PLACE OF EFFECTIVE MANAGEMENT

Place of Effective Management:

(i) In case of companies engaged in active business outside India

  POEM of a company engaged in active business shall be presumed to be outside India if the
majority of the board meetings are held outside India.

However, in case the Board is not exercising its powers of management and such powers are
being exercised by either the holding company or any other person, resident in India, then
POEM shall be considered to be in India.

For this purpose, merely because the Board of Directors (BOD) follows general and objective
principles of global policy of the group laid down by the parent entity which may be in the field
of Pay roll functions, Accounting, Human resource (HR) functions, IT infrastructure and
network platforms, Supply chain functions, Routine banking operational procedures, and not
being specific to any entity or group of entities per se; would not constitute a case of BoD of
companies standing aside.

For the purpose of determining whether the company is engaged in active business outside
India, the average of the data of the previous year and two years prior to that shall be taken
into account. In case the company has been in existence for a shorter period, then, data of
such period shall be considered. Where the accounting year for tax purposes, in accordance
with laws of country of incorporation of the company, is different from the previous year, then,
data of the accounting year that ends during the relevant previous year and two accounting
years preceding it shall be considered.

(ii) In case of companies not engaged in active business outside India
The guidelines provide a two-stage process for determination of POEM in case of companies
not engaged in active business.

(a) First stage: Identifying the person(s) who actually make the key management and
commercial decisions for the conduct of the company as a whole.

(b) Second stage: Determining the place where these decisions are, in fact, being made.
The place where these management decisions are taken would be more important than
the place where such decisions are implemented. For the purpose of determination of
POEM, it is the substance which would be conclusive rather than the form.

RESIDENT AND ORDINARILY RESIDENT

Resident and ordinarily resident/Resident but not ordinarily resident

Only individuals and HUFs can be resident but not ordinarily resident in India. All other
classes of assessees can be either a resident or non-resident. A not-ordinarily resident person
is one who satisfies any one of the conditions specified under section 6(6).

(i) If such individual has been non-resident in India in any 9 out of the 10 previous years
preceding the relevant previous year, or

(ii) If such individual has during the 7 previous years preceding the relevant previous year
been in India for a period of 729 days or less.

Note: In simpler terms, an individual is said to be a resident and ordinarily resident if he satisfies both the following conditions:

(i) He is a resident in any 2 out of the last 10 years preceding the relevant previous year, and

(ii) His total stay in India in the last 7 years preceding the relevant previous year is 730 days or
more.

If the individual satisfies both the conditions mentioned above, he is a resident and ordinarily
resident but if only one or none of the conditions are satisfied, the individual is a resident but
not ordinarily resident.

RESIDENTIAL STATUS (SECTION 6)

RESIDENTIAL STATUS [SECTION 6]

The incidence of tax on any assessee depends upon his residential status under the Act. For
all purposes of income-tax, taxpayers are classified into three broad categories on the basis of
their residential status viz.

(1) Resident and ordinarily resident

(2) Resident but not ordinarily resident

(3) Non-resident

The residential status of an assessee must be ascertained with reference to each previous
year. A person who is resident and ordinarily resident in one year may become non -resident
or resident but not ordinarily resident in another year or vice versa.

The provisions for determining the residential status of assessees are:
(1) Residential status of Individuals
Under section 6(1), an individual is said to be resident in India in any previous year, if he
satisfies any one of the following conditions:

(i) He has been in India during the previous year for a total period of 182 days or more, or

(ii) He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more and has been in India for at least 60 days in the previous year.

Exceptions:
The following categories of individuals will be treated as residents only if the period of their
stay during the relevant previous year amounts to 182 days. In other words even if such
persons were in India for 365 days during the 4 preceding years and 60 days in the relevant
previous year, they will not be treated as resident.

(i) Indian citizens, who leave India in any previous year as a member of the crew of an Indian
ship or for purposes of employment outside India, or

(ii) Indian citizen or person of Indian origin1 engaged outside India in an employment or a
business or profession or in any other vocation, who comes on a visit to India in any
previous year

INCOME SECTION 2(24)

INCOME SECTION 2(24)

The definition of income as per the Income-tax Act, 1961 begins with the words “Income includes”.
Therefore, it is an inclusive definition and not an exhaustive one. Such a definition does not
confine the scope of income but leaves room for more inclusions within the ambit of the term.

