Section 6 of the Income Tax Act, 1961, deals with the concept of "residence" in India for tax

purposes.

The residential status of an individual, a Hindu Undivided Family (HUF), a company, or any
other person is crucial because it determines the scope of taxable income in India.

The section defines who qualifies as a "resident" or "non-resident" and provides specific
conditions to establish this status.

Key Points of Section 6:

1. Residential Status of an Individual:

An individual is considered a resident in India if they satisfy any of the following

conditions:

o They are in India for a period of 182 days or more during the relevant
previous year, or
o They are in India for 60 days or more during the relevant previous year and
365 days or more during the four years immediately preceding that year.

However, the 60 days mentioned above is extended to 182 days for:

o Indian citizens or persons of Indian origin (PIO) who are abroad and come to
India for a visit, or
o Indian citizens who leave India for employment abroad or as a crew member
of an Indian ship.
2. Additional Conditions for "Resident and Ordinarily Resident" (ROR):

A resident individual is further classified as "Resident and Ordinarily Resident"

(ROR) if they satisfy the following two additional conditions:

o They have been a resident in India in at least 2 out of the 10 previous years
immediately preceding the relevant previous year, and
o They have been in India for at least 730 days in the seven years immediately
preceding the relevant previous year.
 If these conditions are not met, the individual is classified as "Resident but Not
Ordinarily Resident" (RNOR).

3. Residential Status of HUF, Firm, and Association of Persons (AOP):

The residential status of a Hindu Undivided Family (HUF), firm, or Association of

Persons (AOP) depends on the control and management of its affairs:

o If the control and management of its affairs are wholly or partly situated in
India during the relevant previous year, it is considered a resident.
o If the control and management are wholly outside India, it is a non-resident.
4. Residential Status of a Company:

A company is considered a resident in India if:

o It is an Indian company, or
o Its place of effective management (POEM) during the relevant previous year
is in India.
o POEM is where key management and commercial decisions necessary for
the conduct of the business as a whole are made.
5. Residential Status of Other Persons:

The residential status of any other person, including a body of individuals (BOI) or an
artificial juridical person, depends on the control and management of its affairs:

o If the control and management of its affairs are wholly or partly situated in
India, it is a resident.
o If the control and management are wholly outside India, it is a non-resident.

Summary:

 Resident: Taxed on worldwide income.

 Non-Resident: Taxed only on income received, accrued, or deemed to be received or
accrued in India.
 Resident and Ordinarily Resident (ROR): Taxed on worldwide income.
  Resident but Not Ordinarily Resident (RNOR): Taxed on income received,
accrued, or deemed to be received or accrued in India, and on income from a business
controlled from or a profession set up in India.

SECTION 6 PRINCIPLES OF DOUBLE TAXATION AVOIDANCE TREATIES

1. Residence Principle

 taxpayer is subject to taxation in the country where they are considered a resident
for tax purposes.
 ensures that individuals and businesses are taxed on their worldwide income in their
country of residence, regardless of where the income is earned.
 DTATs provide clarity and certainty to taxpayers regarding their tax obligations,
fostering confidence and trust in the international tax system.
 By ensuring that income is taxed in the taxpayer's country of residence, DTATs
promote fairness and equity in the allocation of tax burdens, contributing to the
overall stability and integrity of the global tax regime.
 When an individual or a business earns income abroad and pays taxes on that
income in the foreign country, they can claim a credit for the foreign tax paid
against their tax liability in India.

2. Source Principle

 determines that income derived from a particular source is subject to taxation in the
country where the source is located.
 plays a crucial role in the allocation of taxing rights between contracting states,
ensuring that income is taxed in the jurisdiction where the economic activity
generating the income occurs.
 By delineating clear rules for the taxation of income derived from specific sources,
DTATs provide certainty and predictability to taxpayers engaged in cross-border
transactions, facilitating compliance with tax laws and reducing the risk of double
taxation.
SECTION 6 CASES:

1. Subbayya Chettiar vs. Commissioner of Income-

 The appellant, Subbayya Chettiar, a karta of a joint Hindu family, resided in Ceylon
(Sri Lanka) but had business interests and properties in British India.
 Despite spending 101 days in India during the relevant year and managing some
family affairs, the Court ruled that the mere presence of the karta in India for
litigation and tax matters did not shift the control and management of the
family's affairs to India.
 The Court emphasized that the onus was on the assessee to prove that the
control and management were wholly outside India.
 Since the assessee failed to provide sufficient evidence to establish that the
management was exclusively in Ceylon, the Court upheld the Income Tax
Department's decision to treat the family as resident in India for the relevant year.
 The ruling was specific to the assessment year in question, leaving open the
possibility for the assessee to provide evidence in future assessments to prove
otherwise.

