VII SEM TAXATION LAW I - END SEMESTER EXAM

KEY
PART A
1. Under Section 2(15) of the Income-tax Act that charitable purpose includes
relief of the poor, education medical relief. And the advancement of any other object of general
public utility
whether the addition of words not involving the carrying on of any activity for profit makes any
difference to the definition
Word education used in section 2(15) is the systematic instruction, schooling, or training given to
the young in preparation for the work of life. scholastic instruction. The word education has, not
been used in that wide and extended sense whether entitled for exemption.
Case law : Lok Sikshana Trust -whether the purpose of the appellant-trust can be considered to be
entitled to exemption under section 11 of the Income- tax Act, 1961
The test is the genuineness of the purpose tested by the obligation created to spend the money
exclusively or essentially on charity. If that obligation is there, the income becomes entitled to
exemption. That is the most reliable test.
If the legislature intended that the concept of charitable purpose should be the same under the Act of
1961, there was no necessity for it to add the new words in the definition. The appellant trust activity
yields profit and there are no restrictions - go to show that the purpose of the appellant-trust does not
satisfy the requirement that it should be one not involving the carrying on of any activity for profit.
As a result of the addition of the words not involving the carrying on of any activity for profit at the
end of the definition in section 2(15) of the Act even if the purpose of the trust is advancement of any
other object of general public utility,
- would not be considered to be charitable purpose unless it is shown that the above purpose does
not involve the carrying on of any activity for profit
The result thus of the change in the definition is that in order to bring a case within the fourth category
of charitable purpose,
it would be necessary to show that (1) the purpose of the trust is advancement of any other object of
general public utility, and (2) the above purpose does not involve the carrying on of any activity for
profit.
Both the above conditions must be fulfilled before the purpose of the trust can be held to be charitable
purpose
2. ITO must have reason to believe in consequence of information in his possession that ---a)Non-compliance to summon u/s 131(1) or notice u/s 142(1) as to production of certain Books of
Account or other documents. [Even a slightest non compliance may lead to formation of belief]
b) Notice has been / would be issued, but such person has not or might not produce Books of account
in respect of any proceeding under IT Act. [Proceeding may be assessment, appellate, revision,
penalty, rectification, etc.]

c)Possession of undisclosed money, bullion, jewellery or other valuable article or thing --- represents
----- whether wholly or partly, income or property which has not been or would not be disclosed
for the purpose of the Act. (Search Warrant in such a case can be issued)
In Consequence of Information. - Mandatory requirement. Reason to believe - Satisfaction to be
recorded. not the mandate of section 132 that reasonable belief recorded by the designated authority
before issuing the warrant of authorization must be disclosed to the assessee.
For valid search, any of the situations as enumerated above should persist ---- otherwise the
action could vitiate.

entire

CIT v Oriental Rubber, Works (1983) 145 ITR 477 (SC)

3. Tax Planning -Tax evasion -Tax avoidance. The art of dodging tax without breaking law
Thin line of difference between Tax Planning and Tax avoidance.
Earlier legitimate but now illegitimate. Legislature made amendments to plug loop holes and lacuna in
the provision as so prevent tax avoidance.
Illustration.
English Case Law Duke of West Minister, - Lord Tomlin departed in W.T Ramsay Ltd. v IRC Indian Case Law - Indian Judicial thinking : CIT v A. Raman & Co. (1967) 67 ITR 11- Same as West
Minister Principle Departed in McDowell & Co Ltd v CTO (1985) 154 ITR 148. Vodafone
International Holding v UOI (2012)341 ITR 1(SC) Westminster principle continues to apply.
Conclusion - i) Tax Evasion is not only immoral but also illegal Ii) Tax avoidance through sham or
artificial transactions is unacceptable in law Iii) Tax planning through genuine and real transactions of
commercial or substantial value and purpose is proper and will not be rejected by courts even if it
results in tax avoidance.
PART B
4. Parameters on which charge will be levied i). Rate of Tax ii) Charge on person specified u/s 2(31 of
Income Tax Act 1961 Iii) Income sought to be taxed is of the previous year and not of the
assessment year. Iv) Levy of tax on the assessee is on his total or taxable income. v) The
assessment should in every case be made in accordance with provisions of law in force in the
relevant assessment year - and not law applicable to the previous year. vi) Thus for making
assessment, the general rule is income of the previous year alone should be taxed in the
immediately following assessment year. vii) Exception: Same Previous year and Assessment year
Assessment of Income from discontinued business. viii) Income under Head Capital Gains and
Income from other sources.
5. i) Section 6(1):To determine the residential status of an individual, it is to be ascertained whether
he is resident or a non resident during the previous year. An individual will be a resident in India
in any previous year, if he satisfies at least one of the following TWO basic conditions He is in
India in the previous year for a period of 182 days or more.
A falls under exception to basic conditions as he goes for employment purposes outside India
during relevant previous year. Therefore, in As case only 1st basic condition would be checked.
Stay of A in India during PY 2013-14: 1st April, 2013 to 18th September, 2013 : 171 days (30 +
31 + 30 + 31 +31 + 18 days) A does not satisfy first basic condition as his stay during relevant
PY is less than 182 days. Therefore, A is Non Resident in India. Residential status of spouse is
irrelevant for determining residential status of Individual.

