Men must have enough to live upon before they can pay taxes. The revenue-yielding powers of a nation are regulated, not by its mere numbers, but by the margins between its national earnings and its requirements for subsistence. . . . . it is because this margin is so small in India that any increase in the revenue involved serious difficulties.

— Sir William Wilson Hunter (in 1880, with reference to income tax on agricultural income,  under the Income tax Acts, prior to 1886).

Although, the word ‘Direct taxation’ was use much later for differentiating it from ‘Indirect taxation, yet several instances of direct taxation are found in ancient history.

Sir W W Hunter and Taxation in Egypt-Image courtesy ‘The British Museum Dictionary of Ancient EgyptThe earliest recorded and most widespread form of direct taxation was the ‘Corvee’. It was a system of compulsory labour provided to the state (mostly by poor peasants) in ancient Egypt. The word for “labour” in olden Egyptian language is a synonym for taxes. The ‘Corvee’ persisted into the modern era as late as early twentieth century.

In Mesopotamia the earliest form of taxation apparently was the ‘Tithe’, a collection of a percentage of each landholder’s crops, later extended to cattle also. Pharaohs instituted taxes on grains. Later, around 408 BC, peasants could provide labour services instead of paying land taxes. Records suggest that direct taxation has been a part of human history in both the East and the West for at least past 2500 years.

‘Income tax’ is of a comparatively recent origin, first introduced as a ‘War Tax’ in England in the year 1798, by William Pitt. In the following year a 10 per cent, duty was imposed on all incomes above a basic limit. Under the 1799 Act of England, the taxpayer was ‘required to give a return of his income from every-source. In the year 1816 the tax was entirely withdrawn. An Act was introduced by Sir Robert Peel in 1842 formulating a code which to a large extent remains in force in England till date.

Several taxes existed in India before the British system was adopted. One such tax was ‘Pindari’ in the Central Provinces. Pindari was an atrocious tax by proxy warriors, who joined war with any side on the condition that they would extort wealth from losing side, if victorious.‘Veesabuddy’ (tax on business), ‘Moturpha’(tax on manufacture and artisans) and ‘Sair’-was imposed on natural resources in some districts. Pilgrimage tax was also prevalent on popular temples. The British Government, instead of adopting the Indian model of direct taxation, preferred the English model. While, introducing the Income-tax in India, James Wilson delivered a speech on the 18th February 1860. Wilson quoted from Manu-Smriti and other ancient Indian religious texts to justify his levy of direct taxes.

1860 ACT

Under the Act XXXII of 1860, income was divided in-to four schedules taxed separately. These were-Income from landed property, Income from professions and trades, Income from Securities and Income from Salaries and pensions.

As in the British Act, income of charitable institution was not taxable, deduction for life insurance premiums not exceeding one-sixth of the income was allowed. Time and again act was replaced by License tax. Direct tax in its earliest form was sure to fail, as it was imposed on relatively ignorant and unlettered millions at a short notice. They were required to assess themselves or prove right of exemption by filing elaborate returns. The system of notices, surcharges, claims abatements, installments and penalties were the worst of harassments for the gullible population. In between 1860-1886, as many as 23 Direct tax Acts were imposed and repealed.

The administrative machinery for imposition of the Income tax was not in place. An army of tax assessors and collectors was temporarily engaged, aided by self-serving informers. Frauds in assessment and collection went hand in hand with extortions. Inquisition into private affairs, fabrication of false accounts and returns, rejection of honest ones, unequal treatment of the similar cases prevailed. Agriculture was not exempt from income tax in 1860 Act. Tax was targeted on those who were not liable. Zamindars illegally recovered it from tenants and ryots (agriculturalists). The threat of summons was a big reason of public discontent. Amendments introduced seemed inadequate. In 1878, Income tax was replacedby a License tax to raise money for famine insurance. Experiments with the direct taxes continued in one form or another, without paying much attention to problems faced by the rural population.