2. CIT, Bombay v. Nandlal Gandalal

 whether a Hindu Undivided Family (HUF) could be considered a resident of
British India (now India) for income tax purposes when it engaged in business
activities across different locations.
 The case involved a family from Wadhwan State that had a cloth business.
 One member, Nandlal, moved to Bombay and entered a partnership, which
subsequently expanded to Banaras.
 Despite the partnership not being directly an "affair" of the HUF, the court
evaluated whether the family’s control and management over its business
activities were sufficiently exercised within British India to qualify as a
resident.
 HUF should be considered a resident if any part of its control and
management occurs within British India.
 The partnership activities, though legally separate from the family’s affairs,
involved significant expenditure of family funds and management by
family members.
  Therefore, the court determined that the control and management of the
family's affairs were indeed present in British India, and thus, the family
should be treated as a resident for income tax purposes.

Annamalai Chettiar v. ITO

The mere fact that the family has a house in India, where some of its members reside or the
karta is in India in the previous year, does not constitute that place as the seat of control
and management of the affairs of the family, unless the decisions concerning the affairs of
the family are taken at that place. The mere fact of the absence of karta from India does not
make the family non-resident— [1958] 34 ITR 88 (Mad.).

 TAX AVOIDANCE AND TAX PLANNING:

1. Tax Planning 2. Tax Avoidance 3. Tax Evasion

organisation of one’s financial developing a mechanism around the Tax Evasion, means
affairs in a manner that fully ‘grey area’ of the taxation laws to violation of statutory
complies with legal provisions. maximise the benefit of a reduction provisions to evade
in tax liability. payment of tax liabilities
by the taxpayer.
involves the strategic utilisation tax avoidance- legal and may be deploy artificial devices
of all available tax exemptions, subject to ethical conundrum, tax for the purpose of
deductions, concessions, rebates, avoidance strategies exploit the evasion, such as circular
allowances, and other reliefs or inconsistencies and gaps within tax and fictitious
benefits sanctioned under tax regulations by employing various transactions, fake
legislation, minimising the tax tax arbitrage methodologies. invoicing, deployment of
burden to the greatest extent artificial loans and
possible. advances, etc.
This ensures that the post-tax tax evasion-illegal and a crime.
financial position remains as
favourable as feasible.
In essence, tax planning involves
structuring one’s economic
activities, particularly those
related to income generation, in a
manner that adheres strictly to
the legal framework while
simultaneously reducing tax
liability to the minimum
permissible level.

4. McDowell Saga
 SC held that tax planning would be considered legitimate if it is within the
confines of the law.
 What has been frowned upon is ‘colourable devices,’ ‘dubious methods and
subterfuges’ under the guise of tax planning.
 There has been much debate about whether this decision disapproves of tax
avoidance methods adopted by taxpayers to reduce their liability within the
confines of law.
 It was further argued that the decision treats tax avoidance schemes at par with
tax evasion schemes.

5. UOI v. Azadi Bachao Andolan

 The court rejected the argument that an act, which is legally valid, can be
disregarded or deemed non-existent merely because it was motivated by a
desire to avoid taxes or because it supposedly results in economic harm or
prejudice to national interest. The ruling emphasized that as long as the
taxpayer's actions are within the framework of the law, the underlying
motive, even if it is to avoid taxes, cannot render the actions invalid. This
decision reinforced the idea that tax planning, as opposed to tax evasion, is a
legitimate practice..

