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The Tax PublishersSection C
PART A
INCOME-TAX
CHAPTER II
BASIS OF CHARGE

2. Liability to pay, and charge of, income-tax

(1) In accordance with the provisions of this Code, every person shall be liable to pay income-tax in respect of his total income of the financial year.

(2) Subject to the provisions of this Code, income-tax, including additional income-tax, shall be charged in respect of the total income of a financial year of every person.

(3) Where the income-tax referred to in sub-section (2) is to be charged in respect of the income of a period other than the financial year, the income-tax for such period shall be charged accordingly.

(4) The income-tax referred to in sub-section (2) shall be charged at the rate specified in the First Schedule in the manner provided therein.

(5) In respect of the income chargeable under sub-section (2), income tax shall be deducted or collected at source or paid in advance, in accordance with the provisions of this Code.

(6) The chargeability of income-tax on the income of a financial year under the foregoing provisions shall be determined in accordance with the provisions of this Code as they stand on the 1st day of April of that financial year.

FROM NOTES ON CLAUSES

Clause 2 provides for liability to pay and charge of income-tax. It provides that every person shall be liable to pay income-tax in respect of his total income of the financial year in accordance with the provisions of the Code. 'Total income' and 'person' have been defined in clause 314 of the Code.

Clause 2 also provides that subject to the provisions of the Code, income-tax, including additional income-tax, shall be charged in respect of the total income of a financial year of every person. The clause provides that where the income-tax is to be charged in respect of the income of a period other than the financial year, the income-tax shall be charged accordingly. Such income-tax shall be charged at the rate specified in the First Schedule in the manner provided therein. The income-tax shall be deducted or collected at source or paid in advance in respect of the income chargeable to tax in accordance with the provisions of the Code. The chargeability of income-tax for any financial year shall be determined in accordance with the provisions of this Code as they stand on the 1st April of that financial year.

3. Scope of total income

(1) Subject to the provisions of this Code, the total income of any financial year of a person, who is a resident, shall include all income from whatever source derived which--

(a) accrues, or is deemed to accrue, to him in India during the year;

(b) accrues to him outside India during the year;

(d) is received by him, or on his behalf, outside India during the year.

(2) Subject to the provisions of this Code, the total income of any financial year of a person, who is a non-resident, shall include all income from whatever source derived which--

(a) accrues, or is deemed to accrue, to him in India during the year; or

(b) is received, or is deemed to be received, by him, or on his behalf, in India during the year.

(3) Any income which accrues to a resident outside India during the year, or is received outside India during the year by, or on behalf of, such resident, shall be included in the total income of the resident, whether or not such income has been charged to tax outside India.

FROM NOTES ON CLAUSES

Clause 3 deals with the scope of total income. It provides that subject to the provisions of the Code, the total income of any financial year of a person, who is a resident, shall include all income from whatever source derived which--

(a) accrues, or is deemed to accrue, to him in India during the year;

(b) accrues to him outside India during the year;

(d) is received by him, or on his behalf, outside India during the year.

The said clause also provides that subject to the provisions of the Code, the total income of any financial year of a person, who is a non-resident, shall include all income from whatever source derived which--

(a) accrues, or is deemed to accrue, to him in India during the year; or

(b) is received, or is deemed to be received, by him, or on his behalf, in India during the year.

Any income which accrues to a resident outside India during the year, or is received outside India during the year by, or on behalf of, such resident, shall be included in the total income of the resident, whether or not such income has been charged to tax outside India.

4. Residence in India

(1) An individual shall be resident in India in any financial year, if he is in India--

(a) for a period, or periods, amounting in all to one hundred and eighty-two days or more in that year; or

(b) for a period, or periods, amounting in all to--

(i) sixty days or more in that year; and

(ii) three hundred and sixty-five days or more within the four years immediately preceding that year.

(2) The provisions of clause (b) of sub-section (1) shall not apply in respect of an individual who is--

(a) a citizen of India and who leaves India in that year as a member of the crew of an Indian ship; or

(b) a citizen of India and who leaves India in that year for the purposes of employment outside India.

(3) A company shall be resident in India in any financial year, if--

(a) it is an Indian company; or

(b) its place of effective management, at any time in the year, is in India.

(4) Every other person shall be resident in India in any financial year, if the place of control and management of its affairs, at any time in the year, is situated wholly, or partly, in India.

