1.

Basic concepts:

Person :
Section 2(31) The term “person” includes:
1. an individual;
2. a Hindu undivided family;
3. a company;
4. a firm;
5. an association of persons or a body of individuals;
6. a local authority; and
7. every artificial juridical person not falling with in any of the
preceding categories.

Assessee:
Section 2(7) Is a noun derived from verb “assess” dictionary
meaning of which is “to evaluate or estimate the value”.

An income tax assessee is a person who pays tax or any sum of

money under the provisions of the Income Tax Act, 1961.
Moreover, Section 2(7) of the act describes income tax assessee
as everyone, liable to pay taxes for any earned income or
incurred loss in a single assessment year. Also they can be
termed as each and every person for whom:

 Any proceedings are going on under the act for the

assessment of his income
 Income of another person for which he is assessable
 Any loss sustained by him or by such other person or
 Person entitled to any tax refund

Normal Assessee

An individual who is liable to pay taxes for the income earned

during a financial year is known as a normal assessee. Every
individual who has earned any income earned or losses incurred
during the previous financial years is liable to pay taxes to the
government in the current financial year.

All individuals who pay interest/penalty or who are supposed to

get a refund from the government are categorised as normal
assessees. Say, Mr A is a salaried individual who has been
paying taxes on time over the past 5 years. Then, Mr A can be
considered as a normal assessee under the Income Tax Act,
1961.

Representative Assessee

There may be a case in which a person is liable to pay taxes for

the income or losses incurred by a third party. Such a person is
known as a representative assessee.

Representatives come into the picture when the person liable for
taxes is a non-resident, minor, or lunatic. Such people will not
be able to file taxes by themselves. The people representing them
can either be an agent or guardian.

Consider the case of Mr. X. He has been residing abroad for the
past 7 years. However, he receives rent for two house properties
he owns in India. He takes the help of a relative, Mr. Y, to file
taxes in India. In this case, Mr. Y acts as a representative
assessee. If the assessing officer plans to investigate the tax
filing, Mr. Y will be asked to provide the necessary documents
as he is the guardian of the property and represents Mr. X.

Deemed Assessee

An individual might be assigned the responsibility of paying

taxes by the legal authorities and such individuals are called
deemed assessees. Deemed assessees can be:

The eldest son or a legal heir of a deceased person who has

expired without writing a will.

The executor or a legal heir of the property of a deceased person

who has passed on his property to the executor in writing.

The guardian of a lunatic, an idiot, or a minor.

The agent of a non-resident Indian receiving income from India.

For example, Mr P owns a commercial building from which he

earns rent income. He has prepared and signed a will stating
the property should be handed over to his niece after his death.
Upon his death, his niece will be considered as the executor of
the property, i.e. deemed assessee. She will be responsible for
paying tax on the rental income thereon.

Assessee-in-default

Assessee-in-default is a person who has failed to fulfil his

statutory obligations as per the income tax act such as not
paying taxes to the government or not filing his income tax
return. For example, an employer is supposed to deduct taxes
from the salary of his employees before disbursing the salary.
He is, then, required to pay the deducted taxes to the
government by the specified due date. If the employer fails to
deposit the tax deducted, he will be considered as an assessee-
in-default.

Case Law: CIT v/s udhoji Shri Krishanadas (M.P high court,
2004) Held from section 2(7), its clear that term assessee
includes actual as well as deemed assesses under provisions of
Act.

Assessment year – Section 2(9)

An “Assessment year” is defined in Section 2(9) as “twelve

months beginning on the first day of April each year.” Every
year, an assessment year commences on April 1st and finishes
on March 31st of the following year. For instance, the
Assessment year 2021-22 is a one-year period beginning on
April 1, 2020, and concluding on March 31, 2021. In an
assessment year, the assessee’s income from the previous year
is taxed at the rates specified in the appropriate Finance Act. As
a result, it is also known as the “Tax Year.”

Previous year

As per Section 3 of the Income Tax Act, 1961, Previous Year is

the Year immediately preceding the assessment year. Previous
year is also known as Financial Year.

