KSLU Solved Question Papers
Law of Taxation
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 7
2014 Dec Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 7 Law of Taxation 2014 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2014 Dec examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2014 Dec examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2014 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1Define the concept of Income. Explain its characteristics.[16]
Answer
For full marks, cover: why the meaning of income decides the charge (section 4 of the Income-tax Act, 1961; Union List entry 82); the definition in section 2(24), which is inclusive and not exhaustive, with its items grouped; the characteristics the courts give to income: the widest meaning (Navinchandra Mafatlal, G.R. Karthikeyan), a source and some regularity, revenue and not capital (Kettlewell Bullen), real and not hypothetical, cash or kind, lawful or unlawful source (Piara Singh), diversion by overriding title (Sitaldas Tirathdas), accrual or receipt, net and not gross; a table of receipts that are and are not income; the Income-tax Act, 2025.
Why the meaning matters
Section 4 of the Income-tax Act, 1961 charges tax on the total income of every person. Parliament draws its power from entry 82 of the Union List: "taxes on income other than agricultural income". So the first question in any tax dispute is whether a receipt is income at all. If it is not, no head of income and no rate can reach it.
The Act gives no complete definition. Section 2(24) only says what income includes. The rest of the meaning comes from the ordinary sense of the word, as the courts have explained it.
The definition in section 2(24)
The items in section 2(24) fall into a few groups.
- Ordinary income. Profits and gains (sub-clause (i)), and dividend (sub-clause (ii)).
- Employment. The value of perquisites and profits in lieu of salary (sub-clause (iii)). Special allowances to meet the expenses of an office, and allowances for personal expenses or the cost of living (sub-clauses (iiia), (iiib)).
- Benefits from a company or a representative. Benefits that a director or a person with a substantial interest obtains from his company, and sums the company pays on his behalf (sub-clause (iv)). Similar benefits obtained through a representative assessee (sub-clause (iva)).
- Business receipts named by the Act. Sums taxable under sections 28, 41 and 59 (sub-clauses (v) to (ve), (xii), (xiia)). Examples are compensation on the end of a management agency, and export incentives.
- Capital gains chargeable under section 45 (sub-clause (vi)). This is a capital receipt that the Act expressly makes income.
- Mutual bodies. Profits of mutual insurance and of co-operative banking with members (sub-clauses (vii), (viia)).
- Trusts and institutions. Voluntary contributions received by charitable or religious trusts, certain institutions and electoral trusts (sub-clause (iia)).
- Winnings from lotteries, crossword puzzles, races, card games and other games, gambling and betting (sub-clause (ix)).
- Employees' contributions to provident and welfare funds received by the employer (sub-clause (x)).
- Keyman insurance sums, including bonus (sub-clause (xi)).
- Receipts under section 56(2) (sub-clauses (xiii) to (xviid)). Examples are gifts above the limits, excess share premium and compensation on the end of employment. Certain insurance receipts are also covered.
- Government assistance as a subsidy, grant, incentive, drawback, waiver or reimbursement, with two exceptions (sub-clause (xviii)).
Because the definition says "includes", it enlarges the ordinary meaning. It does not confine income to the items listed.
The concept of income: its characteristics
1. The widest meaning. The word is read broadly, in the Constitution and in the Act.
Navinchandra Mafatlal v. Commissioner of Income-tax, Bombay City, AIR 1955 SC 58, decided on 1 November 1954. The assessee challenged the capital gains tax of 1947. He said the legislative entry on "income" could never cover gains of a capital nature. The Supreme Court rejected the argument. Entries that confer legislative power are read liberally, in their widest amplitude. The earlier fiscal practice of treating capital as distinct did not narrow the ordinary meaning of the word.
The same approach governs the Act. In Commissioner of Income Tax, Madras v. G.R. Karthikeyan, AIR 1993 SC 1671, a prize won in a car rally was held to be income though it fitted no listed sub-clause.
2. A source, and usually some regularity. The classic picture is of capital as a tree and income as its fruit. Income ordinarily comes from a definite source: a job, a property, a business or an investment. It usually recurs. But regularity is no longer essential. A single receipt can be income, and winnings are taxed though they are pure chance.