FROM NOTES ON CLAUSES

Clause 4 provides for residence in India. It provides that an individual shall be resident in India in any financial year, if he is in India--

(a) for a period, or periods, amounting in all to one hundred and eighty-two days, or more, in that year; or

(b) for a period, or periods, amounting in all to--

(i) sixty days, or more, in that year; and

(ii) three hundred and sixty-five days, or more, within the four years immediately preceding that year.

The above shall, however, not apply in respect of an individual who is--

(a) a citizen of India and who leaves India in that year as a member of the crew of an Indian ship; or

(b) a citizen of India and who leaves India in that year for the purposes of employment outside India.

The clause further provides that a company shall be resident in India in any financial year, if--

(a) it is an Indian company; or

(b) its place of effective management, at any time in the year, is situated in India.

The said clause also provides that every other person shall be resident in India in any financial year, if the place of control and management of its affairs at any time in the year is situated wholly or partly in India.

For this purpose, 'Indian company' and 'place of effective management' have been defined in clause 314 of the Code.

5. Income deemed to accrue in India

(1) The income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from :

(a) any business connection in India;

(b) any property in India;

(d) the transfer of a capital asset situated in India.

(2) Without prejudice to the generality of the provisions of sub-section (1), the following income shall be deemed to accrue in India, namely :

(a) income from employment, if it is for--

(i) service rendered in India;

(ii) service rendered outside India by a citizen of India and the income is receivable from the Government; or

(iii) the rest period, or leave period, which precedes, or succeeds, the period of service rendered in India and forms part of the service contract of employment;

(b) any dividend paid by a domestic company outside India;

(c) any insurance premium including re-insurance premium accrued from or payable by any resident or non-resident in respect of insurance covering any risk in India;

(d) interest accrued from or payable by any resident or the Government;

(e) interest accrued from or payable by any non-resident, if the interest is in respect of any debt incurred and used for the purposes of--

(i) a business carried on by the non-resident in India; or

(ii) earning any income from any source in India;

(f) royalty accrued from or payable by any resident or the Government;

(g) royalty accrued from or payable by a non-resident, if the royalty is for the purposes of--

(i) a business carried on by the non-resident in India; or

(ii) earning any income from any source in India;

(h) fees for technical services accrued from or payable by any resident or the Government;

(i) fees for technical services accrued from or payable by any non-resident, in respect of services utilised for the purposes of--

(i) a business carried on by the non-resident in India; or

(ii) earning any income from any source in India;

(j) transportation charges accrued from or payable by any resident or the Government;

(k) transportation charges accrued from or payable by any non-resident, if the transportation charges are in respect of the carriage to, or from, a place in India.

(3) For the purposes of clause (a) of sub-section (1), in the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.

(4) The income deemed to accrue in India under sub-section (1) shall, in the case of a non-resident, not include the following, namely:--

(a) any income accruing through, or from, operations which are confined to the purchase of goods in India for the purposes of export out of India;

(b) interest accrued from or payable by a resident, in respect of any debt incurred and used for the purposes of--

(i) a business carried on by the resident outside India; or

(ii) earning any income from any source outside India;

(i) a business carried on by the resident outside India; or

(ii) earning any income from any source outside India;

(d) royalty consisting of lump sum consideration accrued from or payment made by a resident for the transfer of any rights (including the granting of a licence) in respect of computer software supplied by the non-resident manufacturer, along with a computer or computer-based equipment, under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 issued by the Government of India;

(e) fees for technical services accrued from or payable by a resident, in respect of services utilised for the purposes of--

(i) a business carried on by the resident outside India; or

(ii) earning any income from any source outside India;

(f) transportation charges for the carriage by aircraft or ship accrued from or payable by any resident, if the transportation charges are in respect of the carriage from a place outside India to another place outside India, except where the airport or port of origin of departure of such carriage is in India;

(g) income from transfer, outside India, of any share or interest in a foreign company unless at any time in twelve months preceeding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent. of the fair market value of all assets owned by the company;

(h) interest accrued from or payable by a non-resident as referred to in sub-clause (ii) of clause (e) of sub-section (2), if such interest has not been claimed by the non-resident as a deduction from his tax bases chargeable in India.

(5) The provisions of clauses (c) to (k) of sub-section (2) shall be applicable, whether or not,--

(a) the payment is made in India;

(b) the services are rendered in India;

(d) the income has accrued in India.