It basically means the period starting from April 1 and ending

on March 31 of the next year. For the income earned in the
previous/financial year, tax is paid in the assessment year.
However, in those cases, where a new business/profession/ new
source of income, is set up in a particular previous/financial
year, then in such cases, the previous/financial year will not
begin/calculated from 1st April but will begin/ calculated from
the date when the new business/profession/ new source of
income was set up.

For the year 2020-21, if it is considered to be the previous year,

then in this case, the previous year begins on 1st April 2020 and
will end on 31st March 2021. And the assessment year for
this previous/financial year will be 2021-22, i.e, will be from
1st April, 2021 to 31st March 2022.

Similary if the year 2020-21 was the assessment year, then the
year 2019-20 would have been the previous / financial Year.
Tax on Income earned in the previous year is paid in the
assessment year.

However, there are a few exceptions where the tax on Income

earned in the previous year is paid in the previous year itself.
These exceptions are:

 Income earned by a non resident through a shipping

business in India: As per Section 172 of the Income Tax
Act, 1961, the income earned by a non-resident from a
shipping business in India, has to be taxed in the previous
year itself. The non resident in this case either has to own
the ship or has to charter the ship. The ship in this case
should carry passengers/livestock/mail/goods, which are
shipped to Indian Port. The rationale behind this provision
is that the person /non resident may or may not have
agent in India, and once he leaves India, it will get difficult
to recover tax from him. In this cases it is mandatory for
the Assessment Officer to charge Tax.

 Income earned by the person who is leaving India

permanently or for a long period of time. As per Section
174 of the Income Tax Act, 1961, probable income up-till
the probable date of departure of the person leaving, is
taxable. Again the rationale behind this provision is that
 once the person leaves the country it might get very
difficult to recover the tax from him. In this cases it is
mandatory for the Assessment Officer to charge Tax.

 Income earned by those bodies which are formed for a

short period of Time. As per Section 174A of the Income
Tax Act, 1961, the tax on income from those bodies which
are formed for a very short period are collected in the
previous year itself. The rationale behind this is that these
bodies may be dissolved before the beginning of the
assessment year and then collection of tax from them
might get difficult. In this cases it is mandatory for the
Assessment Officer to charge Tax.

 Income earned by those person who are likely to

transfer their property in order to avoid tax. As per
Section 175 of the Income Tax Act, 1961, those people who
are suspected to transfer their property before the
beginning of the assessment year, in order to avoid tax, the
income of those people are collected in the previous year
itself. In this cases it is mandatory for the Assessment
Officer to charge Tax.

 Income earned from a discontinued business. As per

Section 176 of the Income Tax Act, 1961, the tax on
Income from a business which has been discontinued in
that previous year can be collected in that previous year
itself. However, this is completely on the discretion of the
Assessment Officer and it is not mandatory for him to
charge in the previous year itself.
Different heads of income for chargeability to tax under I T
Act, 1961.
As per Section 14 of the Income Tax Act, for the purpose of
charging of tax and computation of total income, all incomes are
classified under the following 5 Heads of Income:-

1. Salaries
2. House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Other Sources

1. Income from Salaries

An Income can be taxed under head Salaries if there is a

relationship of an employer and employee between the payer and
the payee. If this relationship does not exist, then the income
would not be deemed to be income from salary.

If there is no element of employer-employee relationship, the

income shall be not assessable under this head of income.

Illustration: Mrs. Angelina works in SGP Company Ltd. Owned by

her Uncle. Despite being a close relation, she is getting paid 50,000
as a monthly salary. Here, her monthly earnings are chargeable
under income from the salary head since she has an employer-
employee relationship with her Uncle.

As per Section 15(a) of the Income Tax Act, any salary from the
employer or former employer to the assessee (previous year) is
taxable under this head regardless of the fact that it has been paid
or not.

According to the Indian taxation Law, an employer could be

remunerated by the mean of the following terminologies,
  Fees
 Basic Wages
 Advance salary
 Allowances
 Pension
 Gratuity
 retirement benefits and
 Annual bonus as well.
2. Income from House Property

Sections 22 to 27 of the Act of 1961 elucidate the computation of

the total income from the properties inclusive of land and building,
which the concerned person owns. The revenue under this head is
chargeable only when the property has let out or rent i.e. only the
rental income is taxable.

