident in the possession of property (even if leasehold) and there is no finding that the letting out of the property is the business of the assessee, the premium receipt is capital.

 (6)  Salami or premium paid as advance of rent once for all at the outset, the period of tenancy being uncertain and the chances of resettlement of the same land to some other tenant being remote, is capital.

 (7)  Premium (salami) is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to him by the lease. Money paid to purchase the said general right is a payment on capital account.

 (8)  Salami is the amount of money which a landlord insists on receiving as a condition precedent for parting with the land in favour of the lessee and it was received by the landlord, not because of the use of the land but before the land was put into use by the assessee.

 (9)  The question of salami should not be decided on the length of the period of the lease, but on the nature of the right conveyed. The characteristics of the payment should be decided without reference to the nature of the lease including the wasting nature of the assets under the lease.

The question whether a particular receipt like salami can be regarded as revenue or capital cannot be decided in the abstract and each case has to be decided on its facts - Bharat Steel Tubes Ltd. v. CIT [2001] 252 ITR 622 (Delhi).


Sales tax collected by auctioneer is part of trading receipt - The amount of sales tax received by the assessee in its character as an auctioneer, should be held as part of its trading or business receipt - Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC)/Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 (Pat.)/CIT v. Central Wines [1988] 174 ITR 316 (AP).

Sales tax refunds - Where according to a notification issued by Government of Andhra Pradesh certain facilities and incentives were to be given to new industrial undertakings which commenced production on or after 1-1-1969 with investment capital not exceeding Rs. 5 crores, for five years from date of commencement but production incentives were not available unless and until production had commenced and in terms of said notification assessee received refund of sales tax, refund of sales tax was a revenue receipt - Sahney Steel & Press Works Ltd. v. CIT [1997] 94 Taxman 368/228 ITR 253 (SC).

Sales tax collected and kept in deposit account - Sales tax and turnover tax collections form integral part of trading receipts and mere fact that said collections are kept under head ‘Contingency deposit’ without paying amount to sales tax department would not change the character of the receipt. Hence, the amount collected by the assessee formed part of trading receipts and was to be included in the income of the assessee - Ishwardas Sons v. CIT [2006] 156 Taxman 340 (Ker.).

Sales tax collected in excess - Where assessee had collected excess sales tax and Supreme Court had held that that sum proposed to be taxed did not belong to assessee at all and same was directed to be refunded to customers and any left over excess had to be paid to charitable trust, excess sales tax collected and retained as a deposit due to a dispute, could not be taxed in hands of the assessee - CIT v. Arya Vaidhya Pharmacy (CBE) Ltd. [2006] 284 ITR 335 (Mad.).

Sales tax collected by seller of vehicles on hire purchase basis - The amounts collected by the assessee from the hire purchase as sales tax are not really sales tax at all because the sale at that time does not take place and sales tax is payable when the sale takes place and in the case of hire purchase, the sale takes place only at the time mentioned in the hire purchase agreement or at the option of the hirer, if so provided in the agreement. There is no sales tax liability on the assessee at all when he collects the amounts from the hire purchaser and, therefore, the amounts collected have to be treated as income of the assessee in the assessment year in which it makes the collection - CIT v. Motor Sales Ltd. [2006] 283 ITR 186 (All.).


Forfeited security deposits taken from employees are income - When the amounts deposited as security by employees for serving for agreed period were forfeited and it was found that part of expenditure incurred on training of personnel allowed as deduction was met by forfeiture of deposits, the amount forfeited by the assessee was to be regarded as its income - Atlas Cycle Industries Ltd. v. CIT [1982] 133 ITR 231 (Punj. & Har.)/Atlas Cycle Industries Ltd. v. CIT [1981] 128 ITR 60 (Punj. & Har.).

Security deposits collected from agents/retailers by soft drink manufacturer are not trading receipts - Where a soft drink manufacturer collected security deposits from its agents and retailers and such collection did not form part of the sale transaction, the contention of the Revenue that the ‘empty bottles return security deposits’ were trading receipts of the manufacturer was liable to be rejected; such collections were not taxable in the hands of the manufacturer - CIT v. Madurai Soft Drinks (P.) Ltd. [2000] 240 ITR 229/[2005] 146 Taxman 572/276 ITR 607 (Mad.).


Sale of shares held at stock-in-trade gives rise to revenue receipts - Where the assessee made no attempt whatsoever to make out a case that the shares which had been sold were a part of its capital investment, nor did it place any material from which it could be established that the impugned shares had been treated in its books differently from other shares held by it as stock-in-trade, the mere fact that the sale proceeds were paid into the overdraft account in which admittedly proceeds of sale of all the shares held by the assessee were being credited as and when the sales were made and that these shares had not been sold with any amount of frequency, could not be regarded as sufficient to establish that these shares had been held by way of investment and, accordingly, the impugned shares were to be treated as held by the assessee as its stock-in-trade - CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC).

Sale of shares obtained for acquiring controlling interest gives rise to capital receipt - The profit made on the sale of shares acquired with the intention of obtaining control over the company’s management and not for dealing in them would be on capital and not on revenue account - Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC).

Bonus shares are capital receipts - Bonus shares given by a company in proportion to the holding of equity capital by a shareholder are, in the absence of any express provision to the contrary, liable to be treated as capital and not income - CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC)/CIT v. Dayaram Gangabishan & Co. [1957] 31 ITR 997 (Bom.).

Value of shares allotted to managing director as reward for services is taxable income - Where assessee was allotted certain shares of the company in which he was a managing director as a reward for services rendered in connection with the formation and promotion of the company pursuant to an agreement, the money value of the shares represented the income of the assessee - CIT v. Ram Prashad [1978] 113 ITR 462 (Delhi).


Subsidy for assisting trader in his business is revenue receipt - Sahney Steel & Press Works Ltd. v. CIT [1997] 94 Taxman 368/228 ITR 253 (SC).

Normally, it is well-settled that where subsidies or grants are given by the Government to assist a trader in his business they are, generally speaking, payments of a revenue nature. They are supplementary trade receipts and not capital payments although they might be called advances or might be subject to contingency of repayment - Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 437 (Bom.).

Subsidy for recouping revenue expenditure is revenue receipt - If a subsidy is given to recoup revenue expenditure, it will take the same colour and will be deemed to be a revenue receipt in the hands of assessee - Ludhiana Central Co-operative Consumers’ Stores Ltd. v. CIT [1980] 122 ITR 942 (Punj. & Har.).