6. Vodafone International Holdings B.V. v. Union of India

 that Revenue Authorities in India did not have the territorial jurisdiction to tax
offshore transactions.
 Therefore, Vodafone was not liable to withhold India Tax.
 The SC, in this case, has held that revenue must look at the legal nature of the
transaction, and while doing so, it has to look at the entire transaction as a
whole and not adopt a dissecting approach.
 if a structure has existed for a significant period and the transaction meets all
criteria for ‘participation in investment,’ then the SC does not need to delve
into issues such as de facto control versus legal control or legal rights versus
practical rights when determining taxability.

 While interpreting Azadi Bachao Andolan (supra) in the context of McDowell

(supra), the SC referred to the Westminister Principle, which enshrines that
“given that a document or transaction is genuine, the court cannot go behind it
to some supposed underlying substance." The SC held that the majority in
McDowell(supra) held that “tax planning may be legitimate provided it is
within the framework of law.” Thus, reading the cases in the manner indicated
hereinabove, in cases of treaty shopping and/or tax avoidance, there is no
conflict between McDowell (supra) and Azadi Bachao (supra).

 In short, the onus will be on the Revenue to identify the scheme and its
dominant purpose.
Key Points of Section 5:

1. Income of a Resident:
o A resident (both ROR and RNOR) is liable to pay tax on their worldwide
income. This includes:
 Income received or deemed to be received in India during the
previous year.
 Income accruing or arising or deemed to accrue or arise in India
during the previous year.
 Income accruing or arising outside India during the previous year.

Therefore, a resident's global income, irrespective of where it is earned, is subject to

tax in India.

2. Income of a Non-Resident:
o A non-resident is only liable to pay tax on the income that has a nexus with
India. This includes:
 Income received or deemed to be received in India during the
previous year.
 Income accruing or arising or deemed to accrue or arise in India
during the previous year.

A non-resident is not taxed on income that accrues or arises outside India unless it is
directly connected to a source in India.

3. Income of a Resident but Not Ordinarily Resident (RNOR):

o An RNOR is taxed in India similarly to a non-resident for income that accrues
or arises outside India. They are liable to pay tax on:
 Income received or deemed to be received in India during the
previous year.
 Income accruing or arising or deemed to accrue or arise in India
during the previous year.
 Income from a business controlled or a profession set up in India,
even if the income accrues or arises outside India.
 Essentially, an RNOR has a limited global tax liability compared to an ROR.

Summary:

 Residents (ROR): Taxed on their global income.

 Residents but Not Ordinarily Residents (RNOR): Taxed on income received or
deemed to be received in India, income accruing or arising or deemed to accrue or
arise in India, and income from a business or profession controlled or set up in India,
even if accrued outside India.
 Non-Residents: Taxed only on income that is received, accrued, or deemed to accrue
or arise in India. Their income has some territorial nexus with India

Section 5 is crucial as it defines the extent to which income is taxable in India based on the
taxpayer's residential status, which is determined under Section 6 of the Act.

SECTION 5 CASES:

Vodafone International Holdings B. V. v. UOI- territorial nexus

 Under the general theory of nexus relevant for examining the territorial
operation of the legislation, two principles that are generally accepted for
imposition of tax are: (a) Source and (b) Residence.
 Section 5(1) prescribes 'residence' as a primary basis for imposition of tax and
makes the global income of the resident liable to tax.
 Section 5(2) is the 'source-based' rule in relation to residents and is confined to
income that has been received in India; and income that has accrued or arisen in
India or income that is deemed to accrue or arise in India

GVK Industries Ltd. v. ITO

 "residence state taxation" - gives primacy to the country of the residency of the
assessee. This principle postulates taxation of worldwide income and worldwide
capital in the country of residence of the natural or juridical person.
 "source state taxation" –

 rule confers primacy to right to tax to a particular income or transaction to

the State/nation where the source of the said income is located.
 The second rule, as is understood, is transaction specific.
 the source State seeks to tax the transaction or capital within its territory even
when the income benefits belong to a non-residence person, i.e., a person
resident in another country.
 The aforesaid principle sometimes is given a different name, that is, the
territorial principle.
 the principle of nexus, is founded on the right of a country to tax the income
earned from a source located in the said State, irrespective of the country of
the residence of the recipient.
 The source rule is in consonance with the nexus theory and does not fall foul
of the said doctrine on the ground of extra-territorial operation.
DOCTRINE OF MUTUALITY – SECTION 4 and 2(24)

1. Yum restaurants v. cit [delhi]

The assessee was a subsidiary company which entered into tripartite agreement with 2 other
franchisees. It claimed tax exemption under the pretext that the tripartite arrangement was
mutual concern.