Section 22 of the Act provides that the annual value of property

consisting of any buildings or lands appurtenant thereto of which
the assessee is the owner, other than such portions of such property
as he may occupy for the purposes of any business or profession
carried on by him the profits of which are chargeable to income-tax,
shall be chargeable to income-tax under the head “income from
house property.

Hence, the chargeable cess could be levied on the gains from the
building or the land appurtenant to the property comprises
buildings rented for residential, businesses, professional, and
entertainment purposes. In general, the income from the house
property is calculated as, earning – expenditure = profit.

3. Profits and Gains from Business or Profession

Any income earned from any

trade/commerce/manufacture/profession shall be chargeable
under this head of income after deducting specified expenses.
The computation procedures of this head are explicated under
Sections 28 to 44D of the Income Tax Act, 1961. But, it is
quintessential to comprehend the meaning of the terms
‘businesses and ‘profession’ pursuant to the Act. The term
business is defined as an activity performed for the purpose of
earning a profit, while Section 2(36) defines the latter as an
occupation. Notwithstanding, both are similar in all respects that
they are driven in pursuit of income/ profit.

Under this head, the following incomes are chargeable,

 Benefit reaped from the business

 Profit on the income by an organisation or as a result of being
in a partnership,
 Profit earned by the assessee
 Cash received on export by the operation of the governmental
scheme
4. Income from Capital Gains

Any profits or gains arising from the transfer of a capital asset

effected in the financial year shall be chargeable to Income Tax
under the head ‘Capital Gains’ and shall be deemed to be the
income of the year in which the transfer took place unless such
capital gain is exempt under Section 54, 54B, 54D, 54EC, 54ED,
54F, 54G or 54GA.

 LTCG- holding assets for more than 36 months and gaining

profit by selling them.
 STCG- holding assets for less than 36 months and deriving
profit by selling the same.
5. Income from Other Sources

Any Income which is not chargeable to tax under the above

mentioned 4 heads of income shall be chargeable under this head
of income provided that income is not exempt from the
computation of total income. Incomes, which are being left by the
aforementioned clauses, can be charged under this head. Section
56 (2) of the Income Tax Act attributes the following types of
income sources as ‘other income’,

 Interest income from bank deposit

 Dividend earnings
 Gifts
 Insurance policy
 Income from the lottery, card games, gambling, and many
more
The total income of an individual plays a pivotal role in income tax
computation. That is why it is significant to figure out the
underlying structure of income tax. The aforementioned is the brief
outline of the existing five heads of income under the Income Tax
Act, 1961.
What do you mean by salaries? Give the tax treatment:
House Rent Allowance
Pension
Gratuity

SALARY(Sec.17(1)):
Salary includes:
1.Wages;
2. Any annuity of pension;
3.any gratuity;
4.any fees, commission, perquisites, profit in lieu of salary or in
addition to any salary or wages;
5.any advance of salary; but not loan for purchasing house etc.
6. Any payment received by an employee in respect of any period
of leave not availed of by him;
7. employer’s contribution towards recognized provident funding
excess of 12% of the employee’s salary and interest on provident
fund in excess of 9.5%rate.
8. the aggregate of all sums comprised in the transferred balance
to the extent to which it is chargeable to tax under sub-rule (4) of
Rule 11.
9. the contribution made by the Central Government or any other
employer in the previous year, to account of an employee, under a
pension scheme.
Allowances and exemptions

Pension (S. 10(10A))

Pension is taxable as salary (S. 17(1)(ii)).
Commuted value of pension is exempt u/s. 10(10A).
i. for Government employees, fully exempt
 ii. ii. for other employees, following is exempt — a. if employee
has received gratuity then commuted value of 1/3rd of the
pension which he is entitled to receive and b. in any other
case, commuted value of 1/2 of the pension which he is
entitled to receive.
iii. iii. any payment in commutation of pension received from
fund set up by LIC is exempt u/s. 10(23AAB).

House Rent Allowance [S. 10(13A) & Rule 2A]

The least of the following is exempt from tax:
i. 50% of salary, (residential house situated at Mumbai,
Kolkata, Delhi or Chennai) and 40% of salary where
residential house is situated at any other place;
ii. actual house rent allowance received by the employee;
iii. excess of rent paid over 10% of salary.