3. Revenue, not capital. A receipt in the course of earning income is revenue. A receipt for parting with the source itself is capital. A capital receipt is taxed only where the Act says so, as with capital gains.
Kettlewell Bullen and Co. v. Commissioner of Income-tax, Calcutta, AIR 1965 SC 65, decided on 1 May 1964. The assessee held six managing agencies. In 1952 it gave up one of them, that of a jute company, and received Rs 3,50,000 as compensation for loss of office. The Supreme Court held this a capital receipt. The assessee had parted with an asset of enduring value, a source of income. The Court drew the line clearly. Compensation is revenue where the cancelled contract is a normal incident of the business and leaves its structure intact. It is capital where the cancellation impairs the trading structure or takes away a source of income. Section 28(ii) of the 1961 Act now taxes such compensation expressly. It covers the end of a management, an agency or any contract relating to the business.
4. Real, not hypothetical. Tax falls on income that actually results. A book entry for a sum that never comes to the assessee does not create income. The Supreme Court has applied this to export benefits. They were held taxable only in the year the duty-free imports were actually made.
5. Money or money's worth. Income need not be in cash. Rent-free accommodation, a car or free goods given to an employee are income in kind. They are valued and taxed as perquisites.
6. Lawful or unlawful source. The Act asks whether there is income, not whether it was honestly earned.
Commissioner of Income Tax, Patiala v. Piara Singh, AIR 1980 SC 1271, decided on 8 May 1980. The assessee was caught crossing into Pakistan with Rs 65,500 in currency notes. He said he meant to buy gold to smuggle into India. The notes were confiscated. The Tribunal found he carried on a regular business of smuggling. The Supreme Court agreed that he was liable to tax on the income of that business. It also allowed the confiscated notes as a loss of that business. Detection and confiscation were a normal risk of the trade.
7. It must be the assessee's own income. Income that a prior obligation diverts before it reaches the assessee is not his. Income that reaches him and is then paid away is still his.
In Commissioner of Income-tax v. Sitaldas Tirathdas, AIR 1961 SC 728, a father paid maintenance under a decree that created no charge on his income. The payments were held to be an application of his own income, not a diversion, and were not deductible.
8. Accrual or receipt. Income is taxed when it accrues or when it is received, depending on the head and the method of accounting. Under section 5, Explanation 2, income taxed once on accrual is not taxed again on receipt.
9. Net, not gross. Income is what remains after the deductions each head allows. A trader's income is his profit, not his turnover. Salary is taxed after the standard deduction.
10. Exempt income is still income. Agricultural income and the items in section 10 are income in nature. The Act simply leaves them out of total income.
Is it income? Common receipts
| Receipt | Income? | Reason |
|---|---|---|
| Salary, rent, interest, trading profit | Yes | revenue from a source |
| Sale of a capital asset at a profit | Yes, as capital gain | taxed because section 45 says so |
| Sale of personal furniture or clothes | No | personal effects are not capital assets (section 2(14)) |
| Lottery or game show prize | Yes | sub-clause (ix) |
| Gift from a brother | No | relatives are excepted under section 56(2)(x) |
| Gift from a friend above Rs 50,000 | Yes | section 56(2)(x) |
| Profit from smuggling | Yes | Piara Singh |
| Compensation for giving up a source of income | Capital in nature, but now taxed | Kettlewell Bullen; section 28(ii) |
The Income-tax Act, 2025
From 1 April 2026, the 2025 Act defines income in section 2(49). It keeps the inclusive form. Its clauses (a) to (w) follow the same items, from profits and dividend to winnings, gifts and Government assistance. Capital gains are now charged under section 67. The judge-made characteristics above continue to apply.
Conclusion. Income is the base on which the whole tax rests, yet the Act defines it only by inclusion. Section 2(24) lists ordinary items and many receipts the Act chooses to tax, from perquisites and capital gains to winnings, gifts and subsidies. The courts fill in the rest. Income is read in its widest sense, as Navinchandra Mafatlal and G.R. Karthikeyan hold. It is ordinarily a revenue return from a source, and a capital receipt is taxed only when the Act says so, as Kettlewell Bullen explains. It must be real, may be in kind, and may come from an unlawful source, as Piara Singh shows. It must belong to the assessee, as Sitaldas Tirathdas holds, and is taxed net of the deductions each head allows.
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