Subsidy for repayment of capital loans - Where main eligibility condition in scheme under which assessee-sugar mill was granted subsidy was that the subsidy must be utilized for repayment of loans taken by assessee to set up new units or for substantial expansion of existing units, subsidy was a capital receipt - CIT v. Ponni Sugars & Chemicals Ltd. [2008] 174 Taxman 87/306 ITR 392 (SC).

Subsidy for setting up/expansion of plant is capital receipt - If the subsidy granted is in the nature of amounts for setting up of the plant/for expansion of the plant, that would be a capital receipt - CIT v. Tirumala Bricks & Tiles Factory [1996] 217 ITR 547/85 Taxman 143 (AP).

Nomenclature is not relevant - The question as to whether any amount received by the assessee by way of subsidy is to be taxed in hands of the assessee as capital receipt or revenue receipt cannot be decided one way or other unless authorities examine scheme pursuant to which the amount was paid to the assessee. In other words, in order to decide as to whether a particular subsidy given to the assessee is capital or revenue, the same cannot be decided by its nomenclature but it requires an analytical examination of the entire scheme. Before one is able to come to any conclusion, it is necessary to find out as to what is the object of the scheme, its nature, manner, mode of payment, its reimbursement benefit conferred upon the assessee, etc. It is these factors which determine the character of the amount received which in turn determines its nature from income-tax point of view. If the amount is paid by way of subsidy for setting up plant/machinery prior to commencement, then it is regarded to be in the nature of capital but when it is given for running the business, i.e., after the production has begun in the plant, then it may well be regarded as revenue receipt in the hands of the assessee - CIT v. Premier Proteins Ltd. [2006] 150 Taxman 42 (MP).

Subsidy given for running the business - Where the subsidy in question was not given to the assessee for establishment of business, i.e., it was not meant to be used prior to commencement of commercial business so as to make the same as capital one, i.e., in the form of fixed assets, but it was given to the assessee after they commenced the business, i.e., for running the business, the subsidy in question was a revenue receipt - Sundaram Exhibitions (P.) Ltd. v. CIT [2006] 154 Taxman 132 (MP).


Subsidy to film producers is not a revenue receipt - Where to promote production of quality films in Marathi, Government of Maharashtra formulated subsidy scheme for grant of financial assistance to producers of such films, financial assistance received by assessee, a film producer, in terms of aforesaid scheme, was not a revenue receipt - Sadichha Chitra v. CIT [1991] 55 Taxman 247/189 ITR 774 (Bom.).

Subsidy received after completion of film is revenue receipt - Where a film producer was paid subsidy by the State Government after the film was certified by the Censor Board, under a scheme to encourage producers to choose the said State as the locale for their movies, such a subsidy was only a supplementary trading receipt which was taxable, since it was not meant to assist the producer in financing the movie - Jagapathy Art Pictures v. CIT [1999] 240 ITR 625 (Mad.).


Subsidy under export promotion scheme is revenue receipt - The amount received by an exporter and manufacturer of cloth or yarn under a Government export promotion scheme, is a revenue receipt. The fact that in course of carrying on of the business an amount is received which could be turned into capital, does not in any way militate against the said amount being considered to be a revenue receipt - Kesoram Industries & Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 (Cal.).


Power subsidy is revenue receipt - Where the terms under which power subsidy was granted to the assessee clearly suggested that the subsidy went towards reduction of the electricity bills, the subsidy so received was a taxable revenue receipt and not a capital receipt - CIT v. Rajaram Maize Products [2001] 251 ITR 427 (SC).


Purchase tax benefit in the form of subsidy extended by Government to assessee-sugar factories, which was in no way linked to the expenditure incurred in setting up industry, was taxable - CIT v. Ponni Sugars & Chemicals Ltd. [2003] 127 Taxman 188/260 ITR 605 (Mad.).


Replantation subsidy is not a revenue receipt - Replantation subsidy received by the planters from the Rubber Board cannot be treated as revenue receipt and taxed as income - Kalpetta Estates Ltd. v. CIT [1996] 87 Taxman 281/221 ITR 601 (SC).

Replanting subsidy received from the Rubber Board under the Replanting Subsidy Scheme, 1967 by the assessee during the relevant period of assessment is not a revenue receipt - CIT v. Ruby Rubber Works Ltd. [1989] 178 ITR 181 (Ker.) (FB).

The rubber replantation subsidy received by the assessee cannot be called a revenue receipt assessable as income - CIT v. Rajagiri Rubber & Produce Co. Ltd. [1990] 182 ITR 393 (Ker.).


Sales tax subsidy is trading receipt if given for carrying on business; if given for setting up business or completion of project, it is capital receipt - The sales tax upon collection forms part of the public funds of the State. If any subsidy is given, the character of the subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. If the purpose was to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purpose. But if monies were given to the assessee for assisting him in carrying out the business operation and the money was given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade - Sahney Steel & Press Works Ltd. v. CIT [1997] 94 Taxman 368/228 ITR 253 (SC), followed in CIT v. Chhindwara Fuels [2000] 245 ITR 9 (Cal.).

The question whether a particular subsidy is a capital receipt or a revenue receipt is required to be decided keeping in view the nature of subsidy received by the assessee and the scheme pursuant to which the same has been received. It is only when the taxing authorities examine the object, purpose and characteristic of the scheme and the nature of amount received by the assessee in hand pursuant to such scheme, in the light of the law laid down in Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC) that a finding can be recorded one way or the other as to whether it is in the nature of capital or revenue and whether the assessee is entitled to get the benefit of a deduction from his total income or not - Shreejee Chitra Mandir v. CIT [2004] 269 ITR 55/140 Taxman 249 (MP).

Subsidy given for promotion of industry is revenue receipt - Subsidy received from Government, under scheme for promotion of industry, by way of refund of sales tax is a revenue receipt - Kesoram Industries & Cotton Mills Ltd. v. CIT [1991] 191 ITR 518 (Cal.).


Non-refundable deposits from members - Non-refundable deposits taken from its members by a co-operative society engaged in the manufacture and sale of sugar, with the purpose of not only to repay term loans taken from financial institutions and to pay Government share-capital, but also to convert the so-called deposits into shares with a view to increasing the capital base, could not be treated as the income of the co-operative society. Refundable deposits deducted from the cane price are pure and simple fixed deposits repayable after the expiry of a definite period of time with interest and akin to the transaction of loan. They are also clearly liable to be excluded from the taxable income - Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT [2004] 270 ITR 1/139 Taxman 434 (SC).


Lump sum receipt for exploitation of trade mark is a revenue receipt - Where the assessee received lump sum amount as consideration for allowing another company an exclusive licence to use the trade mark owned by the assessee, the amount received was a revenue receipt and not a capital receipt - CIT v. H. Miller’s Co. Ltd. [2000] 246 ITR 316 (Mad.).