Gratuity [S. 10(10)]

Death-cum-retirement gratuity received by the Government
employees or employees under Civil Services — wholly exempt
from tax.
i. Employees covered by Payment of Gratuity Act. Amount
received on termination, after continuous service of not less
than five years qualifies for exemption Exemption is least of the
following : (aggregate maximum from any number of employers)
1. 15 days salary (denominator taken as 26 in case of monthly
salary) for every completed year/part thereof in excess of 6
months, or
2. Rs. 20,00,000 3. gratuity actually received whichever is less.
ii. Other employees — Amount received on retirement,
incapacitation, death or termination — Exemption is least of the
following : (aggregate maximum from any number of
employments)
1. Rs. 3,50,000/- (Rs. 10 Lakh w.e.f 24th May 2010)
2. half month’s salary for each completed year of service; (based
on last ten months’ average salary), or
3. gratuity actually received.

Voluntary Retirement Compensation [S. 10 (10C)]

Any amount received or receivable by an employee of
i. a public sector company, or
ii. any other company, or
iii. an authority established under a Central, State or
Provincial Act, or
iv. a local authority
v. a co-operative society
vi. a university established under a Central, State or
Provincial Act
vii. an Indian Institute of Technology
viii. any State Government; or
ix. the Central Government; or
x. notified institutions having importance throughout India
or in any state or states.
xi. notified Institute of Management at the time of his
voluntary retirement or termination under a scheme
framed in accordance with guidelines prescribed by Rule
2BA.

Exemption allowable only in One A.Y. Restricted to Rs. 5 lakhs.

* The exemption is not available on the amount on which any
relief has been allowed to the assessee u/s. 89 for any Asst. Year
in respect of any amount received or receivable on voluntary
retirement or termination etc.
What is capital gains tax
The capital gains, or profits, are said to have been “realised” when stock shares
or any other taxable investment assets are sold. Unsold investments and
“unrealized capital gains” are exempted from getting taxed. No matter how long
they are held or how much their value rises, stock shares will not be taxed until
they are sold. The majority of taxpayers pay a greater rate on their income than
any potential long-term capital gains.

The term ‘capital gain tax’ refers to the tax imposed on this capital gain. For the
sale that occurred the previous year, this tax is assessed under the heading of
capital gains. You must pay the capital gain tax if and when:

1. A capital asset that you have for sale falls within this category.
2. The sale has given you a profit.
3. The transaction took place the prior year (the year immediately before
the assessment year).

Defining Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights,
machinery, and jewellery are a few examples of capital assets. This includes
having rights in or in relation to an Indian company. It also includes the rights of
management or control or any other legal right.
The following do not come under the category of capital asset:
a. Any stock, consumables or raw material, held for the purpose of business or
profession.
b. Personal goods such as clothes and furniture held for personal use
c. Agricultural land in rural(*) India
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold
bonds (1980) issued by the central government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit
certificates issued under the Gold Monetisation Scheme, 2015 and Gold
Monetisation Scheme, 2019 notified by the Central Government.

*Definition of rural area (effective from AY 2014-15) – Any area which is outside
the jurisdiction of a municipality or cantonment board, having a population of
10,000 or more is considered a rural area. Also, it should not fall within a distance
given below

Types of Capital Assets?

1. STCA ( Short-term capital asset ): An asset held for a period of 36 months
or less is a short-term capital asset.
The criteria is 24 months for unlisted shares (those shares which are not listed in
a recognized stock exchange in India) and immovable properties such as land,
building and house property from FY 2017-18. For instance, if you sell house
property after holding it for a period of 24 months, any income arising will be
treated as a long-term capital gain, provided that property is sold after 31st March
2017.
The reduced period of the aforementioned 24 months is not applicable to movable
property such as jewellery, debt-oriented mutual funds etc.
Some assets are considered short-term capital assets when these are held for 12
months or less. This rule is applicable if the date of transfer is after 10th July 2014
(irrespective of what the date of purchase is). These assets are:
 Equity or preference shares in a company listed on a recognized stock
exchange in India
 Securities (like debentures, bonds, govt securities etc.) listed on a
recognized stock exchange in India
 Units of UTI, whether quoted or not
 Units of equity oriented mutual fund, whether quoted or not
 Zero coupon bonds, whether quoted or not
2. LTCA ( Long-term capital asset ): An asset held for more than 36 months is
a long-term capital asset. They will be classified as a long-term capital asset if
held for more than 36 months as earlier.
Capital assets such as land, building and house property shall be considered as
long-term capital asset if the owner holds it for a period of 24 months or more
(from FY 2017-18).
Whereas, below-listed assets if held for a period of more than 12 months, shall
be considered as long-term capital asset.
 Equity or preference shares in a company listed on a recognized stock
exchange in India
 Securities (like debentures, bonds, govt securities etc.) listed on a
recognized stock exchange in India
 Units of UTI, whether quoted or not
 Units of equity oriented mutual fund, whether quoted or not
 Zero coupon bonds, whether quoted or not
Agricultural Income: Even Nursery at Home could result in
Agricultural Income