ii) Exception to the second basic condition under Sec 6 (1)- An Indian citizen or a person of Indian
origin comes on visit to India during the previous year. For this purpose, a person is said to be of
Indian origin if either he or any of his parents or any of his grandparents was born in undivided
India. In both the above cases, an individual needs to be present in India for a minimum of 182
days or more to become resident in India instead of 60 days. So, If the individual satisfies any of
the two conditions, he is a resident in India and if he does not satisfy any of the conditions, he is
a nonresident during that particular assessment year.
A falls under exception to basic conditions as he is a Person of Indian origin (as his grandfather
was born in undivided India) and he comes on a visit to India during relevant PY. Therefore, in
As case, only 1st basic condition would be checked. Stay of A in India during PY 2013-14: 9th
December, 2013 to 31st March, 2014 : 113 days (23 + 31 + 28 + 31 days) A does not satisfy first
basic condition as his stay during relevant PY is less than 182 days. Therefore, A is Non Resident
in India
iii) Residential Status of a Company Section 6(3). As per section 6(3), residential status of a
company is based on its place of registration and control and management. Indian companies
are always treated as resident irrespective of where their control or management is. Other
companies will be resident if their control and management is wholly in India. Even if the part
of the management or control is outside India, the foreign company would be treated as nonresident in India AT Ltd. is an Indian company as it is registered under the Companies Act,
1956. AT Ltd. is therefore Resident in India as Indian companies are always resident in India.
6. Article 265 {Taxes not to be imposed save by authority of law. No tax shall be levied or
collected except by authority of law.
Thus the basic scheme of taxation in India is : Art. 246 (1) Parliament has exclusive powers to make
laws
As per Art. 246(3), State Government has exclusive powers to make laws
List III of the Seventh Schedule i.e Concurrent list contains entries where both Union and State
Government can exercise powers Entry 82 - The Union Govt. will get tax revenue from Income Tax
(Except on Agricultural Income), Excise (except on alcoholic drinks) and Customs. While
Municipalities will get tax revenue from house property tax.
Constitutionality of both substantive tax law and procedural tax law can arise.
R.K Garg v Union of India (1982) 133 ITR 239 SC - In RK Garg vs Union of India (1982) 133 ITR
239 SC
Taxation law cannot claim immunity from the equality clause of the Constitution.
Where there is more than one method of assessing tax and the legislature selects one of them, the
court will not be justified in striking down the law on the ground that the legislature should have
adopted another method, unless it is convinced that the method adopted is capricious, fanciful,
arbitrary or clearly unjust.
If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be
construed as prospective only.
It has been accepted without dispute that taxation laws must also pass the test of Article 14 of the
Constitution of India.
Thus, the classification must bear a nexus with the object sought to be achieved.

7.a i) Sec 23(1)(a) Sum for which Property might reasonably be expected to be let from year to year. It
is something like notional rent which could have been derived, had the property been let.
ii) Municipal Valuation Local Authorities collect Municipal Taxes The municipal tax can be taken
as an evidence of the earning capacity of the building
iii) Fair Rent means - rent which similar property in the same locality would fetch can be taken as
evidence for arriving at a reasonably expected rent. But if municipal valuation is also available
then municipal valuation or the rent which similar property in the same locality would fetch,
whichever is higher shall be taken as fair rent
iv) Standard rent under Rent Control Act: Standard rent is the maximum rent which a person can
legally recover from his tenant under the Rent control Act. If standard rent is fixed for the proper
fair rent cannot exceed standard rent
b) Computation of Taxable Income from House Property
Gross Annual Value
Municipal Tax

xxxxx
xxxxx
xxxxx

Less:
NetAnnual Value

Less: Deduction u/s 24

(i)
(ii)

30% of Net Annual Value xxxxx

Interest on Loan
xxxxx
Taxable Income from H.P

xxxxx

8.a) Need :- Globalization Movement of People Concurrent Earnings- Borderless Global Economy Internet - Movement of Cross Border M & A Untapped Markets- Double Taxation Conflicts
Purpose - Taxing Residents World-Wide Income Taxing Non-Residents National Income
b) i) A tax treaty is a formally concluded and ratified agreement between two independent nations
(bilateral treaty) or more than two nations (multilateral treaty) on matters concerning taxation
normally in written form. ii) In bilateral agreements between two countries one country is referred to
as State and the other country as Other Contracting State .iii) Source Country Country in which
income arises Residence Country Country in which the assesssee is Residing. iv) Taxable Subject
refers to assessee -Taxable Object refers to income or capital v) Permanent Establishment means a
fixed place of business through which the business of an enterprise is wholly or partly carried on. vi)
For Individuals Five Level Tie-breaker Test (Permanent Home, Centre of Vital Interests, Habitual
Abode, Nationals and Mutual Agreement) For Others - POEM (Place of Effective Management)
9.Deemed assets means those assets which do not belong to assessee but they are included in
computing the net wealth of the assessee.
Conditions for inclusion of Deemed Assets- The individual (transferor) must be the owner of the asset
transferred on the date of transfer. These assets must be transferred without adequate consideration.
These assets must be held by the transferee on the valuation date.
Following deemed assets will be included in the net wealth of individual assessee only: Asset
transferred to spouse Sec.4(1)(a)(I) - directly or indirectly without adequate consideration, then such
asset shall be included in the net wealth of the transferor. Relationship should exist on date of transfer
and valuation date
EXCEPTION: If such asset has been transferred in connection with an agreement to live apart then
such asset shall not be included in the net wealth of the transferor.

Assets held by a minor child. Sec(1)(a)(ii)- Assets held by a minor child are included in the net wealth
of the parent.
However, the following assets shall not be included in the net wealth of parent and would be taxable
in the hands of the minor only.
It should be noted that the child must be minor on the valuation date , otherwise, clubbing provision
shall not apply.
in which parents income the net wealth of the minor child will be clubbed? - If marriage subsist:-In
the net wealth of that parent whose net wealth (excluding the assets of minor child) is greater. If
marriage does not subsist: In the net wealth of that parent who maintains the minor child in the
previous year,
and where any such assets are once included in the net wealth of either parent, they will not be
included in the net wealth of other parent unless permitted by the assessing officer.
10. Identification of the relevant issues.- (1) Whether the return filed by the assessee on April 2,
1993 along with the refund application was one filed u/s. 139(1) of the Income-tax Act ? (2)Even if it
is assumed that the return filed by the assessee along with the refund application commences
assessment proceedings, whether the proceedings should be treated to have been finalized by the
Income-tax Officer by his internal note dated November 10, 1995 and (3) as the proceedings for the
refund were terminated by the Income-tax Officer by his note dated November 10, 1995, Whether
there is no bar for the reassessment proceedings for the same year and, hence, the reassessment
proceedings in respect of the income of such year would be valid?
Explaining the relevant legal Principle and the law/Section involved. - -that during the pendency of
the return filed u/s. 139 of the Act along with refund application u/s. 237 of the Act action could not
have been taken under Section 147/148 of the Act
Applying the law to the issues with logical conclusions- No reassessment proceedings can be initiated
so long as assessment proceedings pending on the basis of the return already filed are not terminated.
Relevant precedents- Judgment and its critical appraisal. - Hence decision in favour of the Assessee