Underwriting commission is not taxable when shares are held by underwriter - Underwriting commission charged by assessee-underwriter in respect of shares which could not be subscribed by public and had to be purchased by assessee, cannot be regarded as income of assessee but it would go to reduce cost of shares purchased by assessee - CIT v. U.P. State Industrial Development Corpn. [1997] 92 Taxman 45/225 ITR 703 (SC).

Only commission earned on shares subscribed by public will be the income of the underwriter - Underwriting commission earned by an underwriter on shares subscribed by the public is taxable as income in the hands of the underwriter. However, underwriting commission on shares subscribed by the underwriter himself under its obligation is nothing but discount against shares which goes into its cost, and hence, no income on that account is chargeable to tax - CIT v. U.P. State Industrial Development Corpn. [2005] 145 Taxman 547 (All.).


Donor’s intention is not relevant - In determining whether a voluntary payment is taxable in the hands of the recipient or not, the point is not what the donor thought he was doing but why the donee received it. As observed in Herbert v. Mc Quade [1902] 2 KB 631, ‘the test is whether from the stand point of the person who receives it, it accrues to him by virtue of his office; if it does, it does not matter whether it was voluntary or whether it was compulsory on the part of the persons who paid it’. The liability to income-tax is not negatived merely by reason of the fact that there was no legal obligation on the part of the person who contributed the money to pay it - P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC).

Where there was no quid pro quo for money received - Where money in question was in fact received by an election agent of the assessee, who was said to have spent it on purchasing jeeps required for the election campaign of the assessee, and there was no evidence to show that the money was used by the assessee for acquiring movable or immovable properties in his name or in the name of his family members or even for his foreign travel or personal expenses, and it was also on record that the assessee did not do any favour or help to the payers at any time, whether before or after he got elected to the Parliament, it could not be said that there was quid pro quo for the receipt of the money. Therefore, the amount so received by election agent of the assessee could not be treated as income in the assessee’s hands - CIT v. Rajesh Pilot [2008] 175 Taxman 8 (Delhi).


[SEC. 4]


Assignment/alienation of source of income, as opposed to application of income, is relevant- If a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment of the source, apart from special statutory provisions like section 16(1)(c) or section 16(3) of the 1922 Act which artificially deem it to be the assignor’s income. But if the assessee merely applies the income so that it passes through him and goes on to an ultimate purpose, even though he may have entered into a legal obligation to apply it in that way, it remains his income - Provat Kumar Mitter v. CIT [1961] 41 ITR 624 (SC).

Obligation should be such that income gets diverted before (and not after) it reaches assessee - There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect, it, does so, not as part of his income, but for and on behalf of the person to whom it is payable - CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC).

Income can be said to be diverted only when it is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else’s income. It is, thus, clear that where by the obligation income is diverted before it reaches the assessee, it is deductible. But, where the income is required to be applied to discharge an obligation after such income reaches the assessee it is merely a case of application of income to satisfy an obligation of payment and, is therefore, not deductible - CIT v. Travancore Sugars & Chemicals Ltd. [1973] 88 ITR 1 (SC).

Under the scheme of the Act, it is the total income of an assessee, computed under the provisions of the Act, that is assessable to income-tax. So much of the income which an assessee is not entitled to receive by virtue of an overriding title created in favour of a third party would get diverted at source and the same cannot be added in computing the total income of the assessee. The determinative factor is the nature and effect of the assessee’s obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title - CIT v. Sunil J. Kinariwala [2003] 126 Taxman 161 (SC).


Credit to contingency reserve by electricity company is not diversion of income - Amounts credited by assessee-company, engaged in business of generating and supplying electricity, to contingency reserve as required by Electricity (Supply) Act, 1948, cannot be said to have been diverted by overriding title - Associated Power Co. Ltd. v. CIT [1996] 84 Taxman 355/218 ITR 195 (SC).

Amount set apart towards Molasses Storage Reserve Fund is not income - Amount set apart towards Molasses Storage Reserve Fund by sugar manufacturer is not taxable as income - CIT v. New Horizon Sugar Mills (P.) Ltd. [2004] 269 ITR 397/141 Taxman 254 (SC).

Interest earned by investing borrowals is assessee’s income and its utilisation for paying interest on such borrowals is not diversion of income - If a person borrows money for business purpose but utilises that money to earn interest, however temporarily, the interest so generated will be his income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it would not cease to be his income. This would not be a case of diversion of income by overriding title - Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC).

Charity payments covered by partnership deeds are not diversion of income - Mere payment by assessee-firm of a sum to a Mission on account of charity as per certain clauses in partnership deed, does not amount to diversion of assessee’s income to extent of such payment - Mahendra Shukla Packaging Industries v. CIT [1996] 219 ITR 382 (All.).

Race collections handed over to relief fund under agreement amounts to diversion of income - Where assessee-race club conducted races under agreement with Government for Chief Minister’s Rehabilitation Fund and Beggars’ Relief Fund and entire net collections were handed over to Government, it was a case of diversion of such income at source - CIT v. Madras Race Club [1996] 219 ITR 39 (Mad.).

Amount set on under section 15 of Payment of Bonus Act - Amount set on under section 15 of Payment of Bonus Act could not be said to have been statutorily diverted towards bonus so as to be excluded from assessee’s income - Seshasayee Paper & Boards Ltd. v. CIT [1998] 145 CTR (Mad.) 498.

Payment of interest by assessee on assets taken over by him on partition of HUF - Where HUF could not get any deduction on account of payment of interest on unsecured loans taken by it, there was no principle on the basis of which a member of the joint family after partition will get deduction for payment of interest on loans falling to his share on partition, on the plea that interest paid by such member amounted to diversion of income - CIT v. Udayan Chinubhai [1996] 88 Taxman 114/222 ITR 456 (SC).

Payment of interest to bank on inheritance of pledged shares - Where assessee inherited certain properties (including shares) and was also liable to pay interest to bank on certain amount borrowed by his father by pledging shares owned by latter, assessee could not claim deduction in respect of interest paid to bank on loan advanced on ground that said interest was paid out of dividend received on shares pledged with bank for securing the loan - CIT v. Mathubhai C. Patel [1998] 101 Taxman 505 (SC).

Business profits - Where assessee-owner of factory had, by an agreement dated 24-7-1962, agreed to sell same to ‘M’ and agreement provided that profit from factories from 30-9-1962 would be for benefit of transferee on completion of sale transaction, though actual transfer of factory had taken place on 30-9-1964, income pertaining to period 1-10-1962 to 30-9-1964 could not be assessed in assessee’s hands as it stood diverted by overriding title - Dalmia Cement Ltd. v. CIT [1999] 104 Taxman 97/237 ITR 617 (SC).

