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Law of Taxation
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B.A. LL.B. (Five Years) · Sem 7
2021 Mar (100 marks) Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 7 Law of Taxation 2021 Mar (100 marks) 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 2021 Mar (100 marks) examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2021 Mar (100 marks) examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2021 Mar (100 marks) 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.
Q1Discuss the scope of the total income with reference to residential status of an Assessee.[16]
Answer
For full marks, cover: the two ways a country can tax (by residence and by source) and how the Income-tax Act, 1961 combines them; residential status as the first step: the tests for individuals (section 6(1), (1A), (6)), Hindu undivided families, firms and associations (section 6(2)), companies (section 6(3)) and others (section 6(4)), and one status for all sources (section 6(5)); the scope of total income under section 5 for each status, by place of receipt and place of accrual; deemed receipt (section 7) and deemed accrual (section 9); the Explanations to section 5; a worked computation for the three statuses; V.V.R.N.M. Subbayya Chettiar, Ogale Glass Works and Vodafone; the Income-tax Act, 2025.
Residence and source
A State can tax income on two bases. Under the residence basis, it taxes the whole income of persons who belong to it, wherever earned. Under the source basis, it taxes income that arises within its territory, whoever earns it. The Income-tax Act, 1961 uses both. A resident pays on income from every source in the world. A non-resident pays only on income with an Indian connection.
So the incidence of tax depends first on the assessee's residential status. Two persons with identical incomes may have very different total incomes, because their statuses differ.
Step 1: fix the status for the previous year
Status is fixed afresh for each previous year. The test depends on the kind of person.
- Individual (section 6(1)). He is resident if he is in India for 182 days or more in the year. He is also resident if he is in India for 60 days or more in the year. In that case he must also have spent 365 days or more in India in the four preceding years. For an Indian citizen leaving India for employment, or as crew of an Indian ship, the 60 days become 182. For an Indian citizen or person of Indian origin visiting India, they also become 182. That visitor's limit falls to 120 days if his Indian income exceeds Rs 15 lakh.
- Deemed resident (section 6(1A)). An Indian citizen whose Indian income exceeds Rs 15 lakh is deemed resident if he is not liable to tax in any other country.
- Not ordinarily resident (section 6(6)). A resident individual is "not ordinarily resident" if he was a non-resident in nine of the ten preceding years. He is also "not ordinarily resident" if he was in India for 729 days or less in the seven preceding years. Persons resident only by the 120-day rule or by section 6(1A) are also not ordinarily resident. Everyone else resident is resident and ordinarily resident.
- Hindu undivided family, firm or association (section 6(2)). It is resident unless the control and management of its affairs is situated wholly outside India. A resident family is not ordinarily resident if its manager satisfies the individual tests in section 6(6)(b).
- Company (section 6(3)). An Indian company is always resident. A foreign company is resident if its place of effective management is in India. That means the place where key management and commercial decisions are in substance made.
- Every other person (section 6(4)). Resident unless control and management is wholly outside India.
- One status for all sources (section 6(5)). A person resident for one source is resident for all.
Step 2: the scope of total income under section 5
Section 5 links each status to two facts about every item of income: where it is received and where it accrues or arises.
| Income | Resident and ordinarily resident (section 5(1)) | Not ordinarily resident (proviso to section 5(1)) | Non-resident (section 5(2)) |
|---|---|---|---|
| Received or deemed received in India | taxed | taxed | taxed |
| Accruing or deemed to accrue in India | taxed | taxed | taxed |
| Accruing outside India from a business controlled in, or a profession set up in, India | taxed | taxed | not taxed |
| Any other income accruing and received outside India | taxed | not taxed | not taxed |
In short, a resident and ordinarily resident person is taxed on world income. A not ordinarily resident person is taxed on Indian income and on foreign income from a business controlled in India. A non-resident is taxed only on Indian income.
Deeming rules that widen the Indian net
- Deemed receipt (section 7). Some sums are taxed as received in India though not actually received there. Examples are the employer's contribution to a recognised provident fund above the limit and interest credited to it above the limit.
- Deemed accrual (section 9). Some income is treated as accruing in India though it may in fact arise abroad:
- income through a business connection, property, asset or source of income in India, or from transfer of a capital asset situated in India (section 9(1)(i));
- salary for services rendered in India (section 9(1)(ii));
- salary paid by the Government to an Indian citizen for services outside India (section 9(1)(iii));
- dividend paid by an Indian company outside India (section 9(1)(iv));
- interest, royalty and fees for technical services paid by specified payers in India (section 9(1)(v) to (vii)).