Actual factual scenario:

i. The new company so formed was receiving funds from non member- pepsi co.

ii. The agreement gave unilateral powers to the assessee company, like it was not
obliged to contribute funds every year and managed and controlled activity of the new
company upto a very large extent

The court also mentioned 3 tests for determining whether doctrine of mutuality is
applicable or not:

(i) Identity of the contributors to the fund and the recipients from the fund;

(ii) Treatment of the company, as an instrument obedient to their mandate,

(iii) Impossibility that contributors should derive profits from contributions made by
themselves to a fund which could only be expended or returned to themselves.

 The 'doctrine of mutuality' traces its origin from the basic principle that a man cannot
engage into a business with himself.
 it is deemed in law that if the identity of the contributor and the participator, is
marked by oneness, then a profit motive cannot be attached to such a venture.
 Thus, for the lack of a profit motive, the excess of income over the expenditure (or
the 'surplus') remaining in the hands of such a venture cannot be regarded as
'income' taxable under the 1961 Act.
 What is taxable under the 1961 Act is 'income' or 'profits' or 'gains' as they accrue
to a person in his dealings with other party or parties that do not share the same
identity with the assessee.
  The doctrine of mutuality bestows a special status to qualify for exemption from tax
liability

2. cit v. bankipur club

Tests for mutuality

 In substance, the arrangement or relationship between the club and its members
should be of a non-trading character.
 At what point does the relationship of mutuality ends and that of trading begins
is a difficult and vexed question.
 A host of factors -Whether or not the persons dealing with each other constitute a
'mutual club' or are carrying on a trading activity or an adventure in the nature
of trade is largely a question of fact.
 Distribution on winding up – Where memorandum of association provided that
upon winding-up or dissolution of company, if there remained any property after
satisfaction of all debts and liabilities, same would be paid to and distributed amongst
members of company in equal shares, surplus receipts for various facilities extended
by assessee-clubs to their members were exempt on ground of mutuality

3. cit v. bangalore club

Interest on investments –

Where assessee was a sports club providing its members various facilities such as restaurant,
gymnasium, library, bar, coffee shop, swimming pool and other facilities for indoor and
outdoor games and apart from surplus fund derived from such activities, assessee-club also
earned interest from its corporate members on investment of its surplus funds as fixed
deposits with them, interest earned on such investments is not exempt from tax on
grounds of mutuality concept.
APPLICATION AND DIVERSION OF INCOME – SECTION 4

1. In Raja Bejoy Singh Dudhuria v. CIT- maintenance for step mother- court decree

 charge 'all income' of an individual----it is what reaches the individual as income

which it is intended to charge.
 In the present case the decree of the Court by charging the appellant's whole
resources with a specific payment to his step mother has to that extent diverted
his income from him and has directed it to his step mother;
 to that extent what he receives for her is not his income.
 It is not a case of the application by the appellant of part of his income in a particular
way it is rather the allocation of a sum out of his revenue before it becomes income
in his hands."

2. CIT v. Sitaldas Tirathdas- maintenance for wife and child- consent decree

 held that when maintenance charges were paid to wife and children under consent
decree by the assessee and the payment was made after it reached the assessee it was
not diversion of income but application of income to discharge an obligation.
 The Supreme Court in this case made a distinction between two types of cases:

(i) where by obligation income is diverted and

(ii) where a person is obliged to apply out of his income.

 In the first case the amount which by the nature of the obligation cannot be said to be
a part of the income of the assessee.
 In the second instance as the income is required to be applied to discharge an
obligation after such income reaches the assessee the same consequence, in law, does
not follow.