Income passed on to third party after its receipt is not a case of diversion of income by overriding title - Where assessee was a partner of a firm having 10 per cent share therein and by a settlement, he created a trust assigning 50 per cent out of his 10 per cent right, title and interest (excluding capital) as a partner and a sum of Rs. 5,000 out of his capital in firm in favour of said trust, it was not a case of diversion of income by overriding title - CIT v. Sunil J. Kinariwala [2003] 126 Taxman 161/259 ITR 10 (SC).

Amounts deducted from cane price and credited to development funds by sugar factory - Deductions made by a co-operative sugar factory from the cane price and credited to the Area Development Fund and the Sugar Development Fund should be treated as the income of the society, and the theory of income diverted at source, will not apply - Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT [2004] 270 ITR 1/139 Taxman 434 (SC).

Tax collections - Luxury tax collected by a hotelier under the relevant State enactment and then remitted to Government cannot be treated as a case of diversion of income at source. It is not possible to argue that the position of the assessee is that of an agent of Government who has been directed to collect tax from its customers and remit the same to Government. No part of the amount received by the hotelier from the occupant of the room for the use of the room - whether as an inclusive payment or with the tax element being shown separately - can be regarded as not forming part of the trading receipts of the assessee. The amount of tax-paid by the hotelier to the State would be deductible from its income while computing the hotelier’s assessable income as the discharge of such a statutory liability is clearly an admissible deduction - Pandyan Hotels Ltd. v. CIT [2004] 266 ITR 172/137 Taxman 542 (Mad.).

Effect of creation of mortgage - Where assessee had himself created mortgage on his property by taking a loan from bank, discharge of loan by assessee by auctioning property and making payment to bank would not amount to diversion of income by overriding title and assessee would not be entitled to deduction of amount paid to bank in computation of capital gains - CIT v. Sharad Sharma [2008] 169 Taxman 67/305 ITR 24 (All.).


[SEC. 4]


General principles governing HUF property - From the Supreme Court decision in C. Krishna Prasad v. CIT [1974] 97 ITR 493, the following principles emerge :

 (1)  There is a distinction between a coparcener and a member of a joint family. A coparcener no doubt is a member but all members need not be coparceners.

 (2)  Property obtained by a coparcener at a partition in a larger HUF is ancestral property in his hands.

 (3)  Such an ancestral property may be disposed of by the sole coparcener because of the peculiarity of the circumstance, that is to say, there is no one else to question the alienation or to claim a share in the property at that time.

 (4)  HUF may consist of a male member and any other member who may be male or female and such other member may have either a right to claim partition or a right to claim maintenance out of the joint family property.

 (5)  There is a distinction between two sets of cases : ( i) a property which was not originally joint may, due to certain circumstances, acquire the character of a joint family property as in the case of blending; and (ii) a property which is already impressed with the character of joint family property coming into the hands of a person as a single coparcener - Bharath Kumar D. Bhatia v. CIT [1993] 199 ITR 190 (Kar.).

Property devolving under section 8 of Hindu Succession Act/Inheritance - It would be difficult to hold that property which devolved on a Hindu under section 8 of the Hindu Succession Act would be HUF property in his hands vis-a-vis own son; that would amount to creating two classes among the heirs mentioned in Class I, the male heirs in whose hands it will be joint Hindu family property vis-a-vis their sons and female heirs with respect to whom no such concept could be applied or contemplated - CWT v. Chander Sen [1986] 161 ITR 370 (SC)/CIT v. Ratanlal [1982] 138 ITR 680 (MP)/Shrivallabhdas Modani v. CIT [1982] 138 ITR 673 (MP).

Property received by assessee on partition of properties of an erstwhile HUF would belong to HUF of assessee. Property inherited by assessee from his father under Hindu Succession Act would also belong to assessee in his individual capacity. Where assessee settled in favour of his minor daughter certain portion of property which he received on partition of erstwhile HUF, such settlement would be deemed to have been made by him in his capacity of karta of HUF and income therefrom could not be included in that of HUF - State of Tamil Nadu v. P. Ganesa Odyar [1999] 102 Taxman 231 (Mad.) (FB).

Property given by a female to her son R for benefit of family would be joint family property in son’s hands and property received by assessee (son of R) on division of such property or of properties acquired out of such funds and accretions thereto, would constitute joint family properties in assessee’s hands - CIT v. K. Satyendra Kumar [1998] 232 ITR 360 (SC).

Gifts to HUF - It is wrong to say that a HUF cannot receive gifts - Sukhlal Bhanwarlal (HUF) v. CIT [1997] 92 Taxman 465/226 ITR 513 (MP).

Gift of self-acquired properties by father to sons will be HUF property in sons’ hands only if cumulative benefit is intended - When a Hindu father gifts self-acquired properties to his sons, and the gift deeds leave no doubt about the fact that the sons only were the donees, the gifts would not be ancestral properties in the donees’ hands. If, however, the donor wanted to confer a ‘cumulative benefit’ on the respective family units of the sons, the gifted property would be the property of the HUF in each case - M.P. Periakaruppan Chettiar v. CIT/M.R.M. Ramaswamy Chettiar v. CWT [1975] 99 ITR 1 (SC).

‘Stridhan’ is absolute property of female member who received it - The position of stridhan of a Hindu married woman’s property during coverture is absolutely clear and unambiguous; she is the absolute owner of such property and can deal with it in any manner she likes; she may spend the whole of it or give it away at her own pleasure by gift or will without any reference to her husband. Ordinarily, the husband has no right or interest in it with the exception that in times of extreme distress, as in famine, illness or the like, the husband can utilise it but he is morally bound to restore it or its value when he is able to do so. It may be further noted that this right is purely personal to the husband and the property so received by him in marriage cannot be proceeded against even in execution of a decree for debt - Pratibha Rani v. Suraj Kumar [1985] 155 ITR 190 (SC).

Burden of proof is on assessee - The person who asserts that a property is joint family property, has to prove that it is so - Anil Kumar Roy Chowdhury v. CIT [1976] 102 ITR 12 (SC).


The family hotchpot can be an empty one - It is not necessary that before any property is converted into joint family property or thrown into the common hotchpot of the family there must be some property of the family because even an empty hotchpot can receive and hold any property that is thrown into it by the coparcener - CIT v. S. Sivaprakasa Mudaliar [1983] 144 ITR 285 (Mad.).