1886 ACT

In 1886 the government, reintroduced an income tax. Under the Indian Income Tax Act of 1886, income was divided into four schedules taxed separately: (1) salaries, pensions, gratuities; (2) net profits of companies; (3) interests on the securities of the Government of India; (4) other sources of income. This last schedule included income from professions, manufacturing, construction, income from trade and property. Exemption was available for foreign consuls; officers whose salary was less than Rs. 500; inhabitants of specific territories like the hill tribes’ regions; railway, shipping, and indigo companies. Some incomes were exempted from tax- agricultural incomes, properties devoted to charitable and religious purposes etc. This Act was drafted carefully, learning from past failures. Government tried to strike a balance between the tax and the cost of enforcing it.


The Indian Income Tax Act of 1886 needed reforms to raise more revenue during the First World War. The Indian Income Tax Act of 1918 repealed the Act of1886 and introduced several changes. First, it replaced the scheduler income tax by a total income tax. Secondly, it disallowed some of the exemptions to the military, railways, shipping, and indigo companies. Finally, income tax return was made compulsory. The special feature of the Income Tax Act of 1922 over the past Acts, was to allow tax charging rates to be fixed by the annual Finance Acts. It will be fascinating to know as to how some specific topics were added to Income tax statute. This is an everlasting tug of war between overzealous authorities and intelligent taxpayers.

It is very interesting to learn as to how and when the specific technical terms were inserted in the Direct taxes Acts. Most of such terms were imported from the Direct taxes legislations as and when introduced in other countries. Some were added under special circumstances, discussed in the respective topics.


The income tax Act 1860 taxed agricultural income as any other income. A bold decision was taken to exempt it in the Act of1886. In the year 1918 the Government of India introduced a Bill to amend the law relating to the rate of the charging of tax. Section 4 of the Draft Bill proposed that the net agricultural income more than one thousand rupees was to be considered for the purpose of upgrading the rates in force. The proposal gave rise to much controversy. Finance Member, Sir William Meyer stated that it was not fair for the wealthy landlords to pay the tax at the rates “intended for the poor”. Pandit Madan Mohan Malviya observed[1]that this was not the right way to proceed about the business of raising the rate of taxation, nor it was proper to bring forward without any justification being presented for it. Shri Sitanath Roy, a rich landlord moved an amendment to the Bill, opposing such a levy. It was supported by Sir Surendra Banerjee. However, Members like Shriniwas Shastri, M A Jinnah, Tej Bahadur Sapru and B N Sarma opposed the amendment moved by Shri Roy.

Apart from the Income Tax Acts, issues relating to the agricultural income were minutely analysed and interpreted by the judiciary also, favouring taxation on fringe incomes of agriculture. In 1920, the Chief Justice of Calcutta High Court, Sir Ashutosh Mukherjee, held in the case of Killing Valley Tea Company v Secretary of State[2] that profit of tea companies was not entirely exempt from income tax. The Indian Income Tax Act 1922 was amended in 1928to assess this income. Hon’ Supreme Court of India in Tea Estate India (P) Ltd vs Commissioner of Income-Tax[3]on 26 April 1976settled this issue. Justice H R Khanna held that-Of the income so computed 40 per cent is under rule 24 to be treated as income liable to income-tax and it would follow that the other 60 per cent only will be deemed to be agricultural income within the meaning of that expression in the Income-tax Act.

In one more important decision delivered by Calcutta High Court in 1920, H H Birendra Kumar Manikya v Secretary of State for India[4], issues related to agricultural income were decided. Hon’ble Court held that premium received for settlement of waste land and premium for transfer of an agricultural land were not agricultural income. Further income from illegal adwabs (holdings) was not exempt from assessment. In yet another case of Raja Probhat Chand Barua v CIT[5] receipts from like ‘Jalkar’, ground rents and market fee were held liable to income tax in permanently settled estates. Pramathesh Chandra Barua, son of Raja Probhat Chand Barua of Gauripur was much appreciated for his acting as ‘Devdas’ in the Bangla film of the same name made in 1935, produced by New Theatre. This company was later closed due to financial difficulties, one of the reasons being the charging of the Excess Profit Tax.