Section 10(1) of the Income-tax Act, 1961 exempts agricultural

income from income-tax. However, net agricultural income is
added to the total non-agricultural income computed as per
Income-tax Act, for the purpose of determining the income-tax
on non-agricultural income of an individual, HUF, AOP/BOI or an
artificial juridical person, although the agricultural income will
remain fully exempt.

Tax is calculated on non agricultural income if following two

conditions are satisfied:

1. Non-agricultural income of the assessee exceeds the

maximum exemption limit which is 2,50,000 in the case of
an individual (other than individual of the age of 60 years or
above) and HUF,etc and
2. Net Agricultural Income exceeds 5,000.

As per section 2(1A), agricultural income means

 Any rent or revenue derived from land which is situated in

India and is used for agricultural purposes.
 Any income derived from such land by agriculture operations
including processing of agricultural produce so as to render
it fit for the market or sale of such produce.
 Any income attributable to a farm house subject to
satisfaction of certain conditions specified in this regard in
section 2(1A).
 Any income derived from saplings or seedlings grown in a
nursery shall be deemed to be agricultural income.

Following are few interesting observation as to the recognition

of income as agricultural income:

1. Income from growing and manufacturing of any product

other than tea [Rule 7] An assessee may have composite
business income which is partially agricultural and partially
non-agricultural, for example, where XYZ Ltd. grows potatoes
and further processes its produce to sell them as wafers. In
 this case the company has composite income i.e. from
agriculture and from business. The composite income has to
be disintegrated and for computing business income the
market value of any agricultural produce raised by the
assessee or received by him as rent in kind and utilised as
raw material in his business is deducted. No further
deduction is permissible in respect of any expenditure
incurred by the assessee as a cultivator or receiver of rent in
kind. For computing agricultural income the market value of
agricultural produce will be total agricultural receipt on
account of potatoes. From such agricultural receipts,
expenses such as cultivation expenses etc. incurred in
connection with such receipt will be deducted and balance
will be agricultural income which will be exempt.

2. The nature of agricultural income would not change merely

because agricultural operation was carried out in a
greenhouse under a controlled environment- held by ITAT,
Pune Bench in the case of Asstt. CIT v. KF Bio Plants (P.) Ltd.
ITA No. 1110/PN/2011 [(Pune-‘A’ Trib)] ITAT & also in the
case of Asstt. CIT v. KF Bio Plants (P.) Ltd. ITA No.
1110/PN/2011 [(Pune-‘A’ Trib)].