Section 2(24) of the Act gives a statutory definition of income. At present, the following items of receipts are specifically included in income :—

(i) Profits and gains.
(ii) Dividends.
(iii) Voluntary contributions received by a trust/institution created wholly or partly for charitable or
religious purposes or by an association or institution referred to in section 10(21) or section
(23C)(iiiad)/(iiiae)/(iv)/(v)/(vi)/(via) or an electoral trust.

Research association approved under section                                                    35(1)(ii) 10(21)
Universities and other educational institutions                                                  10(23C)(iiiad)/(vi)
Hospitals and other medical institutions                                                            10(23C) (iiiae)/(via)
Notified funds or institutions established for charitable purposes                     10(23C)(iv)
Notified trusts or institutions established wholly for public religious                10(23C)(v)
purposes or wholly for public religious and charitable purposes     
Electoral trust                                                                                                       13B

(iv) The value of any perquisite or profit in lieu of salary taxable under section 17.
(v) Any special allowance or benefit other than the perquisite included above, specifically
granted to the assessee to meet expenses wholly, necessarily and exclusively for the
performance of the duties of an office or employment of profit.
(vi) Any allowance granted to the assessee to meet his personal expenses at the place where the
duties of his office or employment of profit are ordinarily performed by him or at a place
where he ordinarily resides or to compensate him for the increased cost of living.
(vii) The value of any benefit or perquisite whether convertible into money or not, obtained from a
company either by a director or by a person who has a substantial interest in the company or
by a relative of the director or such person and any sum paid by any such company in respect
of any obligation which, but for such payment would have been payable by the director or
other person aforesaid.
(viii) The value of any benefit or perquisite, whether convertible into money or not, which is
obtained by any representative assessee mentioned under section 160(1)(iii) and (iv), or by
any beneficiary or any amount paid by the representative assessee for the benefit of the
beneficiary which the beneficiary would have ordinarily been required to pay.
(ix) Deemed profits chargeable to tax under section 41 or section 59.
(x) Profits and gains of business or profession chargeable to tax under section 28.
(xi) Any capital gains chargeable under section 45.The profits and gains of any insurance business carried on by Mutual Insurance Company or
by a cooperative society, computed in accordance with Section 44 or any surplus taken to be
such profits and gains by virtue of the provisions contained in the first Schedule to the Act.
(xiii) The profits and gains of any business of banking (including providing credit facilities) carried
on by a co-operative society with its members.
(xiv) Any winnings from lotteries, cross-word puzzles, races including horse races, card games
and other games of any sort or from gambling, or betting of any form or nature whatsoever.
For this purpose,
   (a) “Lottery” includes winnings, from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever, under any scheme or arrangement by
whatever name called;
   (b) “Card game and other game of any sort” includes any game show, an entertainment
programme on television or electronic mode, in which people compete to win prizes or
any other similar game.
(xv) Any sum received by the assessee from his employees as contributions to any provident fund
(PF) or superannuation fund or Employees State Insurance Fund (ESI) or any other fund for
the welfare of such employees.
(xvi) Any sum received under a Keyman insurance policy including the sum allocated by way of
bonus on such policy will constitute income.
“Keyman insurance policy” means a life insurance policy taken by a person on the life of
another person where the latter is or was an employee or is or was connected in any manner
whatsoever with the former’s business.
(xvii) Any sum referred to clause (va) of section 28. Thus, any sum, whether received or
receivable in cash or kind, under an agreement for not carrying out any activity in relation to
any business or profession; or not sharing any know-how, patent, copy right, trade-mark,
licence, franchise, or any other business or commercial right of a similar nature, or
information or technique likely to assist in the manufacture or processing of goods or
provision of services, shall be chargeable to income tax under the head “profits and gains of
business or profession”.
(xviii)Any consideration received for issue of shares as exceeds the fair market value of the
shares[section 56(2)(viib)].[For details, refer to Chapter 8 “Income from Other Sources”]
(xix) Any sum of money received as advance, if such sum is forfeited consequent to failure of
negotiation for transfer of a capital asset [section 56(2)(ix)].[For details, refer to Chapter 8
“Income from Other Sources”]
(xx) Any sum of money or value of property received without consideration or for inadequate
consideration by any person [section 56(2)(x)].