(6) Where the income of a non-resident, in respect of transfer, outside India, of any share or interest in a foreign company, is deemed to accure in India under clause (d) of sub-section (1), it shall be computed in accordance with the following formula--

A x B
C
Where A	=	Income from the transfer computed in accordance with provisions of this Code as if the transfer was effected in India;
B	=	fair market value of the assets in India, owned, directly or indirectly, by the company;
C	=	fair market value of all assets owned by the company.

FROM NOTES ON CLAUSES

Clause 5 relates to income which is deemed to accrue in India. Income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from:

(a) any business connection in India;

(b) any property in India;

(d) the transfer, of a capital asset situate in India.

The said clause also provides that in addition to the above, the following income shall be deemed to accrue in India--

(a) income from employment, if it is for service rendered in India or for service rendered outside India by a citizen of India and the income is receivable from the Government; or the rest or leave period preceding or succeeding the period of service rendered in India and forms part of the service contract of employment;

(b) any dividend paid by a domestic company outside India;

(c) any insurance premium including re-insurance premium accrued from or payable by any resident or non-resident in respect of insurance covering any risk in India;

(d) interest accrued from or payable by any resident or the Government;

(e) interest accrued from or payable by any non-resident, if the interest is in respect of any debt incurred and used for the purposes of a business carried on by the non-resident in India or for earning any income from any source in India;

(f) royalty accrued from or payable by any resident or the Government;

(g) royalty accrued from or payable by a non-resident, if the royalty is for the purposes of a business carried on by the non-resident in India; or for earning any income from any source in India;

(h) fees for technical services accrued from or payable by any resident or the Government;

(i) fees for technical services accrued from or payable by any non-resident, in respect of services utilised for the purposes of a business carried on by the non-resident in India or for earning any income from any source in India;

(j) transportation charges accrued from or payable by any resident or the Government;

(k) transportation charges accrued from or payable by any non-resident, if the transportation charges are in respect of the carriage to, or from, a place in India.

The said clause also provides that in the case of a non-resident, income deemed to accrue in India shall not include the following--

(a) any income accruing through, or from, operations which are confined to the purchase of goods in India for the purposes of export out of India;

(b) interest accrued from or payable by a resident on any debt incurred and used for the purposes of a business carried on by the resident outside India or for earning any income from any source outside India;

(c) royalty accrued from or payable by a resident for the purposes of a business carried on by the resident outside India or for earning any income from any source outside India;

(e) fees for technical services, accrued from or payable by a resident, in respect of services utilised for the purposes of a business carried on by the resident outside India; or for earning any income from any source outside India;

(f) transportation charges for the carriage by aircraft or ship, accrued from or payable by any resident, if the transportation charges are in respect of the carriage from a place outside India to another place outside India, except where the airport or port of origin of departure of such carriage is in India.

(g) income from transfer, outside India, of any share of interest in a foreign company, unless at any time in the twelve months preceding transfer, the fair market value of the assets in India owned, directly or indirectly, by the company represent at least fifty per cent of the fair market value of all assets owned by the company;

(h) interest accrued from, or payable by, non-resident as referred to in sub-item (ii) of item (e) of sub-clause (2), if such interest has not been claimed by the non-resident as a deduction from his tax base chargeable in India.

The clause also provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.

The clause also provides that income (other than income from employment and any dividend paid by an Indian company outside India) shall be deemed to accrue in India, whether or not,--

(a) the payment is made in India;

(b) the services are rendered in India;

(d) the income has accrued in India.

The clause further provides that where the income of a non-resident, in respect of transfer, outside India, of any share or interest in a foreign company, is deemed to accrue in India under clause (d) of sub-section (1), it shall be computed in accordance with the formula A*B/C, where A denotes income from the transfer computed in accordance with provisions of this Code as if the transfer was effected in India; B denotes fair market value of the assets in India, owned, directly or indirectly, by the company; and C denotes fair market value of all assets owned by the company.

'Business connection', 'royalty', 'fees from technical services' and 'transportation charges' have been defined in clause 314 of the Code.

6. Income deemed to be received in the financial year

The following income shall be deemed to be received in the financial year, namely:--

(a) any contribution made by an employer, in the financial year, to the account of an employee under a pension fund;

(b) any contribution made by an employer, in the financial year, to the account of an employee in any other fund;

(c) the annual accretion, in the financial year, to the balance at the credit of any employee in a fund referred to in clause (b) to the extent it exceeds the limit as may be prescribed.