The Government of India Act of 1935, which is the milestone for the agricultural-income taxation, gave the right to levy it to the States. The states have retained this power under the Constitution of India adopted in 1950.

Calcutta High Court and Pramathesh Chandra BaruaADVANCE TAX

Concept of ‘PAY AS YOU EARN’ was born in US in 1942, in UK and British India in 1944. A person was liable to pay tax, immediately after earning it. Payers were required to ‘deduct and retain tax’ on financial transactions. The recipient of the annual payment was allowed the credit for sum so deducted and deposited.

Section 18A was added to it by Amendment Act XI of 1944, seeking advance payment of tax. After partition, credit for advance tax paid in areas falling under Pakistan was sought in India. It was frequently refused by the Income Tax Officers and at appellate stage. However, ITAT and Courts allowed such credits.


Under the 1860 Act, assessment was made by a local committee, the Panchayat in the rural district and by special commissioners and collectors in towns and cities. Understatement of income was widely prevalent due to the low exemption limit of Rs. 200 and high taxation rates of 2 and 4 percent, as compared with the rate of 0,83 % in Great Britain at the time. In the later years (1864-65), assessments were based on last year’s returns only, no better than estimates or pure fictions, lacking any basis.

Under the 1886 Act, after a return was filed under the self-assessment, final income was determined by the authorities. The Act did not lay down any process as to how income shall be determined.  System was governed by loosely framed rules or by executive orders, allowing a lot of discretion, resulting in chaos. In respect of Schedule 4— “Other Income”—the Collector could assess summarily incomes below Rs. 2000. All that he had to do was to publish a list of such persons in his office, all of whom, unless they objected within 60 days, became liable to the tax. In other cases, the Collector merely notified each assessee what amount has been assessed as tax.  There was also provision for the Collector’s calling for, but not compelling the submission of return of income.  Except in the case of company, there was no obligation to file a return.

The Income tax Act of 1918 was challenged in the Court in the case of Arunachalam Chetty v Board of Revenue. A full Bench of Madras High Court decided against the Crown, holding that income meant only what actually comes in and not, which was not received[6]. Only Justice Sadashiv Iyer dissented.

In future, the whole sphere of accrued and deemed income was covered under income tax. A committee to enquire into desirable reforms in Income tax was also appointed in 1918. This All India Tax Committee was headed by Mr. G C Sim, ICS. Other senior members of this committee were Mr. A R Loftus Tottenham, ICS, Collector of Madras, Mr. C Birch, Collector of Income tax, Karachi. Sir Alexander Murray, Bengal, Mr. W. Gaskell, ICS, Income Tax Commissioner United Province, Mr. Dewan Tekchand, ICS, Commissioner Ambala Division and Rai Sahib Jadunath Roy, United Province.

It first took reports from all Provincial Committees and then submitted its report to Government on 21st July 1921. This Committee, along with many other issues, suggested that depreciation may be allowed for mines etc. employers contribution to PF may be allowed as deduction and bad debts may be allowed.

However, PF issue was settled by an amendment to Indian Income Tax in 1930. It became necessary after Sir William Phillip, officiating Chief Justice of Madras High Court in 1927 in R E Mohamed Kassim Rowther & Co. v. Commissioner of Income Tax, Madras held[7] that payment of any amount that is directly or indirectly dependent on the earnings of profit could not be deducted as business expenditure.


Any assessee could petition the Collector against assessment, if asked to pay a tax of Rs 250. Companies had a right to apply to the Divisional Commissioner (or the Board of Revenue in Madras) for revision, and the Commissioner had discretion to entertain such applications even for the lesser amount. Both the Collector and the Commissioner had power to call for evidences. It could be done only at the instance of the petitioner, to cross verify facts. The Collector had power to compound the assessment with an assessee—whether an individual or a Company—for several years. Chief Revenue Authority was empowered to refer a case to High Court for the interpretation of any provision of the Act.

