Section 14

Section 14 — the law in short

What the courts have decided on section 14, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v. Willamson Financial Services (Supreme Court) — a Chapter VI-A deduction on a tea company's composite income is allowed AFTER the Rule 8(1) sixty-forty apportionment, not against the whole composite income Supreme CourtHelps department
  Our tea company exports. Should the section 80HHC deduction be worked out on the whole composite income before Rule 8 splits it sixty-forty, or only on the forty per cent that is taxable?
  Only on the forty per cent. The Supreme Court held that the deduction under section 80HHC is required to be allowed AFTER the apportionment of income under Rule 8(1), and answered the issue in favour of the Department. The legal fiction in Rule 8(1) is confined to that rule: it assigns chargeability and computability only to the non-agricultural forty per cent, and it cannot be extended into section 80HHC(3)(a), because deductions under Chapter VI-A are made from gross total income and are not part of the computation of income under the head "Profits and gains of business".
• CIT v D.P. Sandu Bros. Chembur (P) Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  The landlord paid my company to give up its tenancy. Is that taxable, and if it cannot be computed as a capital gain can the officer tax it as a casual receipt instead?
  No — he cannot move it to another head. A tenancy right is a capital asset and its surrender is a transfer, so s.45 is the only head that can reach the consideration. For assessment year 1987-88 the Court held the receipt escaped tax altogether because the cost of acquiring the tenancy could not be ascertained and s.48 therefore could not be worked, and it refused to let the department bring the same receipt back under s.10(3) read with s.56. Section 55(2) was amended with effect from 1 April 1995 to supply a cost of acquisition for a tenancy right, so the computation gap this case turned on is closed for later years — the head-of-income holding is what survives.
• Tuticorin Alkali Chemicals and Fertilizers Ltd v CIT Supreme CourtHelps department
  My company is still building its plant. It parked the unused part of its term loans in short-term bank deposits. Can I set the interest earned off against the interest I am paying, or must I pay tax on it?
  You must pay tax on it, under the head income from other sources. Interest earned on surplus borrowed funds parked in deposits before business commences is income the moment it accrues, and it cannot be adjusted against the interest payable on the term loans, because s.57 sets out exhaustively what may be deducted from income assessable under s.56 and interest on term loans taken to build the plant is not in that list.
• Emil Webber v CIT Supreme CourtHelps department
  My Indian contract says my pay is free of Indian tax and the Indian company pays the tax for me. Is that tax itself taxable in my hands?
  Yes. The Supreme Court held that tax paid by an Indian company on an expatriate's salary, under an obligation to pay him free of Indian tax, is itself income of the expatriate. The definition in section 2(24) is inclusive and does not rob income of its natural meaning; anything properly described as income is taxable unless exempted. The payment was made for and on behalf of the assessee, was not gratuitous, and had an integral connection with the salary he received. Since he was not an employee of the company that paid, it fell under section 56 as income from other sources. The appeals were dismissed.
• CIT v National Storage Pvt Ltd Supreme CourtHelps taxpayer
  My client lets specially built units with security, services and staff. The officer says it is still just letting, so it is house property. Is there authority the other way?
  Yes. Where what is hired out is a complex subject — a purpose-built structure together with services the ordinary landlord does not supply — the return is not income derived from the exercise of property rights but income from an adventure or concern in the nature of trade. The Supreme Court also held that the Act does not allow the receipt to be split, taxing the rental element as property income and the extra as business income, where the assessee is in occupation of the premises for the purposes of its business.
• East India Housing and Land Development Trust Ltd v CIT Supreme CourtHelps department
  My client is a company whose memorandum says it exists to develop and let property. Does that alone make its rent business income?
  No. The heads of income are mutually exclusive and are fixed by the source from which the income is derived, so rent from shops and stalls is income from property whatever the company's objects say. The Supreme Court held that the character of the income is not altered because it is received by a company formed with the object of developing and setting up markets, and that if income falls within a specific head the fact that it may indirectly be covered by another head does not make it taxable under the latter.