TAXATION LAW - II
1. Article 265 {Taxes not to be imposed save by authority of law. No tax shall be levied or collected
except by authority of law.
Thus the basic scheme of taxation in India is : Art. 246 (1) of the Constitution of India states that the
Parliament has exclusive powers to make laws with respect to any matters --- enumerated in List I in
the Seventh Schedule to the Constitution i.e Union List.
As per Art. 246(3), State Government has exclusive powers to make laws for state with respect to any
matter enumerated --- in List II of the Seventh Schedule of the Constitution i.e State List.
List III of the Seventh Schedule i.e Concurrent list contains entries where both Union and State
Government can exercise powers. Thus the Seventh Schedule referred to in Art. 246 indicates
bifurcation of powers to make laws between Union Govt. and State Govt.
Entries pertaining to Indirect taxes.
Constitutionality of both substantive tax law and procedural tax law can arise. Normally tax laws are
challenged, when i) provision is introduced. Ii) on the ground that they violate the provisions of
constitution.
R.K Garg v Union of India (1982) 133 ITR 239 SC - In RK Garg vs Union of India (1982) 133 ITR
239 SC in which case the government's order regarding the issue of Special Bearer Bonds was
challenged as being unconstitutional, the court opined that there is always a presumption in favour of
the constitutionality of a statute and the burden is upon him, who attacks it to show that there has been
a clear transgression of constitutional principles
Taxation law cannot claim immunity from the equality clause of the Constitution. Where there is more
than one method of assessing tax and the legislature selects one of them, the court will not be justified
in striking down the law on the ground that the legislature should have adopted another method,
which, in the opinion of the court, is more reasonable, unless it is convinced that the method adopted
is capricious, fanciful, arbitrary or clearly unjust. In the matter of retrospective operation of laws, the
Supreme Court's view has rather been hard.
In the matter of retrospective operation of laws, the Supreme Court's view has rather been hard. unless
that effect cannot be avoided without doing violence to the language of the enactment. If the
enactment is expressed in language which is fairly capable of either interpretation, it ought to be
construed as prospective only.
It has been accepted without dispute that taxation laws must also pass the test of Article 14 of the
Constitution of India. A taxation statute for the reasons of functional expediency and even otherwise,
can pick and choose to tax some Importantly there is a rider operating on this wide power to tax and
even discriminate in taxation: that the classification thus chosen must be reasonable. The extent of
reasonability of any taxation statute lies in its efficiency to achieve the object sought to be achieved
by the statute.
Thus, the classification must bear a nexus with the object sought to be achieved. In deciding whether
the taxation law is discriminatory or not it is necessary to bear in mind that the State has a wide
discretion in selecting persons or objects it will tax, and that a statute is not open to attack on the
ground that it taxes some persons or objects and not others. East India Tobacco Co. v. State of Andhra
Pradesh [1963] 1 SCR.

2)
VAT was introduced to avoid the cascading effect of taxes. Concept of VAT How does it
work.

It works on the principle that ---- when a raw material passes thru various manufacturing stages and
the manufactured product passes thru various distribution stages -----Tax should be levied on value added at each stage and not on gross sale price.
This ensures that the same commodity does not get taxed again and again and thus there is no
cascading effect
VAT is a multi-point tax, with provision for granting set off (credit) of the tax paid at the earlier stage.
Thus what happens is that tax burden is passed on when goods are sold. The process continues till
goods are finally consumed.
Therefore VAT is known as consumption type tax.Thus VAT works on the principle of tax credit
system.
VAT avoids the cascading effect of a tax.So what is this cascading effect of tax mean?
What is a tax related to. It is generally related to selling price of the product.
In modern production technology raw material passesthru various stages and processes till it reaches
ultimate stage.
Illustration:
Steel Ignots - (made in steel mill) rolled into plates (by re-rolling unit) Furniture is made from the
plates (by manufacturer)
Therefore the output of the first manufacturer becomes input of the second manufacturer, who carries
on further processing and supplies it to the third manufacturer. This process continues till final
product emerges.
The same then goes to distributor/wholesaler, who sells it to the retailer and then it reaches the
ultimate consumer.
However if the tax is based on the selling price of the product, the tax burden goes on increasing as
the raw material and final product passes from on stage to another.
Illustration :
For example, tax on a product is 10% of selling price.
Manufacturer A supplies his material to B at Rs 100.
Therefore B gets the material at Rs 110. (which is inclusive of 10% tax)
B carries out further processing and sells the same to C at Rs 150. ---- While calculating his cost B has
considered his purchase cost of materials at Rs 110 and added Rs 40 as his processing charges.
While selling the product to C, B will again charge 10% tax. Thus C will get the product at Rs 165.
(Rs 150 + 10% tax).
Actually , value added by B is only Rs 40 tax on which would have been only Rs 4. However in fact
the tax paid was Rs 15.
Thus, as the stages of production and/or sales continue each subsequent purchaser has to pay tax again
and again `on the material on which tax is already charged once.
Thus we find that B is paying tax not only on his contribution of ` 40 but also on ` 100 and ` 10. Thus,
same material gets taxed again and again and there is also tax on tax. As stages of production and/or

sales continue, each subsequent purchaser has to pay tax again and again on the material which has
already suffered tax. Tax is also paid on tax. This is called cascading effect.
Therefore we can say Tax is paid on Tax. This is called as the cascading effect of tax.
(M) Manufacturer
Net Price
VAT @ 12.5%
Sale Price
VAT credit payable
NET Vat Payable