COMPANY SECTION 2(17)

Company [Section 2(17)]
For all purposes of the Act the term ‘Company’, has a much wider connotation than that

under the Companies Act. Under the Act, the expression ‘Company’ means:

(i) any Indian company as defined in section 2(26); or

(ii) any body corporate incorporated by or under the laws of a country outside India, i.e.,
any foreign company; or

(iii) any institution, association or body which is assessable or was assessed as a company
for any assessment year under the Indian Income-tax Act, 1922 or for any assessment
year commencing on or before 1.4.1970 under the present Act; or

(iv) any institution, association or body, whether incorporated or not and whether Indian or
non-Indian, which is declared by a general or special order of the CBDT to be a
company for such assessment years as may be specified in the CBDT’s order.

Classes of Companies

(a) Domestic company [Section 2(22A)] - means an Indian company or any other company which, in respect of its income liable to income-tax, has made the prescribed
arrangements for the declaration and payment of dividends (including dividends on
preference shares) within India, payable out of such income.

Indian company [Section 2(26)] - Two conditions should be satisfied so that a
company can be regarded as an Indian company –

(i) the company should have been formed and registered under any law relating to
companies which was or is in force in any part of India, and

(ii) the registered office or the principal office of the company should be in India.
The expression ‘Indian Company’ also includes the following, provided its registered or
principal office is in India:

(a) A corporation established by or under a Central, State or Provincial Act (like
Financial Corporation or a State Road Transport Corporation),

(b) An institution or association or body which is declared by the Board to be a
company under section 2(17)(iv).

(c) in the case of the State of Jammu and Kashmir, a company formed and registered
under any law for the time being in force in that State.

(d) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman
and Diu, and Pondicherry, a company formed and registered under any law for the
time being in force in that Union territory.

(b) Foreign company [Section 2(23A)] - Foreign company means a company which is not a domestic company.

(c) Company in which public are substantially interested [Section 2(18)] - The following companies are said to be companies in which the public are substantially interested:
a) A company owned by the Government (either Central or State but not Foreign) or
the Reserve Bank of India (RBI) or in which not less than 40% of the shares are
held by the Government or the RBI or corporation owned by that bank.
b) A company which is registered under section 25 of the Companies Act, 1956 (formedfor promoting commerce, arts, science, religion, charity or any other useful object).
c) A company having no share capital which is declared by the Board for the specified
assessment years to be a company in which the public are substantially interested.
d) A company which carries on its principal business of accepting deposits from its
members and which is declared by the Central Government under section 620A of
the Companies Act to be Nidhi or a Mutual Benefit Society.
e) A company whose equity shares (not being shares entitled to a fixed rate of
dividend) carrying at least 50% of the voting power have been allotted
unconditionally to or acquired unconditionally by and were beneficially held
throughout the relevant previous year by one or more co-operative societies.
f) A company which is not a private company as defined in the Companies Act, 1956
and which fulfills any of the following conditions:
- its equity shares should have, as on the last day of the relevant previous year,
been listed in a recognised stock exchange in India; or
- its equity shares carrying at least 50% (40% in case of industrial companies)
voting power should have been unconditionally allotted to or acquired by and
should have been beneficially held throughout the relevant previous year by
(a) Government or
(b) a Statutory Corporation or
(c) a company in which public are substantially interested or
(d) any wholly owned subsidiary of company mentioned in (c).
(d) Person having substantial interest in the company [Section 2(32)] – is a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend), whether with or without a right to participate in profits, carrying at least 20% of the total voting power.