3. The ITAT Ahmedabad Bench ‘A’ decision in the case of Dy.

CIT v. Best Roses Biotech (P.) Ltd. (2012) 49 SOT 277 (Ahd-
A’-Trib) : (2012) 144 TTJ (Ahd ‘A’-Trib) 645 has analyzed the
advanced mechanism of growing rose plants in a controlled
environment and held as under :
“7.2 Considering the advancement of technology and *the use
of the advanced equipment in cultivation coupled with the
conventional cultivation method put together, it has to be
held that the operation carried out by the assessee was
agricultural operation in nature.* Therefore, the income in
question was an agricultural income.*It cannot be included
in total income being within the ambits of the provisions of
section 10(1).”
4. In Shivlal Ganga Ram, In re AIR 1927 All 703, it has been
held that income from stone quarries is not an agricultural
income.
5. Preservation of potatoes by refrigeration as it is not a process
ordinarily employed by a cultivator & so it is not an
agricultural income.
6. Income from salt produced by flooding the land with sea
water and then extracting salt therefrom is not an
agricultural income as held in Linga Reddi v CIT 2 ITC 363
(Mad).
7. Interest on arrears of rent in respect of agricultural land is
not an agricultural income and hence it will be taxable as
regular income.
8. Income from sale of forests, trees, wild grass, fruit and flowers
grown spontaneously and without human effort is not an
agricultural income. This is so held in the case of ustafa Ali
Khan v CIT (1948) 16 ITR 330 (PC) & also in Maharajadhiraj
Sri Kameshwar Singh (1957) 32 ITR 587 (SC)
9. Registration fee collected from the contractor who is bidding
at the auction conducted for sale of plantation is not an
agricultural income as such registration fee had no nexus
with land& so held to be not an agricultural income
in CIT v Tamil Nadu Forest Plantation Corporation
Ltd. (2000) 162 CTR 525 (Mad).

10. Income derived by the assessee, a State Government

undertaking engaged in cultivation of sugarcane, from the
sale of tender forms is held to be not an agricultural income
in State Farming Corporation v CIT (1990) 181 ITR 271 (Ker).

11. Annuity payable to vendor of agriculture land or payable

to a person giving up his claims to piece of agricultural land
is held to be not an agricultural income – Maharaja Bikram
Kishore of Tripurav Province of Assam (1949) 17 ITR 220

12. Trees which do not have a spontaneous growth and

cannot be regenerated in near future to give some benefit to
assessee and which are being cut in a prescribed manner and
thereafter sold to particular person at a fixed price &
involving no profit element in the transaction, such income
 earned shall be treated as capital receipt and not revenue
receipt. Accordingly, it will not be chargeable to tax as held
in CIT v Mahendra Karma Pooranchand Soni (2014)
42 taxmann.com 380 (Chhattisgarh), (2014) 221 Taxman
172 (Chhattisgarh) (Mag).

13. Income of nursery [Explanation 3 to section 2(1A)]:

Any income derived from saplings or seedlings grown in a
nursery shall be deemed to be agricultural income. So,
irrespective of the fact as to whether the basic operations
have been carried out on land, such income will always be
treated as agricultural income & so will be eligible for
exemption under section 10(1) of the Act.
14. In CITv Maddi Venkatasubbaya (1951) 20 ITR 151
(Mad), it is held that profit on sale of standing
crops/agricultural produce purchased by the assessee is not
an agricultural income.
15. Mushrooms grown by the assessee in ‘growing rooms’
under ‘controlled conditions’ in racks placed on shelves above
land and on Compost (manure) which was prepared with
paddy straw, Horse manure, Chicken manure, Gypsum and
Urea is an agricultural income.
In Dy. CIT v. Inventaa Industries Private Limited [ITA Nos.
1015 to 1018/Hyd/15 (Hyd-Trib)(SB)], ITAT Special Bench
has held as under:
“soil”, even when separated from land and placed in trays,
pots, containers, terraces, compound walls, etc., continues to
be a specie of land and hence “land” for the sole purpose of
determining whether activity performed on such land is for
production of an agricultural product. The Bench finally held
that as basic operations were performed by expenditure of
human skill and labour on land by the assessee, which
resulted in the raising of the ‘product’ called “Edible white
button mushroom” on the land and as this product has utility
for consumption, trade and commerce, the income arising
from the sale of this product was agricultural income and
hence exempt* under section 10(1) of the Income Tax Act
INSTANCE OF AGRICULTURAL INCOME:

In the following conditions, income is held as Agricultural Income:

(1) Income from rising trade or commercial products like jute,
cotton, etc. is an agricultural income.
(2) Income from growing flowers and creepers is an agricultural
income.
(3) Plants sold in pots are an agricultural income provided basic
operations are performed.
(4) Remuneration and interest to partner: Any remuneration (like,
salary, commission, etc.) received by a partner from a firm engaged
in agricultural activities is an agricultural income. Interest on
capital received by a partner from a firm, engaged in agricultural
operation is an agricultural income.
(5) Income arising by sale of trees grown on denuded parts of the
forest after replanting and by carrying on subsequent operations,
is an agricultural income.
(6) Compensation received from insurance company for damage
caused by hail-storm to the green leaf of the assessee’s tea garden
is agricultural income. Further, no part of such compensation
(like, salary, commission etc.) consists of manufacturing income,
as such compensation (salary, commission etc.) cannot be
apportioned under Rule 8 between manufacturing income and
agricultural income.
(7) Any fee derived from land used for grazing of cattle, being used
for agricultural operation, is an agricultural income.
(8) Any income evolved from saplings or seedlings grown in a
nursery shall be deemed to be agricultural income.