2000
250
2250
NIL
250+

(D)
Distributor
2400
300
2700
250
50 +

(W)
Wholesaler
3000
375
3375
300
75+

(R)
Retailer
4000
500
4000
375
125 = 500

3. VAT definition Service Tax definition

Levy of VAT on transactions Levy of Service Tax on transactions
Constitutional Amendment Art 366 (29A) Deeming fiction Indivisible Contract.
Image creative pvt. Ltd. V/s CCT - 2008 2 SCC 614
4. Definition of Sale and Works Contract - Illustrations of works contract and cases:
It is a Sale

It is works contract

Relationship is seller and buyer

Relationship Contractor and Contractee

Thing produced /manufactured as a whole

is the absolute property of the maker when
it comes into existence. He then transfers to
been the buyer.

In works contract the things produced as a whole is

never the property of the maker even though the
material used in the works contract might have
his absolute property

Sale is chattel qua chattel i.e goods are sold

as goods. The property in goods is transferred
at the time of the delivery of the finished article.

The article produced as a whole directly becomes

property of the buyer without first becoming
property of the maker. Property in goods contain in
Works contract passess by accretion, accession or
Blending during the execution work

Rejection of goods is possible

Rejection of goods is generally difficult.

Sale can be of standard goods as well

as tailor made goods

Works contract is only tailor made i.e for a specific

Contractee.

Buyer usually never supplies any material

To the seller

Contractee often supplies material to the contractor

Sale of Goods Act applies to Transaction

Indian Contract Act applies to Transaction.

5. Newspapers and Lottery tickets are not Goods.

Sec 2(d) of the CST Act defines that ----goods includes all materials, articles, commodities and all
kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and
securities.

So what is the attribute that is required to be present to classify a thing as Goods ----?
i) goods must be movable
Newspapers are really goods in normal sense but are specifically excluded in the definition of goods,
in view of entry no. 92 A of List I in the seventh schedule of the constitution-Union List where
newspapers are specifically excluded from the purview of tax.
Old Newspapers are also Newspapers as they have element of new in them and as such cannot be
taxed. Sait Rikhaji v State of A.P AIR 1991 SC 354.
6. Sale in course of Interstate Trade or Commerce Definition Sec 3 (a) What is movement of goods Sec
3(b) Document of title of deeds Aspects of Sale Illustrations.
7. The provisions relating to classification are elaborate in nature, however they are not always adequate to
correctly classify a product. Therefore some principles have been evolved by the court over a period of
time for classification of product and tariff of the same.
Since the primary objective of the Excise Act is to raise revenue, for classifying a particular product
resort should not be had to the scientific and technical meaning of the terms and expressions therein
but to its popular meaning i.e the meaning attached to in a popular sense by the usage of the particular
product.
Therefore as per principle of Trade parlance, a word in statute should be construed in its particular
sense and not in the strict or technical sense.
Identity of the product is associated in the mind of consumer with its primary function. The consumer
buys an article because it performs certain function for him. The mental association with a product
highly important for classification.Illustrations Case Law CCE V Shree Baidyanath Ayurvedh Bhavan
(2009) 12 SCC 419.
8. The duty of Central Excise is levied if the following conditions are satisfied:
(1) The duty is on goods .- i.e article must be goods, it should be movable and marketable.
(2)The goods must be excisable.- it must be included in CETA.
(3)The goods must be manufactured or produced
(4) Such manufacture or production must be in India.
In other words, unless all of these conditions are satisfied, Central Excise Duty cannot be levied.
Rule 4(1) of the Central Excise Rules, 2002 provides that every person who produces or manufactures
any excisable goods, or who stores such goods in a warehouse, shall pay the duty leviable on such
goods in the manner provided in Rule 8 or under any other law, and no excisable goods, on which any
duty is payable, shall be removed without payment of duty from any place, where they are produced
or manufactured or from a warehouse, unless otherwise provided.
Thus, manufacture or production in India of an excisable goods is a taxable event for Central
Excise. Thus it can be concluded that the following persons shall be liable to pay excise duty :
(i) A person, who produces or manufactures any excisable goods,
(ii) A person, who stores excisable goods in a warehouse,
(iii) In case of molasses, the person who procures such molasses,
(iv) In case goods are produced or manufactured on job work,
(a) the person on whose account goods are produced or manufactured by the job work, or (b) the job
worker, where such person authorizes the job worker to pay the duty leviable on such goods.

9. A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more
liberal than a countrys typical economic laws.
An SEZ is a trade capacity development tool --- goal to promote rapid economic growth by using tax
and business incentives to attract foreign investment and technology.SEZs are projected as duty free
area for the purpose of trade, operations, duty and tariffs.
As per law, SEZ units are deemed to be outside the customs territory of India.Goods and services
coming into SEZs from the domestic tariff area (DTA) are treated as exports from India and goods
and services rendered from the SEZ to the DTA are treated as imports into India.
The SEZ policy was first introduced in India in April 2000, as a part of the Export-Import (EXIM)
policy of India was set uprealizing the need that level playing field must be made available to the
domestic enterprises and manufacturers to be competitive globally.
The SEZ Act is expected to give a big thrust to exports and consequently to the foreign direct
investment (FDI) inflows into India.Government of India enacted the SEZ Act, which received the
assent of the President of India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 (SEZ
Rules) were notified on February 10, 2006.
The policy provides for setting up of SEZs in the public, private, joint sector or by State
Governments.
SEZ developers also enjoy a 10-year tax holiday. It is compulsory for every SEZ units in India to
achieve positive net foreign exchange earning.Exemption from industrial licensing requirements and
no import license requirements is also given to the SEZ units
PART C
10). UOI v Rajendra Dyeing and Printing mills 2005(180) ELT 433(SC) - Facts - The respondents
loaded polyester fabrics on the vessel Cherry Chetak on 3rd January, 1983 for export to Aden and
Jeddah.
2. Identification of the relevant issues.-Whether Respondents were entitled to duty drawback thereon
under the Customs and Central Excise Duties Drawback Rules, 1971.
3. Explaining the relevant legal Principle and the law/Section involved.
4. Applying the law to the issues with logical conclusions
5. Applicability of the Ratio to the given case.- The emphasis is on the movement of the goods outside
the territorial waters of India. It is then that an export may he said to have taken place.
6. Judgment and Implications- In the instant case, the said cargo was destroyed when the vessel sunk
within the territorial waters of India. There was, therefore, no export of the said cargo.
Accordingly no duty drawback was available in respect of the said cargo.