IMPORTANT DEFINITION (TAX)

IMPORTANT DEFINITIONS

In order to understand the provisions of the Act, one must have a thorough knowledge of the
meanings of certain key terms like ‘person’, ‘assessee’, ‘income’, etc. To understand the meanings
of these terms we have to first check whether they are defined in the Act.
Terms defined in the Act: Section 2 gives definitions of the various terms and expressions used
therein. If a particular definition is given in the Act itself, we have to be guided by that definition.
Terms not defined under the Act: If a particular definition is not given in the Act, reference can
be made to the General Clauses Act or dictionaries.
Students should note this point carefully because certain terms like “dividend”, “transfer”, etc. have
been given a wider meaning in the Income-tax Act than they are commonly understood.
Some of the important terms defined under section 2 are given below:
(1) Assessee [Section 2(7)]
“Assessee” means a person by whom any tax or any other sum of money is payable under this
Act. In addition, it includes –
• Every person in respect of whom any proceeding under this Act has been taken for the
assessment of
 -his income; or
 -assessment o fringe benefits; or
- the income of any other person in respect of which he is assessable; or
- the loss sustained by him or by such other person; or
 the amount of refund due to him or by such other person.
• Every person who is deemed to be an assessee under any provision of this Act;
• Every person who is deemed to be an assessee-in-default under any provision of this Act.

(2) Assessment [Section 2(8)]
This is the procedure by which the income of an assessee is determined by the Assessing Officer.
It may be by way of a normal assessment or by way of reassessment of an income previously
assessed.
(3) Person [Section 2(31)]
The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is closely connected
with the latter. The term ‘person’ is important from another point of view also viz., the charge of
income-tax is on every ‘person’.
The definition is inclusive i.e. a person includes,
(i) an individual,
(ii) a Hindu Undivided Family (HUF),
(iii) a company,
(iv) a firm,
(v) an Association of persons (AOP) or a body of individuals (BOI), whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person e.g., an idol or deity.

EXTERNAL AIDS TO CONSTRUCTION

External aids to construction

External aids refer to aids which are external to the statue such as legislative history, dictionaries,
foreign decisions, reference to other statues. Let us examine some of them:Legislative history - Historical setting cannot be used as an aid if the words are plain and clear. If the wordings are ambiguous, one can look at the historical facts and circumstances that prevailed at the time when the law was passed for determining the object and purpose.
Reports of Commissions including Law Commission or Committees including Parliamentary
Committees preceding the introduction of a bill can also be referred to as evidence of
historical facts, surrounding circumstances or mischief intended to be remedied.

• Circulars - CBDT Circulars issued under section 119 of the Income-tax Act, 1961 are binding
on the tax officers and persons employed in the execution of the Income-tax Act 1961. They
express the views of CBDT on any issue. They are however not binding on the appellate
authorities, tribunal, courts or the taxpayer. Taxpayers can however take benefit of the
beneficial circulars.
• Speech - The speech made by the mover of the Bill can also be used to ascertain the
mischief sought to be remedied, the object and purpose of the legislation. However,
speeches made by the Members of the Parliament at the time of consideration of a Bill, are
not admissible as an aid.
• Explanatory Memorandum - Notes on clauses and memorandum explaining the provisions
of the Finance Bill can also aid in construction, in case of ambiguity.
• Dictionary meaning - the dictionary meaning of a word should not be looked at where the word has been statutorily defined or judicially interpreted. However, when there is no such
interpretation or definition the court may take aid of dictionaries to ascertain  a meaning of the
word.

AIDS TO INTERPRETATION

Aids to interpretation

An aid is a device that helps or assists courts in interpretation of statues. They can be broadly
classified as:
• Internal Aids
• External Aids

Internal aids to construction
Internal aids of construction refer to aids present within the statue itself, such as the long title, the
preamble, heading, marginal notes, punctuations, definition sections, provisos and explanations.

Let us now examine some of these:

• Explanations – Explanation is generally meant to explain or clarify the meaning of certain
words and expressions contained in the main provision. Explanation appended to a section is
an integral part of the section. It does not have independent existence apart from the section.
In exceptional cases an explanation may widen the scope of the main section by introducing
a legal fiction.