Possession of ancestral property is not a pre-condition for blending - Damodar Krishnaji Nirgude v. CIT [1962] 46 ITR 1252 (Bom.).

The three essential pre-conditions - According to the settled principles, a property which was originally the separate or self-acquired property of a coparcener may, by operation of the doctrine of blending, become joint family property if it has been voluntarily thrown by him into the common hotchpot, relinquishing and waiving all his separate rights thereto. For applying the doctrine of blending, however, there are certain pre-conditions, namely :

  (i)  existence of a coparcenary;

 (ii)  existence of coparcenary property; and

(iii)  existence of separate property of a coparcener - CIT v. Polaki Butchi Babu [1988] 174 ITR 430 (Ori.).

Self-acquisition should be without detriment to ancestral estate - The test of self-acquisition by the karta or coparcener is that it should be without detriment to the ancestral estate. It is, therefore clear that before an acquisition can be claimed to be a separate property, it must be shown that it was made without any aid or assistance from the ancestral or joint family property - V.D. Dhanwatey v. CIT [1968] 68 ITR 365 (SC)/ S. Bhagwant Singh v. CIT [1960] 38 ITR 436 (Punj.) (DB).

No legal formality is necessary for blending - CIT v. S. Sivaprakasa Mudaliar [1983] 144 ITR 285 (Mad.).

No registered instrument is necessary for blending - CIT v. Kanhaiya Lal [1970] 75 ITR 702 (All.).

Consent of other members is not necessary for blending - CIT v. A. Krishna Murthy [1978] 113 ITR 133 (AP).

Interest in a trust can be blended with HUF property - CIT v. Gopaldas T. Agarwal [1979] 116 ITR 613 (Bom.).

Though female member cannot blend her separate property with ancestral property, any declaration to that effect will amount to gift to HUF - A female member of the joint family cannot blend her separate property, even if she is an absolute owner thereof, with the joint family property. Whether that separate property is the female’s absolute property or whether she has a limited estate in this property would make no difference to that position. However, by her declaration she must be deemed to have made a gift to the HUF and income from that property would be taxed as HUF income - Pushpa Devi v. CIT [1977] 109 ITR 730 (SC).

Share in firm - An individual's share in a firm can be validly impressed with character of joint family property - CIT v. Chiranjiv Lal [1997] 143 CTR (Delhi) 215.


Two or more coparceners are necessary - A partition can take place between two coparceners or more, not between two capacities of one and the same person - T.G.K. Raman (HUF) v. CIT [1983] 140 ITR 876 (Mad.).

Sole surviving coparcener cannot effect any partition - Before one can visualise or think of a partition, the property has to be owned by more than one person. Obviously, the sole owner cannot divide the property. The grant of any share in the property by the sole surviving male member of the HUF to the wife or to the mother would be only in the nature of settlement of the property upon them in lieu of their right of maintenance and cannot by any stretch of reasoning be said to be a partition of the property against them - Sat Pal Bansal v. CIT [1986] 162 ITR 582 (Punj. & Har.) (FB).

Remainder interest is alone divisible as per rules of partition - In the case of death of male member of HUF, the existing character of joint family property is split into two : One inherited by heirs. Obviously that passes from the ownership of HUF and vests in heirs separately as individuals. The second is remainder in which members of the family have a share as per the principles of Hindu law to which the persons are subjected. Such remainder interest is divisible as per rules of partition as and when such division is claimed by any such person having right to claim partition - CIT v. Balubhai Nanubhai (HUF) [1996] 87 Taxman 157/220 ITR 334 (Guj.).

Female members have no right to claim partition except when a deemed partition takes place in intestate devolution - While a coparcener is entitled to claim partition, and get his share separated, female entitled to share has no such right to claim partition under customary Hindu law. Section 6 of Hindu Succession Act does not confer on female member a right to claim partition of coparcenary property except in the contingency envisaged under section 6, namely, on deemed partition on death of a male member. Nor does it affect the state of jointness of property except when actual physical partition of such property takes place - CIT v. Balubhai Nanubhai (HUF) [1996] 87 Taxman 157/220 ITR 334 (Guj.).

Partition is not necessary for acquisition of separate properties - It is well-settled proposition applicable to Hindu law that members of the joint family coparcenary can, without disturbing the status of joint family or the coparcenary, acquire separate property or run independent business for themselves. It is not, therefore, correct in law to take the view that without a partition or a partial partition, some of the members belonging to the HUF cannot constitute themselves into a partnership firm - Ratanchand Darbarilal v. CIT [1985] 155 ITR 720 (SC)/Kshetra Mohan Sannyasi Charan Sadhukhan v. CEPT [1953] 24 ITR 488 (SC).

Income of minor from sums received on partition - Where assessee received a sum as minor on partition of his HUF and invested it in a firm, share of profit and interest received by him till his marriage was his individual income and after his marriage it was assessable as HUF income - CIT v. Jitendra Kumar (HUF) [2006] 205 CTR (All.) 181.


For conversion of family business into partnership, partition is a pre-requisite - For converting HUF business into a partnership, there has to be a division between the coparceners qua the joint family business, although it is not necessary to disrupt the HUF as a whole. The Hindu law or the Act does not impose any disability upon the members of a HUF in the matter of entering into a contract inter se. They can enter into a valid partnership provided they put into the partnership by way of their capital their separate property or the property which they might have obtained as a result of partition, complete or partial, of the joint property. But it is well-settled that before entering into such partnership, the prerequisite is the partition of that joint family asset which is sought to be introduced as capital of the partnership so that it acquires the character of a separate property. Therefore, where there was no such partition, and the entire capital of the business of the HUF was treated as the capital of one partner and none of the other partners contributed any capital in the firm, no partnership could be said to have come into existence for purposes of assessment of income - Kalu Ram & Co. v. CIT [2002] 254 ITR 307 (Delhi).

Sub-letting of a contract by assessee-HUF to its karta in his individual capacity - Where the assessee-HUF derived income from contract business and in the accounting year relevant to the assessment year, the HUF had sublet its contract to its karta in his individual capacity, the Assessing Officer would not be justified in assessing the income from the contract in the hands of the HUF. One person can be assessed in dual capacity, i.e., one as karta of HUF and another as in his individual capacity, when one person has dual personality under the Income-tax Act. If the assessee-HUF had sublet the contract without there being any adverse tax effect and specially when the income had not escaped as the contract given to individual could not be said to be a sham transaction, there was no tax evasion in this case - Vijay Prakash Toshniwal v. CIT [2006] 156 Taxman 337 (Raj.).