INSTANCE OF NON--AGRICULTURAL INCOME:

In the following cases, income is held as Non-agricultural Income:

(1) Salary received by an employee from any business (having
agricultural income) is non-agricultural income.
(2) Dividend received from a company engaged in agricultural
operation is non-agricultural income.
(3) Income from salt produced by flooding the land with sea-water
is non-agricultural income.
(4) Income from fisheries, poultry farming, dairy farming, butter &
cheese making, etc. is non-agricultural income.
(5) Breeding & rearing of livestock is non-agricultural income.
(6) Interest received by a moneylender in the form of agricultural
produce is non-agricultural income.
(7) Profit on sale of standing crops after harvest, where such crops
were acquired through purchase is non-agricultural income.
(8) Royalty income from mines is non-agricultural income.
(9) Remuneration to a Director or Managing Director from a
company engaged in agricultural business is non-agricultural
income. The provision holds good even when such remuneration is
on the premise of certain percentage of net profit.
(10) Income earned by a cultivator from conversion of sugarcane
(raised on own land) to jaggery is non-agricultural income to the
extent to which income is related to such conversion only. This is
because sugarcane itself is marketable.
(11) Interest on arrears of rent receivable in respect of agricultural
land is non-agricultural income.
(12) Income from a land situated outside India is non-agricultural
income
(13) Annuity received by a person in consideration of transfer of
agricultural land, is non-agricultural income.
(14) Income on supply of water for agricultural operation is non-
agricultural income. The provision holds good even when such
income is received in the form of agricultural-produce.
(15) Income from sale of trees and grasses grown spontaneously
(without any human effort), is non-agricultural income.
(16) Royalty income of mines.
(17) Income from butter and cheese making
(18) Income from poultry farming.
(19) Income from sale of trees of forest which are of spontaneous
growth and in regard to which forestry operations alone are
accomplished.
(20) Where the assessee company is growing various types of
hybrid / germ plasm seeds after conducting agrigenetic
agricultural research costing crores of rupees, income earned on
sale of such seeds cannot be treated as as 'Agricultural Income'.
(21) Receipts from TV serial shooting in farm house.

22)Hire charges received for use of the garden for shooting

films could not be treated as agricultural income, as it has no
nexus with the land, except that it was carried out on the
agricultural land. So, it is held to be not an agricultural income
in B. Nagi Reddiv CIT (2002) 258 ITR 719 (Mad)
Being an Indian citizen but living in foreign, do I need to pay my taxes in India?
Or being a foreign citizen but earning income from India, when am I liable to pay taxes in
India?
Non-understanding of correct residential status creates a high buzz for persons residing outside
India or the persons visiting foreign for most of the year. They remain confuse whether taxes
are to be paid in India and quantum of such taxes, provisions if income is earned in India or
outside India etc.
As the saying goes in Income Tax: “An Indian Citizen may not be resident Indian, but A Foreign
Citizen may be resident Indian.” So, by today’s blog, we wish to make you understand the
concept of residential status and how it affects tax levy. Residential status constitutes of two
main categories – Resident or Non – resident.