LLM- TAX ON INCOME (DIRECT TAX CODE)

1. HUF is essentially a unit of society and not necessarily an economic or commercial unit.
It needs, therefore, to be emphasized that there could be an HUF which does not own property or
carry on business.
Problem and Issue :
The tax administrators and law makers have been viewing this institution - with suspicion. Under
section 4 of the Income Tax Act, 1961.
income-tax is payable by every person and the word person as defined in section 2(31)(ii) of the
Income Tax Act, includes a Hindu Undivided Family
HUF a legal entity under direct tax laws. No separate definition of the expression HUF has been
given in any of the direct tax laws because the term has a definite connotation under the Hindu Law.
But the income from these assets, was invariably clubbed with their individual income and subjected
to tax.
Therefore the issue is :
How the families consisting of a father and his sons, or of brothers, and the like, can acquire assets?
Section 64(2) does not bar creation of HUF..
There is an erroneous impression that this provision u/s 64(2) debars or obstructs the creation of HUF
assets where none existed before. It merely ensures - that the income from the assets so transferred or
gifted would be assessed in the hands of the donor individual and not in the hands of HUF to which
the assets now belong.
But, this does not prevent the HUF from utilising the assets and income there from for carrying on
business or trade, the income from which would not be caught within the mischief of section 64(2)
A newly created HUF as a unit may receive gifts from outsiders or from father or brothers of the
Karta - who are not members of the donee HUF.
All such gifts will result in accretion to the family fund without attracting he provisions of section
64(2).
The only care to be taken is that none of the debtors should be coparceners or members of the donee
HUF.
Creation of new HUFs through partition of an existing HUF Partition of an HUF by dividing its
assets among its coparceners and members is a recognized method of creating a number of smaller
HUFs and thereby distributing its income into a number of units which bear tax at a lower rate.- It is
thus a useful tool in tax planning.
Creation of HUF through reunion after total partition.
If the circumstances of the family require partial partition while others remain joint and continue to
carry on the business of the main HUF, the members can first have a total partition dividing all the
family assets and liabilities amongst smaller HUFs and claim a total partition under section 171
before the ITO.- The ITO will enquire and pass an order u/s. 171(1).
Two or more smaller HUFs so formed can then reunite.
The partition strategy can therefore be usefully adopted to create smaller HUFs.

It is legally permissible for the coparceners who had originally separated,

- if they throw back into the joint pool all the assets which they had been allotted in the earlier
partition.
This reunion will partially nullify the effect of total partition.
HUF is a firm in fact but not in law. HUF, through its Karta enter into a valid partnership with a
stranger or with the Karta of another HUF.
If there are two partners one of them is Karta of a HUF. Upon death of Karta, the partnership stands
dissolved. In the absence of a contract to the contrary, another member of the HUF cannot step into
the shoes of the Karta.
Rashik Lal & Co Vs. CIT 229 ITR 458 (SC)
Tax Advantages of HUF
HUF is a separate entity for taxation under the provisions of sec. 2(31)
Separate exemption limit under Income-tax Law of Rs. 2 L (AY 2014-15) Rs. 2.5 L (AY 2015-16)
Separate deduction u/s 80G and u/s 80C.
Separate Income-tax deduction on Interest for self occupied House Property. Cost Inflation Index
benefit available to Calculate Cost of the Asset.
Tax benefit of 20% Tax on Long-term Capital Gains Saving Tax on Long-term Capital Gain possible
by investing in Capital Gains Bonds of NHAI / REC
Enjoy lower tax rate of 15% on Short-term Capital Gains.
Presumptive taxation u/s 44AD applicable on Long term Capital Gains Saving by investing in
Residential Property.
Self occupied one Residential House & the tax gain specially by way of Interest on Loan &
Repayment of Loan Special 30% deduction on Rental Income also to HUF. As per section 10(2) of the
Income-tax Act, 1961,
Any sum received by an individual from Hindu Undivided Family of which he is member is exempt
from tax. Member of joint family living apart from the other members does not effect his/her position
in law to claim the right as per section 10(2).
Illustration :By setting up an HUF - an individual can divide his taxable income between two separate
income tax entities. This decreases his net taxable income, as HUF gets deductions under Sec 80 of
Income Tax Act 1961 separately, as also the basic exemption and thereby cuts his annual tax payment
by 1,47,290/2. The law laid down in Soloman v. Soloman and Co.(supra) is often considered the source on the
basis of which the jurisprudence of corporate personality has been written.
The Courts have evolved the concept of lifting or piercing the corporate veil.
In recent times the plague of tax evasion has been so severe that the Courts have actively used the
doctrine of piercing of corporate veil to probe into transactions and decide the actual entities
responsible behind the facade of the company.