Widow cannot be manager of HUF - Coparcenership is a necessary qualification for the managership of a joint Hindu family and as a widow is not admittedly a coparcener, she has no legal qualifications to become the manager of a joint Hindu family - CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510 (SC).

Karta can gift immovable property to daughter within reasonable limits - A father can make a gift of ancestral immovable property within reasonable limits, keeping in view the total extent of the property held by the family, in favour of his daughter at the time of her marriage or even long after her marriage. Question as to whether a particular gift is within reasonable limits or not has to be judged according to the status of the family at the time of making a gift, the extent of the immovable property owned by the family and the extent of property gifted. No hard and fast rule prescribing quantitative limits of such a gift can be laid down. The answer to such a question would vary from family to family - R. Kuppayee v. Raja Gounder [2004] 135 Taxman 37 (SC).

Where property gifted by karta of HUF to his minor daughters out of natural love and affection constituted a small and reasonable proportion of total value of the properties owned by HUF and gift was treated as valid and assessed to gift-tax and gift-tax assessment had become final, income from gifted properties and value thereof could not be included in income-tax and wealth-tax assessments of assessee-HUF - CIT v. K.N. Shanmughasundaram [1998] 232 ITR 354 (SC).

Karta can make gifts of movable property within reasonable limits - The karta of a joint Hindu family has been empowered to give gifts of movable properties within a reasonable limit for love and affection. If he has made some gifts in favour of the donees on account of love and affection these cannot be said to be void. If the gifts are of excessive amounts or are not given for love and affection, these may be termed as voidable. In that eventuality, these can be challenged by the sons and not by third persons - CIT v. Daljit Singh [1981] 131 ITR 719 (Punj. & Har.).

Karta cannot gift immovable property to his wife - Gift of immovable property by the assessee as the karta to his wife must be regarded as void and ineffective in law. He can, however, make a gift within reasonable limits of such property for pious purposes-Gangadhar Narsingdas Agarwal (HUF) v. CIT [1986] 162 ITR 320 (Bom.).


Principles to be applied - The tests enumerated in earlier decisions are (i) whether the income received by a coparcener of a HUF as remuneration had any real connection with the investment of the joint family funds; (ii) whether the income received was directly related to any utilisation of family assets; (iii) whether the family had suffered any detriment in the process of realization of the income; and (iv) whether the income was received with the aid and assistance of the family funds. From these subsidiary principles, the broader principle that emerges is whether the remuneration received by the coparcener in substance, though not in form, was not one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the HUF but if it is the latter, then it is the income of the individual coparcener - Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 (SC).

Income of member from firm/company is assessable as HUF’s income, only if it was earned by detriment to family funds - Income received by a member of a HUF from a firm or a company in which the funds of the HUF are invested, even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the HUF, if it is earned by detriment to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the member’s separate income - P.N. Krishna Iyer v. CIT [1969] 73 ITR 539 (SC).

Share of profits from firm is assessable in HUF’s hands, if capital had come out of HUF funds- Whether in entering into a partnership with outsider, the karta acted in his individual capacity and for his own benefit, or he did so as representing his joint family and for its benefit, is a question of fact. If for the purpose of contribution of his share of the capital in the firm the karta brought in money out of the HUF’s funds, then he must be regarded as having entered into the partnership for the benefit of the HUF and as between him and the other members of his family he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as income in the hands of the HUF - CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123 (SC).

After disruption of HUF, income from firm is not that of HUF - When once the family has disrupted, the position under the partnership continues as before, but the position under the Hindu law changes. There is then no HUF as a unit of assessment in point of fact, and the income which accrues cannot be said to be that of HUF - Charandas Haridas v. CIT [1960] 39 ITR 202 (SC).

Remuneration/profits must have been earned with the help of joint family assets - The question whether the amount received by the karta by way of managing director’s remuneration in the one case or as his share of profits in the partnership business in the other case is his personal income or is the income of his HUF cannot arise as between the company and the karta as the managing director or between the outside partner and the karta as partner. Neither the company nor the outside partners, as the case may be, is or are interested in such a question. Such question can arise only as between the karta and the members of his family and the answer to the question will depend on whether the remuneration or profit was earned with the help of joint family assets - CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123 (SC).

Where Tribunal found that remuneration and commission received by the Karta of HUF were earned by him on account of his personal qualifications and exertions and not on account of investment of family funds in company and therefore, could not be treated as income of HUF and since Tribunal is final fact finding authority, High Court was not correct in holding that income was to be treated as HUF’s income - K.S. Subbiah Pillai v. CIT [1999] 103 Taxman 400/237 ITR 11 (SC).

Salary received by HUF member from firm managed by him is his individual income - The law is well settled that if a member of a HUF joins a partnership and he is given a salary for managing the firm or for rendering special services to the firm, the salary will be his individual income - CIT v. Trilok Nath Mehrotra [1998] 231 ITR 278 (SC).

Merely because a member of a HUF becomes a partner in a firm as representing the family, everything that he receives cannot be treated as the income of the family. In the absence of a finding that income which was received by the member was directly related to any assets of the family utilised in the partnership, the income cannot be treated as the income of the HUF - CIT v. Gurunath V. Dhakappa [1969] 72 ITR 192 (SC).

Salary received as MLC is individual income - Salary received by the assessee as a member of legislative council is not includible in HUF’s income but is his individual income - CIT v. Maharaja Chintamani Saran Nath Sahdeo [1982] 133 ITR 668 (Pat.).


Female heirs of a Hindu governed by Dayabhaga School of Hindu law, dying intestate, cannot form joint Hindu family by means of agreement by throwing therein interest of any one of them in inherited property - CIT v. Smt. Sandhya Rani Dutta [2001] 115 Taxman 369 (SC).


No assessment in HUF status is permissible after 1-12-1976 - It was not permissible for Income-tax Department to make assessment in status of HUF in Kerala once the Kerala Joint Hindu Family System (Abolition) Act, 1975 had been brought into force with effect from 1-12-1976 - CIT v. N. Ramanatha Reddiar (HUF) [1996] 222 ITR 765 (SC).

After the coming into force of the Kerala Joint Hindu Undivided Family System (Abolition) Act, 1975, i.e., 1-12-1976, the Hindu undivided family has ceased to exist in Kerala and there cannot be any assessment on a Hindu undivided family. Thus, assessment of HUF in State of Kerala after 1-12-1976, is to be made in the hands of individual members - CIT v. N. Krishna Iyer (HUF) [1991] 187 ITR 634 (Ker.).

Kerala Joint Hindu Family System (Abolition) Act, 1975 cannot be applied to persons outside Kerala on the sole ground that they had been born there, when in fact they had established permanent residence outside the State and were permanently domiciled outside Kerala State - CIT v . D.K. Nambudripad [2002] 120 Taxman 776/253 ITR 601 (Mad.).