These rules matter most for non-residents, whose only taxable income is Indian income.
The Explanations to section 5
- Foreign income is not deemed received in India merely because it appears in a balance sheet prepared in India (Explanation 1).
- Income taxed once on the basis of accrual is not taxed again when it is received or remitted (Explanation 2).
- Foreign income of a past year that was not taxable when it arose does not become taxable when it is brought into India later. A remittance is not income.
A worked computation
Ravi has these incomes in the previous year:
| Item | Rs |
|---|---|
| Salary for work done in Mumbai | 6,00,000 |
| Interest on a fixed deposit with a bank in Mumbai | 40,000 |
| Rent of a flat in London, received in London | 3,00,000 |
| Profit of a business in Dubai controlled from Mumbai, received in Dubai | 5,00,000 |
| Dividend from a United States company, paid into his account in Mumbai | 50,000 |
| Foreign income of an earlier year, brought into India this year | 2,00,000 |
| Status | Items included | Total income (Rs) |
|---|---|---|
| Resident and ordinarily resident | salary, interest, London rent, Dubai profit, dividend | 14,90,000 |
| Not ordinarily resident | salary, interest, Dubai profit, dividend | 11,90,000 |
| Non-resident | salary, interest, dividend | 6,90,000 |
The salary accrues in India under section 9(1)(ii). The interest accrues and is received in India. The dividend is received in India first, so it is taxed in every status. The London rent is foreign income, so only an ordinarily resident person pays on it. The Dubai profit is foreign income from a business controlled in India, so a not ordinarily resident person pays too. The Rs 2,00,000 brought in is a remittance of past income and is never included.
The cases
V.V.R.N.M. Subbayya Chettiar v. Commissioner of Income-tax, Madras, AIR 1951 SC 101, decided on 21 December 1950. The karta of a Hindu undivided family lived and did business in Ceylon. In one year he visited India seven times, for 101 days in all, handled family litigation and started two partnership businesses. The question was whether the family was resident. The Supreme Court explained that "control and management" means the directing power, the "head and brain" of the family's affairs. The word "wholly" means a family, like a company, may be resident in more than one place. The burden of proving that control was wholly outside India lay on the assessee. He had not produced the correspondence that might have shown it, so the family was held resident for that year.
Commissioner of Income-tax, Bombay South v. Ogale Glass Works Ltd., AIR 1954 SC 429, decided on 19 April 1954. A company outside British India was taxable there only on income received there. It asked the Government of India to pay its bills by cheque, and the cheques were posted from Delhi. The Supreme Court held that the company's request made the post office its agent. So the money was received in British India when the cheques were posted. The case shows how the place of receipt can decide whether a non-resident pays at all.
Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613. Vodafone, a foreign company, bought a share of a Cayman Islands company from another foreign company. Through that share it gained control of an Indian telecom business. The Revenue claimed capital gains tax of about Rs 12,000 crore, saying the gain arose from an Indian source under section 9. The Supreme Court held that the transfer of a foreign share was not the transfer of a capital asset in India. Parliament responded through the Finance Act, 2012. It added Explanation 5 to section 9(1)(i), deeming a foreign share that derives its value substantially from Indian assets to be situated in India. The case shows how the deemed accrual rules decide the tax of non-residents.
Assessment
The scheme is logical: the closer a person's tie to India, the wider the net. It also contains anti-avoidance rules, such as the 120-day test and the deemed residence of Indian citizens with large Indian incomes who pay tax nowhere. These stop wealthy citizens from avoiding tax everywhere. Its difficulty lies in the deeming rules, whose reach, as Vodafone showed, has been fiercely contested.
The Income-tax Act, 2025
From 1 April 2026 the same structure applies to each tax year. Section 5 of the 2025 Act sets the scope of total income and section 6 the tests of residence. Section 7 deals with deemed receipt and section 9 with deemed accrual.
Conclusion. The incidence of income tax depends on residential status, which is fixed each year by the tests in section 6. A resident and ordinarily resident person is taxed on income from all over the world. A not ordinarily resident person is taxed on Indian income and on foreign income from a business controlled or profession set up in India. A non-resident is taxed only on income received, or accruing, in India. Sections 7 and 9 widen what counts as Indian income, and income once taxed on accrual is not taxed again on receipt. Subbayya Chettiar shows how status is fixed, Ogale Glass Works how receipt is located, and Vodafone how far deemed accrual reaches.
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