Later in 1917, the Collector was authorized to serve a notice for a return if in his opinion, Part IV income was Rs. 1000 or more. Still no statutory rules were in place to compute the profit, orders were only executive. Assessment in general was made by adding income under each head separately. The Indian Income Tax Act, 1922 was brought about, because of the recommendations of the All India Tax Committee. The 1922 Act can be described as a milestone in the evolution of direct tax laws in India.

After the assessment of tax was over, the assessee was entitled to appeal if he did not agree with the outcome. An executive-appellate remedy was available before the Appellate Assistant Commissioner of Income Tax (under Section 30 of the1922 Act). In 1939, Act was amended to provide for further remedy before the Appellate Tribunal. It was provided under Section 5A of the 1922 Act, by Section 85 of the Indian Income Tax (Amendment) Act, 1939. The appellate authority was exercised by a bench comprising of one Judicial Member andone Accountant Member. It was permissible for any Member to dispose of appeals, sitting singly, subject to the limit laid down for the assessed income or jointly for bigger cases. It was also open to the President of the Appellate Tribunal to constitute larger benches of three Members, subject to the condition, that it would comprise of atleast one Judicial Member and one Accountant Member. Issues were decided by the majority. Only a Judicial Member could be appointed as the President of the Appellate Tribunal.

Section 67 of the 1922 Act barred suits in civil courts pertaining to income tax related issues. Additionally, any prosecution suit or other proceedings could not be filed, against an officer of the Government, for an act or omission, in furtherance of anything done in good faith or intended to be done under the 1922 Act.

A further quasi-judicial appellate remedy was provided under section 33A, inserted by the Indian Income Tax (Amendment) Act, 1941. It provided for a remedy by way of revision before a Commissioner of Income Tax. Similar provisions were also carried under Income Tax Act 1961.

The 1922 Act did not provide for an appellate remedy, before the jurisdictional High Court. In the pre-Constitution era, the Government of India Acts prohibited any interference by the high courts in revenue matters, in the exercise of their original jurisdiction (Section 106 of the Government of India Act, 1919 and section 226 of the Government of India Act1935). However, the jurisdiction of the high courts could be invoked for the interpretation of statutes (e.g. section15 of Income-tax Act, 1918 and section 66 of Income-tax Act, 1922. Under Section 66, either the assessee or the Commissioner of Income Tax, could move an application to the Appellate Tribunal, requiring it to refer a question of law (arising out of an assessment order) to the jurisdictional High Court. In case of refusal to make such a reference, the aggrieved assessee or the Commissioner of Income Tax could contest it before the jurisdictional High Court.A case referred to the High Court under Section 66, was to be heard by a bench of not less than two judges of the High Court. In exercise of the reference jurisdiction, a question of law, which had arisen in an appeal pending before the Appellate Tribunal, had to be determined by the High Court. After the jurisdictional High Court had answered the reference, the Appellate Tribunal would dispose of the pending appeal with reference to the legal position declared by the High Court.

The 1922 Act was repealed by the Income Tax Act 1961. Under the Income Tax Act 1961, an order passed by an assessing officer, was appealable before the Deputy Commissioner (Appeals) and Commissioner (Appeals). Depending on the limits specified in Section 246/246A of the Income Tax Act, As before, against the order passed by the executive-appellate authority, a further appellate remedy was provided before a quasi-judicial Appellate Tribunal under Section 252 of the Income Tax Act 1961.The Appellate Tribunal had all the powers which are vested in the income-tax authorities referred to in section 131, and any proceeding before the Appellate Tribunal would be deemed to be a judicial proceeding. The Appellate Tribunal would be deemed to be a civil court for all the purposes of section 195 and Chapter XXXV of the Code of Criminal Procedure, 1898 (5 of 1898).

Section 257 of the Income Tax Act 1961 provided for a reference directly to the Supreme Court. The instant reference could be made by the Appellate Tribunal, if it was of the opinion, that the question of law which had arisen before it, had been interpreted differently, by two or more jurisdictional High Courts.

Section 260A[8] was inserted in the Income Tax Act 1961, to raise objections to the jurisdictional High Court against the orders passed by the Appellate Tribunal. Remedy against a decision rendered by the jurisdictional High Court was vested with the Supreme Court under Section 261 of the Income Tax Act.