Richter Holding v. The Assistant Director of Income Tax1 used this doctrine to take the view that it
may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of
the transaction and ascertain the virtual facts.
Court further held that the Assessee, as a majority share holder, enjoys the power by way of interest
and capital gains in the assets of the company and it is necessary to identify whether the transfer of
shares includes indirect transfer of assets and interest in the company.
In Juggilal Kamlapat v. Commissioner of Income Tax, Uttar Prades the Honble Supreme Court had
taken the view that the doctrine of lifting the corporate veil ought to be applied only in exceptional
circumstances and not as a routine matter. However, if the intention of the Assessee is to avoid tax
through a collusive device, and the real purpose was something else than what appeared on the face,
then the Court may lift the veil of corporate entity to pay due regard to the economic realities behind
the legal facade.
The above analysis shows that in the initial years the Courts have taken a balanced approach while
using the doctrine and have time and again stated that the doctrine must be used in exceptional cases
and must not be used as a tool to fasten liability on the entities behind the corporate curtain.
The aim of the doctrine is to ensure that the players behind the corporate veil maintain the sanctity of
the companys affairs and do not malign the same by injecting personal motive. Nevertheless, a
situation may warrant that the legal identity of the company as a juristic person be seen in
distinguishment with the identity of the person causing the tax evasion, fraud, etc.
Illustration : loss caused to a company by embezzlement, something engineered and tailored on the
lines of the Satyam case, where a Managing Director (or an agent/employee) of a company, along
with his confidants occupying top positions, are involved in defrauding a company of its funds and
business opportunities.
The Courts in this regard have opined that the loss be allowed as a deduction under the provisions of
the Income Tax Act, 1961. In the case of Badridas Daga v. CIT3, the Honble Supreme Court held
that a loss caused by embezzlement is allowable as a deduction where it is shown that the loss has
occurred in the course of the business and is incidental to it. Another pre-condition to be established is
that the company has to be unaware of the embezzlement.
The onus in such cases therefore lies on the company to prove the absence of knowledge of the
embezzlement. Though the determination of knowledge will depend on a case to case analysis, but
where the company fails to do so, like in the case of Curtis v. J. & G. Oldfield Limited 5 and Plas-Flab
Pvt. Ltd. v. Commissioner of Income the loss is not allowed as a deduction. Nevertheless, the legal
principle with regard to the application of the doctrine is reinforced by declaring the company as a
separate juristic person and the director as another.
Even in taxation cases, there may be cases where the identity of a company may be disregarded to
identify the real culprit, whereas on the other hand, there may be cases where the identity of the
company will be reinforced to allow the separation of the knowledge of the person causing the fraud
with the knowledge of the company.
3. The assessment orders were upheld by the Appellate Assistant Commissioner. The appeals filed
by the respondent-Timber firm before the Sales Tax Appellate Tribunal were allowed and the cases
were remanded for fresh consideration.
The High Court relying on the decision of this Court in State of Punjab v. M/s. Jullundur Vegetables
Syndicate, [1966] 17 STC 326 held that the Saw Mill partnership firm was a partnership firm
distinct from the respondent Timber firm for the purposes of sales tax assessment and the turnover of
the one could not be included in the turnover of the other.

The approach adopted by the High Court is not sound. The true solution has to be found not in the tax
law but in the partnership law. The orders of the High Court dismissing the Tax Revision Cases are
maintained.
The orders of the Sales Tax Appellate Tribunal remanding the case are confirmed. Instead of the cases
going back to the assessing officer they shall stand remanded to the Appellate Assistant
Commissioner.
In every case when the assessee professes that it is a partnership firm and claims to be taxed in that
status, the first duty of the assessing officer is to determine whether it is, in law and in fact, a
partnership firm.
For determining whether there is a firm, the assessing officer will apply the partnership law, subject
of course, to any specific provision in that regard in the tax law modifying the partnership law. If the
tax law is silent, it is the partnership law only to which he will refer. Having decided the legal
identity of the assessee, that it is a partnership firm, he will then turn to the tax law and apply its
relevant provisions for assessing the partnership income.
In the instant case, there are two businesses, a business in timber and a business in saw dust.
Both businesses were carried on by the same partners, one as a partnership firm called K.
Kelukutty, and the other under the name M/s. K.K.K. Sons Saw Mills, said to be a separate
partnership firm.
Having regard to the definitions of dealer and person in sections 2 (viii) and 2 (xvi-A) of the
Kerala General Sales Tax Act, 1963 a
partnership firm must be regarded under that Act as an
assessable entity separate and distinct from its individual partners. However, the Act contains no
provision which bears on the identity of a partnership firm.
Therefore, recourse must be had for that purpose to the partnership law alone. Where it is claimed
that there are not one but two partnership firms constituted by the same persons and carrying on
different businesses, the assessing authority must test the claim in the light of the partnership law.
It is only after that question has been determined namely, whether in law there is only one
partnership firm or two partnership firms, that the next question arises: whether the turnover is
assessable in the hands of the partnership firm as a taxable entity separate and distinct from the
partner ?
There is first a decision under the law of partnership, thereafter the second question arises, the
question as to assessment under the tax law.
Each partnership agreement may constitute a distinct and separate partnership,and therefore distinct
and separate firms. The firm name is only a collective name for the individual partners but each
partnership is a distinct relationship.
The partners may be different and yet the nature of the business may be the same. An agreement
between the partners to carry on a business and share its profits may be followed by a separate
agreement between the same partners to carry on another business and share the profits therein.
The intention may be to constitute two separate partnerships and therefore two distinct firms. Or to
extend merely a partnership originally constituted to carry on one business to the carrying on of
another business. It will all depend on the intention of the partners.