3. P.C. Mullick's case- expenses of sradh

 held that the payment of the Sradh expenses and the costs of probate were payments
made out of the income of the estate coming to the hands of the appellants as
executors, and in pursuance of an obligation imposed by their testator and that it was
 not a case like the one in which a portion of income was by an overriding title
diverted from the person who would otherwise have received it.
 It was simply a case in which the executors having received the whole income of the
estate apply a portion in a particular way pursuant to the directions of their testator,
in whose shoes they stand

4. CIT v. Sunil J Kinariwala- formed a trust in partnership

 there is a clear distinction between a case where a

 partner of a firm assigns his share in favour of a third person - the assignee gets
no right or interest in the main partnership except, of course, to receive that part of
the profits of the firm referable to the assignment and to the assets in the event of
dissolution of the firm
 a partner constitutes a sub-partnership with his share in the main partnership-
the sub-partnership acquires a special interest in the main partnership.
 The case on hand cannot be treated as one of a sub-partnership, though in view of
section 29(1) of the Indian Partnership Act, the Trust, as an assignee, becomes entitled
to receive the assigned share in the profits from the firm not as a sub-partner because
no sub-partnership came into existence but as an assignee of the share of income of
the assigner-partner.
 Consequently, the share of the income of the assessee assigned in favour of the Trust
has to be included in the total income of the assessee.
SECTION 9 INCOME ACCRUED

ROYALTY

Engineering Analysis Centre of Excellence Pvt Ltd v The Commissioner of Income Tax
held that the amount paid by resident Indians to non-resident manufacturers/ suppliers
of computer software in terms of distribution agreement or End-User Licence Agreement
(EULA) does not amount to royalty and that such payment does not give rise to any income
taxable in India and therefore, there is no liability on the resident Indian companies to deduct
tax at source on purchase of software under section 195 of the Income Tax Act 1961

DIT v. Ericsson A.B

 There was an agreement between the Indian cellular operating companies ('ICO') and
Ericsson A.B. ('Ericsson') as per which later was required to supply GSM systems.
 The revenue contended that there was supply of software with GSM. Hence
consideration for the same be treated as royalty.
 The key issue in this case revolves around whether income earned by a non-
resident company from its Indian subsidiary can be deemed to accrue or arise in
India under Section 9 of the Income Tax Act.
 The Board clarified that such income would not be considered as accruing or
arising in India if three conditions are met:
(i) the sales contracts are executed outside India,
(ii) the sales are made on a principal-to-principal basis at arm's length,
(iii) the subsidiary does not act as an agent of the parent company.
In this case, the Tribunal found that these conditions were met, thus the non-resident
company did not have any business connection in India, and the issue of whether it
had a Permanent Establishment (PE) in India was not relevant.
 This amendment, 1976, established that the situs of the payment and the utilization of
the services in India determine the taxability, not the location where services were
provided.

K BHAGYALAXMI V. CIT- sale v. usage

FEE FOR TECHNICAL SERVICES

I. CONSULTANCY SERVICES

1. GVK Industries v. ITO

In order to set up a power project, assessee-company availed of consultancy services of a

Switzerland based company for raising required finance from international organisations on
most competitive terms. Thus, payment made to Swiss company for rendering such
consultancy services amounted to 'fee for technical service' liable to tax in India

The test for finding out whether services rendered are technical services are 52-

(i) whether there is use of specialized knowledge, experience and skill or merely it
was providing of standard facilities
(ii) to what extent the human element is involved in rendering services- bhararti
cellular- bsnl to bharti.
(iii) To what extent professionalism and expertise is involved in the work
(iv) whether services involved only the application of machines and technology
relating to "engineering, manufacturing or other applied sciences".

2. Inshikiwajma heavy industries

In the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT5 it was held that "whatever
is payable by a resident to a non-resident by way of fees for technical services would not
always come within the purview of Section9(1)(vii), but it must have sufficient territorial
nexus with India so as to furnish a basis for imposition of tax."

PERMANENT ESTABLISHMENT-

DIT v. Morgan Stanley

Morgan Stanley India was set up to support the main office functions of the US company in equity
and fixed income research, 5 account reconciliation and providing information-technology-enabled
services such as back-office operation, data processing and support centre. A service PE was
recognised where service was rendered through employees deputed to India. At the same time, it
was held that mere “stewardship* activity / shareholders‟ services” will not be a service PE because
mere protection of own interest against competition by ensuring quality and confidentiality will not
constitute a service PE.