The machinery for enforcing the 1860 Act was not in place. Except in Presidencies, like Calcutta, Bombay and Madras, there was hardly any whole-time income-tax Officers. The work was done by the land revenue Officers as a subsidiary activity. There was no obligation on individuals to furnish returns of income, nor, consequently, any penalty for not doing so. Tax on salaries of public servants and interest on securities was collected at source without much difficulty. Assessments of Joint Stock Companies was regulated, as they had to file returns of profit.

Administration of the Income Tax 1886 was also done by Land Revenue Officers, except in Presidency towns, as before.

From 1st April 1922, administration of income tax was shifted to the Union subject and income tax was shifted from the Provincial to the Union Government. A separate agency was created, and between 1922 and 1931, the administration of the income tax was progressively transferred from the Revenue Department to full-time Income-tax Officers. With the Income tax Act, 1922, for the first time, a specific nomenclature was given to various levels of Income-tax authorities.

Executive work was entrusted to Income tax Officers, Assistant Commissioners, (both Appellate and Inspecting) and Commissioners of Income fax. Members of the Appellate Tribunal were also Government officials (Sections 5 and 5A). The statute required the Income tax Officers in certain specific cases to proceed with the previous approval of the Inspecting Assistant Commissioners. No directions could be given by higher authority to Appellate Assistant Commissioners in the discharge of their appellate functions. Thus, questions of fact were to be decided by the departmental officers whereas, legal issues were entrusted to higher forums. Central Board of Revenue was established by the Act IV of 1924.


When in the year 1938, Lord Greene, M.R. observed[9] in British Solomon Aero Engines Ltd v. IR “Income tax. . . is a tax on income; it does not tax capital”. Little did he think then of what the future held in store for a taxpayer. In the context of the case, he was referring to income tax on a capital receipt as distinguished from a current or revenue receipt. Since then “tax on capital” has taken many forms. If one has capital, one could use it to produce income. Income tax was chargeable on it.

The gain has been variously called capital appreciation, accretion to capital or capital gain. Income tax on its original concept may be a tax on income, i.e. on what comes in. Profits of gains arising from the sale, exchange, relinquishment, or transfer of a capital asset as defined in the Act are deemed to be income of the previous year in which, they took place and are taxable under the head capital gains. Such gains do not fall within the ordinary concept of income but have been made chargeable by specific provision. It also includes profit or gain from sale of a capital asset from conversion of this capital asset into a stock in trade of a business carried on by him and profit or gain from the transfer of capital asset by way of distribution on the dissolution of the firm or other entities. The income chargeable under this head is worked out by deducting expenditure incurred wholly and exclusively in connection with such transfer plus the cost of acquisition of the asset and the cost of any improvement thereto from the full value of the consideration received or accruing as a result of the transfer of capital asset.

Capital gain was introduced for the first time in the Indian Income tax 1922, by the Finance tax 1947, under the head Capital gains by inserting section 12B.In the Budget speech, the then FM said, “We have also heard of the huge sums that are said to have been made in black market operations. And I must say that support for these opinions is bound in the numerous reports of transactions in which business and properties of various kinds have changed hands for vast sums of money”.

This tax was short lived for two assessment years 1947-48 and 1948-49. It was abolished from 1.1.49. it was again considered by the Taxation Enquiry Commission and rejected it. It was again advocated by N Kaldor in his tax review survey report submitted to the Government on 30/03/1956. Along with the capital gains, he also proposed an expenditure tax and a gift tax. Accepting the suggestions, Govt introduced a Gift tax and a Wealth tax. Estate duty was already imposed from 1953. Capital gain tax was revived from 1.4.1957.