• PSTS Heavy Lift and Shift Ltd v DCIT (heard with CeeDeeYes IT Parks P Ltd) High CourtHelps taxpayer
  My company's only business is letting its warehouses and its IT park. The Assessing Officer has taxed the rent as income from house property and knocked out my depreciation. Can I get it assessed as business income?
  Yes, where letting the property is the company's sole and exclusive business. The Madras High Court held that once the property is a business asset and the exclusive business of the company or firm is to earn rental or lease money, that rent can only be business income, and it answered the question of law in the assessee's favour for both a warehousing company and an IT park company.
• Fakir Mohmed Haji Hasan v CIT High CourtHelps department
  An unexplained investment has been added to my income under section 69A and the asset was then confiscated. Can I set the loss off against that addition?
  No. The Gujarat High Court held that income deemed under sections 69, 69A, 69B and 69C falls under none of the heads in section 14, not even income from other sources, because those sections apply precisely where the source is unknown or unexplained. Since the deemed income cannot be classified under a head, the deductions that go with a head are not available against it. Gold worth Rs 48,72,000 found concealed in the assessee's car and confiscated by customs was rightly added under section 69A, and its confiscation could not be claimed as a trading loss.
• Commissioner of Income-tax v. Justice R.M. Datta (Calcutta High Court, 4 July 1989) — section 176(4) deems the receipt to be income but creates no further fiction bringing it under 'Profits and gains of business, profession or vocation', so arrears received after the profession ceased escape the charge High CourtHelps taxpayer
  I was an advocate on cash basis and stopped practising when I was appointed to the Bench. Fees for old work are still coming in. The Assessing Officer says section 176(4) makes them taxable. Is there an answer?
  There is, and this is it. The Calcutta High Court held that section 176(4) creates only two fictions — that the sum received after discontinuance is deemed to be the income of the recipient, and that it is charged to tax in the year of receipt — and does not create a third fiction deeming the receipt to be income of a business or profession carried on by the assessee in that year. Because the receipt is the fruit of professional activity it falls under the head 'Profits and gains of business, profession or vocation' and cannot be taken to the residuary head; and because the assessee carried on no profession in any part of the relevant previous year, it cannot be computed under sections 28 to 43A. The question referred was answered in the affirmative and in favour of the assessee.
• V. Parthasarathy v. Addl. Commissioner of Income-tax (Andhra Pradesh High Court, 11 September 1975) — 'discontinuance' in section 176(4) covers temporary and involuntary cessation, so an advocate elevated to the Bench has discontinued his profession High CourtHelps departmentNo later treatment found
  I stopped practising only because I was appointed a judge, and I went back to the Bar when I retired. Surely that is a suspension and not a discontinuance, so section 176(4) cannot apply to fees I received while I was on the Bench?
  That argument was run and rejected. The Andhra Pradesh High Court held that both 'discontinuance' and 'cessation' in section 176(4) take in temporary as well as permanent discontinuance, that the length of time for which the profession is stopped is not an element of the concept, and that the question whether the cessation was voluntary or involuntary has no bearing on the application of the sub-section. It also rejected the reading that the sub-section is confined to discontinuance by retirement or death, holding that the words 'on account of' govern cessation of the profession, retirement and death equally. The writ petition was dismissed.
• Dynacon Equipments Pvt Ltd v ACIT ITATHelps taxpayerNo later treatment found
  My client's factory has been shut for years and the land, building and two generators are let out on one rent. The officer has taxed the whole of it as income from other sources. Can it be house property?
  Yes, on this decision. The Tribunal held that where the lease deed shows that the predominant objective is to let out the land and building along with the plant installed in it in order to earn rental income, and there is no visible intention to carry on organised and systematic business activity, the income is assessable under the head income from house property. It relied on the structure of section 14: income is to be assessed under the correct specific head, and only income that cannot be brought under any of the prescribed heads because of its nature falls to the residuary head of income from other sources.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.