The intention of the partners will have to be decided with reference to the terms of the agreement
and all the surrounding circumstances, including evidence as to the interlacing or interlocking of
management, finance and other incidents of the respective businesses.
4. Background
As per sections 44 AA of the Income-tax Act, 1961, a person engaged in business is required to
maintain regular books of account under certain circumstances.
The term presumptive taxation covers a number of procedures under which the desired base for
taxation (direct or indirect) is not itself measured but is inferred from some simple indicators which
are more easily measured than the base itself..
To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the
presumptive taxation scheme under sections 44AD and 44AE.
A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in
turn, is relieved from tedious job of maintenance of books of account.
For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given
below:
The presumptive taxation scheme of sections 44AD & 44AE.
Further, this Scheme cannot be adopted by a person who has made any claim towards deductions
under section10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.
The scheme of section 44D is designed to give relief to small taxpayers engaged in any business,
except the following businesses:
Business of plying, hiring or leasing goods carriages referred to in sections 44AE.
A person who is carrying on any agency business. A person who is earning income in the nature of
Commission or brokerage. Also a person carrying on profession as referred to in section 44AA(1) is
not eligible for presumptive taxation scheme.
The scheme of sections 44AE is designed to give relief to small taxpayers engaged in the business of
plying, hiring or leasing goods carriages.
The provisions of sections 44AE are applicable to every person (i.e., an individual, HUF, firm,
company, etc.).
The presumptive taxation scheme of sections 44AE can be adopted by a person who is engaged in the
business of plying, hiring or leasing goods carriages and who does not own more than 10 goods
vehicles at any time during the year.
Illustration Legal constraints on the adoption of presumptive methods
should be considered in drafting legislation for their application, including constitutional constraints,
such as equality before the law and a prohibition on confiscation of property.
They might also include obligations under international agreements. For example, some double tax
treaties may prohibit taxing a non resident on a presumptive basis without allowing the taxpayer to
prove its actual income and be taxed accordingly

The appropriate design of a presumption will depend on the particular problems it is seeking to
address.
Therefore, before a particular presumptive method can be recommended or designed for a specific
country,
it is necessary to ascertain what types of taxpayers are giving rise to problems under the normal rules
for determining the tax base and the nature of those problems.
Presumptive taxation may or may not be an appropriate solution.
For example, if a particular group of taxpayers is unable to comply with the tax system, consideration
should be given to whether it is possible to remove that group from the tax system altogether.
5.1. Facts.
2. Identification of the relevant issues.
3. Explaining the relevant legal Principle and the law/Section involved.
4. Applying the law to the issues with logical conclusions
5.Relevant precedents Applicability of the Ratio to the given case.
6. Judgment and its critical appraisal
7. Current trends and position in the legal provision, if any.
Your conclusion
6. Partnership has been one of the most oldest forms of business relationships and is still a preferred
form for small trading and business enterprises, especially for the professionals worldwide. But
gradually, this form has lost its demand because of inherent demerits in it, the primarily being the
unlimited liability of partners. So, a need was felt to develop a format that would combine the
flexibility of partnership and the advantages of limited liability of a limited liability company at a low
compliance cost. Limited Liability Partnership (LLP) entities have been introduced in India by way of
LLP Act, 2008 that was notified with effect from March 2009.
ISSUES SURROUNDING LLP
No pass through Mechanism: The provisions as regards LLP do not treat LLP as a transparent entity
but treat them at par with the partnership format. Accordingly, the profits and losses of the LLP would
not pass through in the hands of partners but would be assessable in the hands of LLP. This implies
that an LLP, like a partnership firm, will pay tax on its profits after deduction of business expenditure,
salaries and interest paid to partners. Partners will then be taxed on their salary and interest receipts,
whereas share in profits is exempt.
Double Taxation: The tax treatment as per the provisions laid, caused some unrest to potential foreign
investors who would now be exposed to double taxation in respect of income arising from an LLP
incorporated in India since profits would be liable to tax in the hands of the LLP in India and when the
profits are distributed to the partners, such profits would be liable to tax in the respective jurisdiction
where the partner is resident. This situation is not even addressed by the double taxation avoidance
agreements entered into by India with other countries.
Unlimited Liability in Taxation: Income Tax Act makes every partner of a LLP jointly and severally
liable for the taxes to be paid by the LLP for the period during which he was a partner, unless the nonrecovery of taxes cannot be attributed to gross neglect, misfeasance or breach of duty on his part. The
aforesaid is irrespective of any contrary provision in the LLP Act.
Conversion of firm to LLP: LLP & general partnership to be treated as equivalent. No tax
implications if rights & obligations remain the same after conversion and no transfer of any asset /
liability after conversion. However, no specific tax treatment provided in IT Act. No Conversion
Back: While you can convert from a firm or a company to an LLP, there are no provisions for erring
and deciding to reconvert back into a partnership or a company.

7.1. Facts.
2. Identification of the relevant issues.
3. Explaining the relevant legal Principle and the law/Section involved.
4. Applying the law to the issues with logical conclusions
5.Relevant precedents Applicability of the Ratio to the given case.
6. Judgment and its critical appraisal
7. Current trends and position in the legal provision, if any.
Your conclusion

LLM - Tax Jurisprudence

1. Tax Planning, Avoidance and Planning. - Illustration- employer allots shares debentures - Gifting of
shares- amendment of Sec 47 of Income Tax Act, 1961.
All started with --- IRC v. Duke of Westminster[1897]AC 22 (HL) the West Minister Principle where
Lord Tomlin made the following remark with reference to tax avoidance
Every man is entitled, if he can, to order his affairs, so that the tax attaching under the appropriate
Act is less than it otherwise be
The principle which was commonly followed for several years, ---- A departure was made in judicial
thinking in the following case. i) W.T Ramsay Ltd v I.R.C [1935] All ER 259
Ratio laid down:
Transactions aimed solely at avoiding payment of tax and were of preordained nature with no
commercial purpose. Courts have to ignore such transactions and tax liability has to be fixed as if the
transactions never took place.
Indian Judicial thinking: Same as West Minister Principle : CIT v A. Raman & Co. (1967) 67 ITR 11
Avoidance of tax liability by so arranging affairs that charge of tax distributed is not prohibited. A tax
payer may resort to a device to divert the income before it accrues to him ---- A taxing statute may not
be violated but lawfully circumvented.
McDowell & Co Ltd v CTO (1985) 154 ITR 148.
Facts.
2. Identification of the relevant issues.
3. Explaining the relevant legal Principle and the law/Section involved.
4. Applying the law to the issues with logical conclusions
5.Relevant precedents Applicability of the Ratio to the given case.
6. Judgment and its critical appraisal
7. Current trends and position in the legal provision, if any.
Your conclusion
The Supreme Court held that, Ratio laid down in the principle of West Minister case was no longer
applicable even in England and hence question of following the same in India did not arise.
Tax planning may be legitimate provided it is within the frame work of law.
It is the obligation of every citizen to pay taxes honestly without resorting to subterfuges.Using
dubious methods to avoid payment of tax is not permissible.
Vodafone International Holdings BV v Union of India and another (2012) 6 SCC 613.
Supreme Court held that gains arising from the said transaction were not liable to tax in India, and that
therefore there was no obligation on Vodafone to deduct tax at source.
Supreme Court has directed the tax authorities to return INR 2500 Crores,
The decision of the Supreme Court is expected to have a far reaching impact on the taxability in India
of cross-border transactions.