FROM NOTES ON CLAUSES

Clause 6 provides that the following income shall be deemed to be received in the financial year, namely:--

(a) any contribution made by an employer in the financial year to the account of an employee under a pension fund;

(b) any contribution made by an employer in the financial year to the account of an employee in any other fund; and

(c) the annual accretion in the financial year to the balance at the credit of any employee in a fund referred to in item (b) to the extent it exceeds the limit as may be prescribed.

FROM MEMORANDUM REGARDING DELEGATED LEGISLATION

Clause 6 of the Bill provides that the following income shall be deemed to be received in the financial year--

(a) any contribution made by any employer, in the financial year, to the account of an employee under a pension fund;

(b) any contribution made by any employer, in the financial year, to the account of an employee in any other fund;

(c) the annual accretion, in the financial year, to the balance at the credit of any employee in a fund referred to in clause (b) to the extent it exceeds the limit as may be prescribed.

Accordingly, it is proposed to empower the Central Government to make the rules in this regard for the purposes of this clause.

7. Dividend income

For the purposes of inclusion in the total income of an assessee--

(a) any dividend declared, distributed or paid by a company within the meaning of item (a) or item (b) or item (c) or item (d) or item (e) of clause (81) of section 314 shall be deemed to be the income of the financial year in which it is so declared, distributed or paid, as the case may be;

(b) any interim dividend shall be deemed to be the income of the financial year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

FROM NOTES ON CLAUSES

Clause 7 relates to dividend income. Clause 7 provides that any dividend declared, distributed or paid by a company shall be deemed to be the income of the financial year in which it is so declared, distributed or paid. It also provides that any interim dividend shall be deemed to be the income of the financial year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

For this purpose, clause 314 of the Code defines 'dividend'.

8. Total income to include income of any other person

(1) The total income of any person, being a transferor, shall include the following, namely:--

(a) any income accruing to any other person, by virtue of a transfer, whether revocable or not, without transfer of the asset from which the income accrues; or

(b) any income accruing to any other person, by virtue of a revocable transfer of an asset.

(2) The provisions of clause (b) of sub-section (1) shall not apply in a case where--

(a) any income accrues from an asset transferred to any trust, if the transfer is not revocable during the life time of the beneficiary of the trust; or

(b) any income accrues from an asset transferred to any other person, not being a trust, if the transfer is not revocable during the lifetime of such other person.

(3) In this section,--

(a) a transfer shall be deemed to be revocable if--

(i) it contains any provision for the re-transfer, directly or indirectly, of the whole or any part of the income or assets to the transferor; or

(ii) it, in any way, gives the transferor a right to re-assume power, directly or indirectly, over the whole or any part of the income or assets;

(b) a transfer shall include any settlement, trust, covenant, agreement or arrangement.

FROM NOTES ON CLAUSES

Clause 8 provides that the total income of a person being a transferor, shall include the income of any other person if such income accrues to any other person by virtue of a transfer, without transfer of the asset from which the income accrues; or the income accrues to any other person by virtue of a revocable transfer of an asset.

However, such income shall not be included in the total income of the transferor in a case where any income accrues from an asset transferred to any trust or any other person, if the transfer is not revocable during the lifetime of the beneficiary of the trust or during the lifetime of such other person.

The clause further provides that a transfer shall be deemed to be revocable if it contains any provision for the re-transfer, directly or indirectly, of the whole or any part of the income or assets to the transferor or it, in any way, gives the transferor a right to re-assume power, directly or indirectly, over the whole or any part of the income or assets. For the purpose of this clause, a transfer shall include any settlement, trust, covenant, agreement or arrangement.

9. Income of individual to include income of spouse, minor child and others

(1) The total income of any individual shall include--

(a) all income which accrues, directly or indirectly,--

(i) to the spouse, by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind, from a concern in which the individual has a substantial interest;

(ii) from assets transferred, directly or indirectly, to the spouse by the individual, otherwise than for adequate consideration, or in connection with an agreement to live apart;

(iii) from assets transferred, directly or indirectly, to the sons wife by the individual, otherwise than for adequate consideration; or

(iv) from assets transferred, directly or indirectly, to any other person by the individual otherwise than for adequate consideration, to the extent to which the income from such assets is for the immediate or deferred benefit of the spouse or sons wife;

(b) all income which accrues to a minor child (other than a minor child being a person with disability or person with severe disability) of the individual, other than income which accrues to the child on account of any--

(i) manual work done by the child; or

(ii) activity involving application of the skill, talent or specialised knowledge and experience of the child;

(d) all income derived from any converted property which is received by the spouse or minor child upon partition of the Hindu undivided family of which the individual is a member.