The Supreme Court in the caseof DIT v. Morgan Stanley & Co. Inc(2007) 292 ITR 416 (SC) held that
the unit in India which performed the back office services would not constitute an Agency PE for
Morgan Stanley Inc in India.Morgan Stanley did not have the authority to enter into contracts or
bind Morgan Stanley Inc with any contracts in India.

BUSINESS CONNECTION [SECTION 9(1)(i)]

CIT v. R. D. Aggarwal & Co.

 The expression 'business connection' undoubtedly means something more than

'business'.
 A 'business connection' involves a relation between a business carried on by a non-
resident which yields profits or gains and some activity in the taxable territories
which contributes directly or indirectly to the earning of those profits or gains.
 It predicates an element of continuity between the business of the non resident and
the activity in the taxable territories: a stray or isolated transaction is normally not
to be regarded as a business connection.
 A relation to be a 'business connection' must be real and intimate, and through or
from which income must accrue or arise whether directly or indirectly to the non
resident.
 income which accrues or arises to a non-resident outside the taxable territories is
sought to be taxed, and not income which accrues or arises or is deemed to accrue or
arise within the taxable territories
 permanent establishment - is for the purpose of assessment of income of a non-
resident under a Double Taxation Avoidance Agreement,
 business connection- is for the application of section 9 of the Income-tax Act

TRANSFER OF CAPITAL ASSET SITUATE IN INDIA [SECTION 9(1)(i)] Vodafone's

  the Supreme Court of India addressed whether the indirect transfer of capital
assets situated in India falls within the ambit of Section 9(1)(i) of the Income Tax
Act.
 The court ruled that Section 9(1)(i) cannot be interpreted to cover indirect
transfers of capital assets located in India.
 The provision is meant to apply only to the direct transfer of such assets.
 Extending the section to include indirect transfers would nullify the specific wording
"capital asset situate in India," thereby overstepping the intended scope of the law.
 The court emphasized that the terms "directly or indirectly" in the section relate to
income and not to the transfer of capital assets.
 the court noted that provisions like "look-through" clauses or limitations of benefits
must be explicitly stated in the statute or treaty and cannot be inferred through
interpretation.
 the court found that the offshore transaction between Hutchison
Telecommunications International Ltd. (HTIL) and Vodafone was a legitimate
foreign direct investment (FDI) into India, conducted through the transfer of shares
in a company incorporated in the Cayman Islands (CGP).
 The situs of the shares was held to be where the company was incorporated
(Cayman Islands), not where the underlying assets (India) were located.
 The court rejected the Revenue's claim that the transaction was a transfer of a
'capital asset' under Indian tax law and thus not subject to Indian capital gains tax.

Business Connection Permanent Establishment

Section 9 of the Income Tax Act, 1961
Article 5 of DTAA explains the concept
explains the concept of Business
of Permanent Establishment.
Connection.
As per Section 9 of the Income Tax Act,
1961 the scope of Business connection As per article 5 of DTAA the scope of PE
is very wide due to inclusive is limited.
definition.
Section 9 mentions about the concept Article 5 of DTAA mention about the
of agency PE only & due to the four types of PE
inclusive definition, the judgements
given by the courts explained the (a) Fixed Place PE
meaning of business connection.
 (b) Service PE

(c) Construction PE

(d) Agency PE

· Concept of Service PE exists only in

limited DTAA. (Approx 15 to 16 DTAA)

· Every DTAA/Treaty has different

definition of PE.
There is no concept of No. of Days There is concept of No. of Days to
in the case of Business Connection. trigger the PE.
Business Connection includes the Article 5 of DTAA does not include
concept of Significant Economic the concept of Significant
Presence. Economic Presence.

The term PE was recognized in CIT v. Visakhapatnam Port Trust as requiring

the following:

“In our opinion, the words “permanent establishment” postulate the existence of
a substantial element of an enduring or permanent nature of a foreign
enterprise in another country which can be attributed to a fixed place of
business in that country. It should be of such a nature that it would amount to a
virtual projection of the foreign enterprise of one country into the soil
of another country.3”
Section 15: INCOME FROM SALARIES

1. Income from Salaries:

o Definition:

This includes any amount received by an employee from an employer as

compensation for their services, whether in cash or kind. It encompasses
wages, salaries, allowances, bonuses, and any other remuneration paid or
allowed by the employer.