Under the draft proposals of the 1918 Act, in line with the British Act, income of a married woman was proposed to be assessed jointly with her husband. But it was not approved. Apart from it, during the discussions on Bill, fears were expressed by the members that taxation on HUF would lead to disruptions of joint families due to taxation. In 1937, section 16(3) was added due to the recommendations by the Experts Committee. In its report, the committee had expressed grave concern on the tax avoidance by partnership between husband and wife and admission of minor children in the partnership for the benefit. Such suggestions were later backed by the Law Commission and Tyagi Commission’s report.  Ultimately, it found a place in the Income Tax Act 1961, in the form of ‘Clubbing of Income’. (Section 64)


This income has been taxable from the very day of introduction of Income tax in India, right from 1860. This position continued under the Income tax Act 1886. However, there was no specific head for it even in 1886 Act and it was taxed only under the residuary head, i.e. ‘Income from the other Sources’. Section 24 of the 1886 Act charged it and made a distinction between ‘Occupied’ and ‘Let out’ premises. A legal fiction was created here, deeming the income ‘Saved’ and not income ‘Coming’. income from occupied buildings was determined at 5/6th of the ALV. This one sixth of ALV was turned into a deduction in later years, which was changed to one fifth, then one fourth and now 30%. If the property was under self-occupation, annual value was taken to be 10% of the aggregate income of the owner.

Under the Act of 1918, a special head was created for this income, which continues so far. Also, in the 1918 Act, a 10% rule was applicable, wherein a deduction of 10% of receipt was allowed for the self-occupiedproperty. If the taxpayer had two properties, the ALV of the self-occupied property was taken as nil. Under 1922 Act, for the first time, loss under one head could be adjusted with the profit in other head and it applied to HP income as well. From 1939, the word ‘Co-owner’ was also insertedin section 9(3).


In the Act of 1886, there was no specific provision of depreciation, but it was governed by the Executive orders issued by the Govt of India. In 1887, depreciation was allowed at the rate of 5% on the cost of machinery[10]. Separate deduction for repair and maintenance was also allowed. In January 1912, depreciation on buildings which housed heavy machinery was allowed at the rate of 2.5% in lieu of repair and maintenance expenses on the same[11].

Under the 1918 Act, apart from regular expenses, a depreciation was allowed on machines, buildings, and plants at the prescribed rate under section 9(2)(ix). It was allowed on straight line basis, subject to the conditions. If it were not fully claimed by the assesseein one year, it could be added to the allowance to be made in following years. It was the origin, which later became the basis of carry forward of Unabsorbed depreciation, if there was no profit in one year. Some liberal provisions were also enacted, which enabled the assessee to apply for the revision of assessments on the ground that they had to postpone their repairs due to war, or suffered exceptional depreciation or the machinery installed for war could not be used after war.

Section 9(2)(vii) also provided for the obsolescence for machinery or plant, sold or discarded. Under the 1922 Act, rates of depreciation were laid down statutorily by Rules, though on straight line method only. Depreciation continues till date with alterations. From 1939 depreciation was allowed at written down value.


Though, Income tax is a tax on income, it was strange that income was not defined under Income tax 1922 or earlier Acts. It was defined for the first time in 1939 in section 2(6C) of the IT Act 1922, as amended in 1939. This was an exclusive definition. The had specific definition of income defined as “income” means income, one fourth and is 30% and profit accruing and arising or received in British India and includes, in case of a British subject within the dominions of a Prince or State in India in alliance with Her Majesty, any salary, annuity, pension or gratuity payable to that subject by the Government or by a local authority established in the exercise of the powers of the Governor General in Council in that behalf.

Subsequently, Income was defined exhaustively under section 2(24) of the IT Act 1961. Even before and after this legal issues were raise in respect of ‘Real’ and ‘Artificial’ incomes, ‘Accrued’ and ‘Received’ income, ‘Casual’ and ‘Recurring’ incomes, ‘Mutual trade’ and profit on ‘Trading with oneself’ and also the issues related to the ‘Source based’ and ‘Place of receipt’ based income.


One may possess idle capital without necessarily producing any recurring income like a hoard of gold. Way of taxing such wealth was also enacted, through the Wealth tax Act 1957.One may dispose of such capital without consideration. Corresponding Gift Tax Act 1958 was in place to take care of it. If one consumes it, then the Expenditure Tax Act 1987 would prevail. One may not consume it during his lifetime and leave it behind. Either the executor or heir would pay Estate duty, as per Estate Duty Act 1953. Efforts were made to plug every leakage of revenue through an Act. Later, some more direct taxes were tried for a brief period like Fringe Benefit tax and Banking Cash Transaction tax (under Income Tax Act 1961 for the period 2005-2009) etc.