The Supreme Court has acknowledged that certainty and stability form the basic foundation of any
fiscal system, thereby guiding investors on where they stand and also helping the tax administration in
enforcing the provisions of the taxing laws.
The transaction for transfer of shares of a Foreign Company (though directly or indirectly holds
shares of an Indian Company) between two non-residents on principal to principal basis abroad
cannot be deemed as Transfer of Capital Asset situated in India and accordingly, cannot result into
levy of capital gains tax in India.
The provisions of Section 9 of Act will be attracted only when capital asset is located / situated in
India.
The transaction should not be structured in a manner for avoidance of income tax. The investment
structure should be examined and seen in a holistic manner. The lump-sum consideration for purchase
of an entire investment cannot be allocated or dissected in order to calculate the value of specific
rights and entitlements. The withholding tax obligations in India would arise only when such income
is taxable in India.
The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/
saving device, but it should apply the look at test to ascertain true legal nature of the transaction.
Government has decided not to pass a legislation retrospectively to recover the revenue.
2. Facts.
Identification of the relevant issues.
Explaining the relevant legal Principle and the law/Section involved.
Applying the law to the issues with logical conclusions
Relevant precedents Applicability of the Ratio to the given case.
Judgment and its critical appraisal
Current trends and position in the legal provision, if any.
Your conclusion
- branded software is goods - Software is capable of being abstracted, consumed and use - Software
can be transmitted, transferred, delivered, stored, possessed etc. - No infirmity in Judgment of
authorities below or in impugned Judgment - Appeal dismissed by Supreme Court.
3. The four canons or principles of taxation proposed by Adam Smith in 1776 are still considered
relevant more than three hundred years later.
Any tax system is aimed at achieving particular objectives whether it is mainly raising revenue or
correcting any harmful practice, must have particular characteristics or principles that make the
objectives realizable.
Adam Smith laid down four principles of taxation which he called canons of taxation. His clear and
simple statement of the four canons of taxation that underpins a good tax system remains relevant to
this date.
These principles which have both an ethical aspects and administrative aspects to them can be
summed as canons of equity, certainty, convenience and economy
Canon of Equity, Certainty, Convenience, Economy, Economic efficiency, Administrative simplicity:
Flexibility Transparency Fairness: Horizontal Equity Vertical Equity.
4. Types of Tax Planning : Short Long Permissive Purposive Sec 60-65 of IT Act,. Areas of Tax
Planning - At the time of setting up new business entity Form of Organisation Ownership Pattern
Locational aspect and nature of business

5. Facts.
Identification of the relevant issues.
Explaining the relevant legal Principle and the law/Section involved.
Applying the law to the issues with logical conclusions
Relevant precedents Applicability of the Ratio to the given case.
Judgment and its critical appraisal
Current trends and position in the legal provision, if any.
Your conclusion
6. Problems of Refund
(1) In the case of income tax, there is no time limit within which an AO needs to process the refund in
case it could not be issued by the CPC. The insistence on manual filing of TDS certificates before the
AO for verification of a refund claim stalls the process.
(2) Where eligible refunds emanate from Commissioner (Appeals), Income Tax Appeals Tribunal, a
high court or the Supreme Court, again, the AO faces no prescribed time limit for issuing the refund.
(3) In the case of service tax, a consistent complaint was that of refusal to pay due interest to domestic
suppliers and to service exporters under different pretexts including repeated demands for additional
documentation or the use of a provision entitled unjust enrichment by the department. The latest
available data reveal that, in 2010-11, interest on refunds was 0.01 per cent and 0.02 per cent of
refunds for customs and excise respectively, which may serve as an indicator of the realism of the
complaints.
(4) It was reported by officers to the TARC that it was routine to receive instructions from above to
slow down or stop making legitimate tax refunds in the last quarter of the financial year.
MeasuresRefunds should be issued within a strict time frame. There should be a separate budgetary head for
refund of direct tax and indirect taxes in the annual budget out of which refunds should be issued so
that there is transparency. Adequate allocation should be made by the government under this head.
Refunds sanctioned should be paid along with the applicable interest automatically as is done in the
case of income tax and not on demand by the taxpayers. As in the case of direct taxes and customs
duty drawback, the refund and interest payment should be directly credited to the bank account of the
taxpayer.
The rate of interest on refunds should be the same as the interest charged by the tax department. This
would ensure equity between the two interests and would not disadvantage the taxpayer unduly.
Refunds arising after a favourable appeal should be paid in time or the tax payer should be allowed to
set-off the advance tax liability or self-assessment tax liability of subsequent years against the refunds
due.
The test to determine whether there is unjust enrichment in indirect taxes should be limited to cases
of refunds where there is direct passing on of amounts claimed as refunds. In any other situation, this
concept should not be applied.
Refund claim subjected to pre-audit verification should be issued within a specified time. The postaudit verification of refund claim should be risk-based. An easier and simplified scheme should be
introduced for service exporters. The entire refund filing and processing mechanism should be online.
7. Taxation of Notional Income - Statutory Provisions-Judicial Approach cases