2. Timing of Taxation:
o Taxable Year:

Section 15 specifies that the income from salaries is taxable in the financial
year (assessment year) in which it is due or paid. This means:

 Due Basis: If the salary is due to be paid in a particular financial year,

it is taxable in that year.
 Paid Basis: If the salary is actually paid in a particular financial year, it
is taxable in that year.
3. Specific Inclusions:
o Salary in Arrears: Salary that is due but not paid during the financial year is
taxable in the year it is due.
o Salary Received in Advance: If salary is received in advance, it is taxable in
the year it is received.
4. Conditions for Taxability:
o Employment Relationship:
 For income to be taxed under Section 15, there must be a clear employer-
employee relationship. Payments made outside this context, such as
contractual payments not under a traditional employment relationship, may not
be covered.

5. Exclusions and Adjustments:

o Certain allowances or perquisites may be specifically included or excluded
based on other sections of the Income Tax Act, such as Section 10 (which
deals with exemptions).

Overall, Section 15 provides clarity on when salary income becomes taxable and ensures that
all salary payments, whether received or due, are accounted for in the correct financial year
for tax purposes

CASES:

1. CIT v. Bachubhai Nagindas Shah

 Writing-off or waiver on the part of the assessee after the income from "Salaries" had
become due to him cannot amount to anything more than disposal of the income.
 The concept of real income where the income falls under the head "Salaries" cannot
help the assessee

2. Lakshminarayan Ram Gopal & Son Ltd. v. Govt. of Hyderabad, Ram Prashad v.
CIT

 Servant or agent - The distinction between a servant or an agent can be summarised as

follows:—
(i) a master can tell his servant what to do and how to do it;
(ii) a principal cannot tell his agent how to carry out his instructions;
(iii) a servant is under more complete control than an agent;
(iv) a servant is a person who not only receives instructions from his master but is
subject to his master's right to control the manner in which he carried out those
instructions;
(v) an agent receives his principal's instructions but is generally free to carry out those
instructions according to his own discretion;
 (vi) a servant qua servant has no authority to make contracts on behalf of his master;
generally, the purpose of employing an agent is to authorise him to make contracts on
behalf of his principal;
(vii) an agent is paid commission upon effecting the result which he has been
instructed by his principal to achieve;
(viii) a servant is paid wages or salary

2. Lalu prasad Yadav v. cit

 The case highlighted the need to classify income correctly under various heads as per
Section 14 of the Act.
 The Assessing Officer had reclassified the income of the Chief Minister from "other
sources" to "salary," arguing that despite the Chief Minister not being traditionally
employed, his income should be treated as salary based on constitutional provisions
and state legislation.
 That, the Chief Mini ster held a constitutional office and hence his income should be
treated as salary
 The court agreed with this view, asserting that the Chief Minister's income falls under
the category of salary as defined by Article 164 of the Constitution and relevant state
laws.
 the court emphasized that income received by judges of the Supreme Court and High
Courts, although they do not have traditional employers, is still classified as salary
under Articles 125 and 221 of the Constitution.
 The tribunal's ruling that the Assessing Officer did not err in changing the income
classification to salary was upheld, affirming that the Chief Minister's income should
indeed be taxed under the head "Salaries."

3. Justice Deoki Nandan Agarwala vs Union Of India

 It was contended that a Judge of a High Court and the Supreme Court has no
employer and, therefore, what he receives is not salary; accordingly, what he receives
as remuneration is not taxable under the head of salary under the Income Tax Act.
 It is true that High Court and Supreme Court Judges have no employer, but that, ipso
facto, does not mean that they do not receive salaries.
 They are constitutional functionaries.
 Articles 125 and 221 of the Constitution deal with the salaries of Supreme Court and
High Court Judges respectively and expressly state that what the Judges receive are
salaries.
 It is not possible to hold, therefore, that what Judges receive are not salaries or that
such salaries are not taxable as income under the head of salary.