(2) The provisions of sub-clause (i) of clause (a) of sub-section (1) shall not apply in relation to any income accruing to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of the technical or professional knowledge and experience of the spouse.

(3) The income referred to in sub-clause (i) of clause (a) of sub-section (1) shall, notwithstanding anything contained therein, be included in the total income of the spouse whose total income (excluding the income referred to in that sub-clause) is higher.

(4) The Board may prescribe the method for determining the income referred to in sub-clause (ii) and sub-clause (iii) of clause (a) of sub-section (1).

(5) The income referred to in clause (b) of sub-section (1) shall be included in the total income of--

(a) the parent who is the guardian of the minor child; or

(b) the parent whose total income (excluding the income referred to in that clause) is higher, if both the parents are guardians of the child.

(6) Where any income referred to in clause (b) of sub-section (1) is once included in the total income of a parent, any such income arising in the succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer considers it necessary to do so after giving an opportunity of being heard to the other parent.

(7) In this section, 'property' includes any interest in property whether movable or immovable, the sale proceeds of such property, in whichever form and where the property, is converted into any other form of property by any method, such other property.

FROM NOTES ON CLAUSES

Clause 9 provides that the total income of any individual shall, inter alia, include all income accruing directly or indirectly--

(i) to the spouse, by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind, from a concern in which the individual has a substantial interest;

(ii) from assets transferred, directly or indirectly, to the spouse by the individual, otherwise than for adequate consideration, or in connection with an agreement to live apart;

(iii) from assets transferred, directly or indirectly, to the sons wife by the individual, otherwise than for adequate consideration; or

The income referred to in sub-clause (i) above shall be included in the total income of the spouse whose total income is higher. The said clause also provides that the total income of any individual will not include any income accruing to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of the technical or professional knowledge and experience of the spouse. The said clause further provides that the Board may prescribe the method for determining the income referred to in sub-clauses (ii) and (iii) above.

The said clause further provides that the total income of any individual shall also include all income accruing to a minor child (other than a minor child being a person with disability or person with severe disability) of the individual. Such income shall be included in the total income of the parent who is the guardian of the minor child or the parent whose total income is higher, if both the parents are guardians of the child. Where any such income is once included in the total income of a parent, such income arising in the succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer considers it necessary to do so, after giving an opportunity of being heard, to that other parent. The clause provides that the total income of any individual shall not include all income accruing to a minor child on account of any manual work done by the child or activity involving application of the skill, talent or specialised knowledge and experience of the child.

The clause also provides that the total income of an individual shall include all income derived from any converted property or part thereof as a member of a Hindu undivided family or which is received by the spouse or minor child upon partition of the said family. In the said clause, 'property' has been defined to include any interest in property whether movable or immovable, the sale proceeds of such property in whichever form and where the property is converted into any other form of property by any method, such other property. 'Converted property' has been defined in clause 314 of the Code.

FROM MEMORANDUM REGARDING DELEGATED LEGISLATION

Clause 9 of the Bill provides that the total income of any individual shall include, besides other income, all income which accrues, directly or indirectly from assets transferred, directly or indirectly, to the spouse by the individual, otherwise than for adequate consideration, or in connection with an agreement to live apart; and from assets transferred, directly or indirectly, to the sons wife by the individual, otherwise than for adequate consideration. It has been further provided that the Board may prescribe the method for determining the income referred to above.

Accordingly, it is proposed to empower the Board to make rules in this regard for the purposes of this clause.

10. Income not included in the total income

Subject to the provisions of this Code, the total income of a financial year of a person shall not include the income enumerated in the Sixth Schedule.

FROM NOTES ON CLAUSES

Clause 10 provides that the total income of a financial year of a person shall not include the income enumerated in the Sixth Schedule.

11. Persons, entity or funds not liable to income-tax

The persons, entity or funds enumerated in the Seventh Schedule shall not be liable to income-tax under this Code for any financial year, subject to the fulfillment of conditions specified in the said Schedule.

FROM NOTES ON CLAUSES

Clause 11 provides that the persons enumerated in the Seventh Schedule shall not be liable to income-tax under this Code for any financial year, subject to the fulfillment of conditions specified in the said Schedule.