Provisos – Generally the function of a proviso is to carve out an exception or to qualify a
provision. A proviso cannot control the enactment. A proviso is not applicable unless the
main provision is applicable to the facts of the case. It must be construed harmoniously with
the main provision.
For example:

•  Sections 80GGB and 80GGC provides for deduction from gross total income in respect of contributions made by companies and other persons, respectively, to political parties or an electoral trust.
•  The proviso to sections 80GGB and 80GGC provide that no deduction shall be allowed under those sections in respect of any sum contributed by cash to political parties or an electoral trust. Thus, the proviso to these sections spell out the circumstance when deduction would not be available there under in respect of contributions made.
•  The Explanation below section 80GGC provides that for the purposes of sections 80GGB and 80GGC, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951. Thus, the Explanation clarifies that the political party has to be a registered political party
•  Non-obstante clause – is a clause which begins with the phrase “notwithstanding anything contained in any other provision of the Act” or “notwithstanding anything contained in a particular provision(s) of the Act”. Use of this phrase shows that the intent of lawmakers is to give it an overriding effect, in case of a conflict, over the other provisions of the statute mentioned in the provision.

For example:
Section 43B provides deduction of certain specified sums for computing of income under the
profit and gains from business or profession on actual payment basis. It begins with the
phrase “notwithstanding anything contrary in any other provision of this Act”. Thus, it
overrides the other provisions of the Act and provides deduction of payments or expenditures
specified therein only on the basis of actual payment.
• Marginal notes and headings - Headings may be prefixed to a section or a group of
sections. Marginal notes are the notes which are inserted at the side of the sections in a
statute and express the effect of the sections stated. Headings and marginal notes cannot
control the plain words of the provisions. Only in the case of ambiguity they may be referred
to throw light on intention of legislature.
• Definition clauses and undefined words –The object of a definition clause is to avoid the necessity of frequent repetitions in describing the subject matter in the statute. When the
statute defines a particular word, the same should be used, unless the context otherwise
requires. A word occurring more than once in a statute should be generally given the same meaning, unless the context requires otherwise. Words not specifically defined must be taken in their legal sense, dictionary meaning, commercial or common meaning. Definition from any
other statute cannot be borrowed and used ignoring the definition contained in the statute
itself.

In the Income-tax Act, definitions contained in section 2 are for the purposes of the Income-
tax Act. However, definitions contained in a particular Chapter of the Income-tax Act, 1961
are generally relevant only in the context of the provisions relating to that Chapter, unless
reference to such definition(s) has been made in any other provision(s)/Chapter of the Act.

RULES OF INTERPRETATION

Rules of Interpretation

• Rules of Interpretation are principles that have evolved over the years, on account of interpretation of provision of law by various Courts. These rules help in interpretation of law. The object behind use of these rules is to ascertain the intention of the lawmakers. 
• These rules are not static and keep on evolving. At times, there may be more than one rule of interpretation which appear to applicable to a given situation. The Courts then decide the most appropriate one in the given situation considering the facts of the case.

In the ensuing paragraphs, we have made an attempt to discuss the Rules of Interpretation, largely
in the context of income-tax law, citing appropriate instances.

I. Significant rules of interpretation used by courts:

• Rule of literal interpretation - This rule is based on the age-old doctrine that “judges do not legislate, they only interpret law”. It stipulates that the intention of the legislation must be found in the words used by the legislature itself. Attention must be given to what has been
said and also what has not been said. Nothing should be added or subtracted. If the provision
is unambiguous and if from that provision the legislative intent is clear, the other rules of
construction of statutes need not be called into aid.

• Mischief rule - The mischief rule originated in 16th century in the Heydon’s case in the
United Kingdom. It is commonly known as the Heydon’s Rule or Purposive construction.
Under this rule, the position before an amendment or enactment of an Act is examined to find
out the mischief sought to be remedied to determine the rationale for the remedy. In order to
do so, the following aspects are looked at:

- What was law before the provision was introduced or amended?
- What was the mischief or the defect for which the earlier provision of law did not provide
a remedy?
- What remedy has the Parliament effected in the provisions of law to cure the mischief or
defect?
- What is the intended effect of such remedy?
Courts then have to make a construction that suppresses the mischief and advances the
remedy.