Page Contents
1. Who is Resident in India?
2. Who is Non-Resident (NR) in India?
3. Difference between Ordinarily Resident (OR) and Not-Ordinarily Resident (NOR)
4. Conditions to be fulfilled to become Resident and Ordinarily Resident
5. Conditions to be fulfilled to become Resident but Not Ordinarily Resident
6. How income is taxed according to different residential status?
7. Practical examples to understand the concept better:

1. Who is Resident in India?

Upon fulfilling “ANY ONE” of the following two conditions (known as basic conditions),
the person is said to be resident in India for the concerned Financial Year. The conditions
are:
(a) If he is in India during the relevant previous year for a period amounting in all or in
aggregate to 182 days or more. OR
(b) If he was in India for a period or periods amounting in all to 365 days or more during
the four years preceding the relevant previous year AND he was in India for a period or
periods amounting in all to 60* days or more in that relevant previous year. Exceptional
case the condition (b) mentioned above (60 days & 365 days) doesn’t apply in case of

1. An Indian citizen who has left India for the purpose of employment in foreign, or
2. An Indian Citizen or person of Indian origin who comes to visit India.
Thus, in these cases, if person stays in India for a period of 182 days or more in the
concerned F.Y., he is said to be Resident in India.
2. Who is Non-Resident (NR) in India? If “NONE” of the above mentioned conditions is
fulfilled, then person is to be Non-resident in India.
3. Difference between Ordinarily Resident (OR) and Not-Ordinarily Resident (NOR).
After deciding if a person is resident in India, next comes the question of deciding whether
he is an Ordinarily Resident or Not-Ordinarily Resident.

4. Conditions to be fulfilled to become Resident and Ordinarily Resident

After fulfilling one of the above two tests for normal residential status, an individual
becomes resident of India. Further to become, an ordinary resident of India an individual
has to in addition to above test has to fulfill both the following two conditions:
1. He has been resident of India in at least 2 previous years out of 10 previous years
immediately prior to the previous year in question. AND
2. He has stayed in India for at least 730 days in 7 previous years immediately prior to the
previous year in question.
5. Conditions to be fulfilled to become Resident but Not Ordinarily Resident
After fulfilling one of the above two tests for normal residential status, an individual
becomes resident of India. Further to become, Resident but NOT ordinary resident
(‘RNOR’) an individual has to in addition to above test fulfil ANY the following two
conditions:
1. He was a non-resident in India for 9 previous years out of 10 previous years preceding
the relevant previous year. OR
2. He was in India for a period or periods aggregating in all to 729 days or less during seven
previous years preceding the relevant previous year.
6. How income is taxed according to different residential status?

Mark a note of these points:

1. Income received outside India, but subsequently remitted to India doesn’t amount to
receiving of income in India. 1st receipt is important for consideration;
2. While counting period of stay, continuous stay or stay at a particular location in India
doesn’t matter;
3. Person of Indian origin means a person who himself, either of his parents or either of his
grandparents (both paternal and maternal) were born in Undivided India.
4. While computing the period of stay in India, both the day of entering in India and the
day of leaving India shall be counted in period of stay in India.

7. Practical examples to understand the concept better:

Case 1: Bill Gates, owner of Microsoft comes to India for 100 days every year. What
shall be his residential status for A.Y. 2020-21 (F.Y. 2019-20)?
Solution: Bill Gates’s residential status shall be determined in 2 steps:
Step 1: Total stay of Bill Gates in last 4 years preceding 2019-20 (Concerned F.Y.) is 400
days (i.e. 100 * 4) and his stay in F.Y. 2019-20 is 100 days. Therefore, since he has satisfied
2nd condition of the basic conditions, he is a resident in India.
Step 2: His total stay in India in last 7 years preceding F.Y. 2019-20 is 700 days (i.e. 100 *
7), he satisfies the 2nd condition of the additional conditions, hence he is Not-Ordinarily
Resident (NOR) in India. Thus, for AY 2020-21, Bill Gates shall be resident but Not
Ordinarily Resident (NOR).

Case 2: Sachin, an Indian citizen, leaves India on 22nd September 2019 for the first
time, to work as an employee of a company in America. What shall be his residential
status for A.Y. 2020-21 (F.Y. 2019-20)?
Solution: During the F.Y. 2019-20, Sachin was in India for 175 days i.e. 30 (April) + 31
(May) + 30 (June) + 31 (July) + 31 (August) + 22 (September). Since he is leaving India
for purpose of employment, hence 2nd condition of basic condition shall not be applicable
for him. He doesn’t fulfil the 1st condition of basic conditions also. Hence he shall be Non-
Resident in India for F.Y. 2019-20.
If you still find difficulties in determining residential status or have problems related to tax
levy in any of the residential status, feel free to reach us. We are working hard so that you
can live a tax-tensions-free life.