[SEC. 4]


ITO has no option under 1961 Act to tax the members individually - There are no words in the 1961 Act which empower the ITO to give him an option to tax either the AOP or its members individually or, for that matter, to tax the firm or its partners individually. If it is the income of the AOP in law, AOP alone has to be taxed; the members of the AOP cannot be taxed individually in respect of the income of the AOP. Thus, if certain income is income of AOP in law, AOP alone has to be taxed and merely because members of AOP have been taxed individually in respect of said income, the Assessing Officer is not precluded from taxing AOP with respect to that income - ITO v. Ch. Atchaiah [1996] 84 Taxman 630/218 ITR 239 (SC).


An illegal association can be assessed as AOP - Even though an AOP is an illegal one, there is no bar on authorities levying income-tax on profits made by it - V.K. Kumaraswami Chettiar v. Addl. ITO [1957] 31 ITR 457 (Mad.).


If business is not unlawful, any illegality in forming partnership is not relevant - It is unnecessary in order to constitute an association that there should be any mutual rights or obligations among the members enforceable in a Court of law. So long as the object of the association is to carry on for gains a business which is not unlawful, formation of a partnership in contravention of the Abkari Law does not render the income, profits and gains of the association immune from taxation - K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem & Co. v. CIT [1948] 16 ITR 412 (Mad.).


Co-sharers of inherited estate will not constitute AOP - Where four individuals succeeded to the estate of their uncle as co-sharers and were entitled to equal share in the income of that estate, they would not constitute an AOP because (i) they did not form a unit for the promotion of any joint enterprise to earn income, profits or gains; and (ii ) the collection of the entire income from the estate by one of the sharers or even by a common employee will not make that income an income from a joint venture and each of the sharers got his income as an individual and not as an AOP - CAIT v. Raja Ratan Gopal [1966] 59 ITR 728 (SC).

Co-widows succeeding to estate of deceased Hindu cannot constitute AOP - Under Mitakshara succession, co-widows succeed as co-heirs to the estate of their deceased husband and take as joint tenants with rights of survivorship and equal beneficial enjoyment; they are entitled as between themselves to an equal share of the income. Though they take as joint tenants, no one of them has a right to enforce an absolute partition of the estate against the others so as to destroy their right of survivorship. But they are entitled to obtain a partition of separate portions of the property so that each may enjoy her equal share of the income accruing therefrom. Where they did not exercise their right to separate possession and enjoyment and they chose to manage the property jointly, each acting for herself and the others and receiving the income of the property which they were entitled to enjoy in equal shares, they cannot be treated as an AOP unless the property was capable of joint management - CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC).

JOINT LEGATEES - Whatever the object of associating, the association has to be voluntary on the part of the persons forming association. Forced association of persons because of inheriting joint property by a will or such other circumstances not being voluntary would not constitute such joint legatees as association of persons. Thus, where a will merely stated that during the lifetime of the testator he will remain the owner of all movable and immovable properties and after his death, S and T will become owners of all movable and immovable properties, the assessee [S and T] could not be said to be an AOP because of the terms of the will under which the two legatees had inherited the assets of the testator jointly and shares of each legatees were not specified - CIT v. Laxmi Pd. & Sons [2009] 316 ITR 330 (All.).

Muslim widow carrying on business of late husband on behalf of her children cannot be assessed as AOP - CIT v. Mrs. Moktar Begum [1966] 162 ITR 402 (Cal.).


Trustees/beneficiaries of discretionary trust cannot be assessed as AOP - By no stretch of imagination, could either the trustees or the beneficiaries be an association of persons because there is no element of volition on their part which is the essence of association - CIT v. Shri Krishna Bandar Trust [1993] 201 ITR 989 (Cal.).

See also CIT v. Marsons Beneficiary Trust [1990] 52 Taxman 454 (Bom.)/CIT v. GR Family Trust 2005 Tax LR 959 (Mad.).


Co-receivers of dissolved firm are not assessable as AOP - The receivers appointed by the Court are merely the representatives of the real owners; the primary duty to pay the tax is of real owners though it may be levied and recovered from the receivers. Where the Court appointed three receivers for a dissolved firm in order to carry on its business till it was wound up, the resulting profits accrued to the firm only and was assessable as such, and the profits could not be assessed in the status of AOP - N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 (SC).

CO-PARTNERS - Where business of firm is sold as a going concern surplus arising out of such transaction has to be assessed in status of AOP - CIT v. Electric Control Gear Mfg. Co. [1997] 93 Taxman 384/227 ITR 278 (SC).

JOINT VENTURE - Where ten persons by entering into an agreement created joint venture for purchasing the lottery tickets and the object of purchasing the lottery tickets was to win a prize, these ten persons were assessable as AOP in respect of income by way of prize money on lottery - CIT v. A.U. Chandrasekharan [1997] 141 CTR (Mad.) 177/229 ITR 406 (Mad.)/CIT v. George [2001] 118 Taxman 202 (Mad.).

Where a joint venture was entered into by assessee with four other companies so as to comply with the requirements of local laws and transactions with these companies were at arm’s length and said companies were not bogus companies, and there were no exceptional circumstances warranting the lifting of the corporate veil, taxable entity was AOP consisting of assessee and four other companies and not assessee alone and further it could not be treated as a case of tax avoidance - CIT v. Malibu Estate (P.) Ltd. [2006] 156 Taxman 165 (Delhi).

CO-OWNERS - Merely because transfer of property was in favour of four brothers, transfer cannot be said to be in favour of AOP where property was transferred to four brothers in separate defined shares - CIT v. T.V. Suresh Chandra [2001] 119 Taxman 275 (SC).


[SEC. 4]


Where a business carried on as proprietary concern was inherited by widow and minor children of proprietor and was continued by widow on her own behalf and on behalf of minors, income from business was to be assessed in status of body of individuals - Meera & Co. v. CIT [1997] 91 Taxman 219/224 ITR 635 (SC).


Where a firm had sold its business as a going concern, surplus arising out of transaction was to be assessed under section 41(2)/45 in status of BOI and not as a firm - CIT v. Artex Mfg. Co. [1997] 93 Taxman 357/227 ITR 260 (SC).


[SEC. 4]


Complete identity between contributors and participators is essential - The essence of mutuality lies in the return of what one has contributed to a common fund. All participators must be contributors to the common fund. There must be complete identity between the contributors and the participators - CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC).