CASE LAWS

Case Laws

• The study of case laws is an important and unavoidable part of the study of income-tax law. It is not possible for Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act.
•  Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues.
• The Supreme Court is the Apex Court of the country and the law laid down by the Supreme Court is the law of the land. The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction.

CIRCULARS AND NOTIFICATIONS

Circulars and Notifications

Circulars

• Circulars are issued by the CBDT from time to time to deal with certain specific problems and
to clarify doubts regarding the scope and meaning of certain provisions of the Act.
• Circulars are issued for the guidance of the officers and/or assessees.
• The department is bound by the circulars. While such circulars are not binding on the
assessees, they can take advantage of beneficial circulars.

Notifications

• Notifications are issued by the Central Government to give effect to the provisions of the Act.
For example, under section 10(15)(iv)(h), interest payable by any public sector company in
respect of such bonds or debentures and subject to such conditions as the Central
Government may, by notification in the Official Gazette, specify in this behalf would be
exempt. Therefore, the bonds and debentures, interest on which would qualify for exemption
under this section are specified by the Central Government through Notifications.
• The CBDT is also empowered to make and amend rules for the purposes of the Act by issue
of notifications.

For example, under section 35CCD, the CBDT is empowered to prescribe guidelines for
notification of skill development project. Accordingly, the CBDT has, vide Notification No.
54/2013 dated 15.7.2013, prescribed Rule 6AAF laying down the guidelines and conditions
for approval of skill development project under section 35CCD.

INCOME TAX RULES 1962

Income-tax Rules, 1962

The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
• The CBDT is empowered to make rules for carrying out the purposes of the Act.
• For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time
to time. These rules are collectively called Income-tax Rules, 1962.
• It is important to keep in mind that along with the Income-tax Act, 1961, these rules should
also be studied.

THE FINANCE ACT

THE FINANCE ACT

Every year, the Finance Minister of the Government of India introduces the Finance Bill in the
Parliament’s Budget Session. When the Finance Bill is passed by both the houses of the
Parliament and gets the assent of the President, it becomes the Finance Act. Amendments are
made every year to the Income-tax Act, 1961 and other tax laws by the Finance Act.
The First Schedule to the Finance Act contains four parts which specify the rates of tax -

•  Part I of the First Schedule to the Finance Act specifies the rates of tax applicable for the current Assessment Year.
•  Part II specifies the rates at which tax is deductible at source for the current Financial Year.
•  Part III gives the rates for calculating income-tax for deducting tax from income chargeable under the head “Salaries” and computation of advance tax.
•  Part IV gives the rules for computing net agricultural income.

INCOME TAX ACT 1961

INCOME TAX ACT 1961

The levy of income-tax in India is governed by the Income-tax Act, 1961. In this book we shall
briefly refer to this as the Act.
• It came into force on 1st April, 1962.
• It contains 298 sections and XIV schedules.
• It undergoes change every year with additions and deletions brought out by the annual
Finance Act passed by Parliament.
• In pursuance of the power given by the Income-tax Act, 1961 rules have been framed to
facilitate proper administration of the Income-tax Act, 1961.

OVERVIEW OF INCOME TAX LAW IN INDIA

OVERVIEW OF INCOME-TAX LAW IN INDIA

• Constitution of India gives the power to levy and collect taxes whether direct or indirect to the Central and State Government. The Union and State Government are empowered to levy taxes by virtue of Article 246 of the Constitution of India.
• Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the Union and the State Governments have the authority to make laws for the purpose of levy of taxes.

The following are the lists:

(i) Union List: Central Government has the exclusive power to make laws on the matters
contained in Union List.
(ii) State List: State Government has the exclusive power to make laws on the matters
contained in the State List.
(iii) Concurrent List: Both Central and State Governments have the power to make laws on the
matters contained in the Concurrent list.

Income-tax is the most significant direct tax. Entry 82 of Union List i.e., List I of Seventh
Schedule to Article 246 of Constitution of India has given the power to Central Government to levy
taxes on income other than agricultural income.