Identity need not necessarily be of individuals - The main test of mutuality is complete identity of the contributors with the recipients. The identity need not necessarily be of individuals, because it is an identity of status or capacity which matters - CIT v. Indian Paper Mills Association [1994] 209 ITR 281/74 Taxman 188 (Cal.).

Arrangement must be of non-trading character - It is settled that in the case of ‘mutual society or concern’ (including a Members’ club), there must be complete identity between the class of contributors and the class of participators. The particular label or form by which the mutual association is known, is of no consequence. In substance, the arrangement or relationship between the club and its members should be of a non-trading character. At what point does the relationship of mutuality ends and that of trading begins is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. Whether or not the persons dealing with each other constitute a ‘mutual club’ or are carrying on a trading activity or an adventure in the nature of trade, is largely a question of fact. - CIT v. Bankipur Club Ltd. [1997] 92 Taxman 278/226 ITR 97 (SC).

Mere incorporation as a company is not relevant - Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund, the company makes no profit. In such cases, where there is identity in the character of those who contribute and of those who participate in the surplus , the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members - CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC).

Surplus received back is not profit - A mutual association is an AOP which agrees to contribute funds for some common purpose mutually beneficial and receives back the surplus left out in the same capacity in which they have made the contributions. Therefore, the capacity as contributors and participants remains the same. They contribute not with an idea to trade but with an idea of rendering mutual help. They receive back the surplus which is left after meeting the expenditure of the association which is incurred for the common purpose in the same capacity in which they have contributed. Thus, they receive back what was really their own. The receipt in their hands is not really a profit as no man can make a profit out of himself, just as he cannot enter into a trade or business with himself - CIT v. West Godavari District Rice Millers’ Association [1984] 150 ITR 394 (AP).

When incidental activities are revenue-generating - Simply because some incidental activity of an assessee claiming the status of mutual concern was revenue-generating, that would not provide any justification to hold that it was tainted with commerciality and reached a point where relationship of mutuality ended and that of trading began. Where the predominant object of the assessee was to render appropriate assistance and help to its members for improving their performance and role, the mere fact that the assessee had let out a part of its premises to its members and was receiving rents and had also allowed non-members to use its convention centre for a consideration, was not sufficient to clothe the activity of the assessee as commercial activity. The order of the Tribunal to the effect that principle of mutuality would apply to income other than income in the form of rental or licence fee collected from non-members required no interference - CIT v. Standing Conference of Public Enterprises (SCOPE) [2010] 186 Taxman 142 (Delhi).


Principle of mutuality will extend to property income also - Where the assessee-club provides recreational facilities to its members and their guests and to no one else, and is run on ‘no profit no loss’ basis, in that the members pay for all their expenses and are not entitled to any share in the profits and surplus, if any, is used for maintenance and development of the club, the notional income from house property in respect of the club building is not assessable to tax, on the principle of mutuality which will extend to such deemed income also on the facts of the case - Chelmsford Club v. CIT [2000] 243 ITR 89 (SC).

Test of mutuality is not lost if transactions include those with non-members - Whether the surplus in the hands of the club has resulted out of transactions entered into with a motive of profit-earning which can be said to be tainted with commerciality, is wholly irrelevant for determining the taxability of the receipt because even non-commercial or casual receipts are liable to income-tax under the Act.

Merely because the assessee-company had entered into transactions with non-members and earned profits out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not lost - CIT v. Ranchi Club Ltd. [1992] 196 ITR 137/64 Taxman 433 (Pat.)(FB).

Supplies to members are not ‘sales’ - A members’ club formed for social intercourse and for either recreation or for cultural activities cannot be considered to trade for profit so as to make its surplus taxable in law when it over-charges its members for the supply of refreshments, beverages or amenities to its members. Such supplies are not sales as there is no element of transfer of property in them - CIT v. Merchant Navy Club [1974] 96 ITR 261 (AP).

Distribution to members on winding up - Where memorandum of association of assessee-clubs, registered as charitable companies, provided that upon winding up or dissolution of company, if there remained any property after satisfaction of all debts and liabilities, same would be paid to and distributed amongst members of company in equal shares, surplus receipts for various facilities extended by assessee-clubs to their members were exempt on ground of mutuality - CIT v. Bankipur Club Ltd. [1997] 92 Taxman 278/226 ITR 97 (SC).

Receipts from non-members - Where the assessee-club’s marriage hall was admittedly being rented out to non-members making them as temporary members only for the purpose of letting out the marriage hall and the amounts received from non-members were taxed in the hands of the assessee, principle of mutuality would not apply in such a fact situation; under such circumstances the Tribunal would not be justified in holding that the rental income received by the assessee from non-members was not taxable - CIT v. Trivandrum Club [2006] 153 Taxman 481 (Ker.).

Activities should not be commercial or profit-motivated - Where the facilities extended by the clubs to their members are as a part of usual privileges, advantages and conveniences attached to the members of the club, the said activity cannot be said to be trading activity. On the other hand, if the activities disclose profit-earning motive and are tainted with commerciality, then it would cease to be mutuality and the very claim that the assessee is mutual concern of the members’ club would be of no consequence. Once a finding is recorded that there is no commerciality and what is being offered are usual privileges, advantages and conveniences, that would attract the principle of mutuality. Such a finding and consequent applicability of the principle cannot be interfered with unless the revenue from the record points out that the findings are totally perverse - CIT v. Willingdon Sports Club [2008] 302 ITR 279 (Bom.).

Mutuality concept will not apply to interest received on investments - Where assessee was a sports club providing its members various facilities such as restaurant, gymnasium, library, bar, coffee shop, swimming pool and other facilities for indoor and outdoor games and apart from surplus fund derived from such activities, assessee-club also earned interest from its corporate members on investment of its surplus funds as fixed deposits with them, interest earned on such investments is not exempt from tax on grounds of mutuality concept - Madras Gymkhana Club v. Dy. CIT [2009] 183 Taxman 333 (Mad.).


General - Principle of mutuality would be applicable in respect of amounts received by co-operative group housing society on account of equalization charges, maintenance funds and entry fee from power of attorney holders, interest receivable from members of society as also income determined on account of shops constructed and allotted within premises of society - CIT v. Talangang Co-op. Group Housing Society Ltd. [2010] 195 Taxman 110 (Delhi).

Taxability of transfer fees - No part of transfer fees received by co-operative housing societies, governed by provisions of Maharashtra Co-operative Societies Act, 1960 and Maharashtra Co-operative Societies Rules, 1960, whether from outgoing or from incoming members, is liable to tax in view of principle of mutuality - Sind Co-op. Hsg. Society v. ITO [2009] 182 Taxman 346 (Bom.).