‘Other Sources’ is a residuary head of income under the Income Tax Act. Any receipt classified as income but not falling under the regular heads i.e. Salary, House Property Income Business and Capital Gains is to be covered under this residuary head. Though it is the last or residuary head, but many receipts covered under this head has been on statute from the very beginning. For example, interest income has been a part of every Income Tax enacted in India right from 1860.

The Act No II of 1886, was ‘An Act for imposing a tax on income derived from sources other than agriculture’, was passed on 29th January 1886 and was enacted with effect from 1st April 1886.

The 1886 Act had also covered incomes not falling under the above schedule C, Interest on Securities’ by inserting a further schedule D, which covered ‘Other Sources of Income’ and the Collector was authorized to determine what persons are chargeable under it.

Under the ACT No VII OF 1918, under section 2(13), it was mentioned that “Total income” means total income from all sources to which the Act applies. Under section 5, heads of incomes were more precisely defined as – Save as otherwise provided in this Act, the following classes of income shall be chargeable to income-tax in the manner hereinafter appearing, namely- Salaries. Interest on securities. income derived from house property. income derived from business. Professional earnings and Income from other sources. The 1918 Act charged all receipts, casual or non-recurring pertaining to business or profession. This Act was replaced by the Income Tax Act of 1922, in view of the reforms introduced by the Government of India Act, 1919. The present law of income tax in India is governed by the Income Tax Act, 1961 which replaced the Act of 1922. It came into force on 1st April 1962 and since then it was amended. Tax rates are not given time and again in the Income Tax Act but in the Finance Act, which is passed by the Parliament along with the budget for the Central Government every year.

Under the 1922 Act, ‘Other Sources’ was covered in section 12. The ambit of charging u/s 12(1) was described as “Income profits and gains of every kind which may be included in its total income if not included under any of the preceding heads”.

With the expansion of trade and industries, there many controversies whether a particular income would fall under the head ‘Business income’ or under the ‘Other Sources’. The issues start crystallizing with precise scrutiny in various case laws. Several amendments were made due to case laws decided by various courts and due to the recommendations of ‘Expert Committees’ appointed by the Government.

The Law Commission appointed by the Government suggested several measures, which were incorporated in the Income Tax Act 1961. One of its suggestions was to altogether omission of the words-‘which may be included in its total income’. It also sought to shift the burden from the Department to the taxpayer whether it falls under section 56 of the Act, enlisting ‘Income from the Other Sources’. The new classification gave rise to another set of controversies.

Pre-operative incomes, Netting off interest income. Compensation and interest on Compulsory acquisition of land, Interest Income of Co-operative societies, Lease/Rental income assessed as the other sources, Income received by Official Liquidator on compulsory winding up of company/business, Gifts, Lotteries, Money/property received without/inadequate consideration, Share premium more than FMV, Miscellaneous receipts/Trusts are broadly covered under this head. Expenses incurred for earning such income could be claimed u/s 57(iii) of 1961 Act.


Section 24(1) of the Act provided that ‘Set off of losses’ under one head could be set off with a profit in another head under the same assessment year only. On the recommendations of the Experts’ Committee in 1935, a provision was made in section 24(20 of the IT Act 1922, with effect from 1/04/1939 to allow carry forward and set off of loss under the head’ Profits and gains of Business’ for six years. it gave rise to more complications and it is still one of the most complicated section. This period was amended to eight years in 1957.Thesignificant change brought by this Act was the introduction of setoff of loss from one source against the income from other sources. It also introduced desperate department for income tax administration. The slab rate system was introduced in 1939 on the recommendations of Income Tax Enquiry Committee 1935.


Under the 1886 Act, section 3(2)(ix) specifically stated that salary shall not include any perquisite or benefit, which is not money. The position remained unchanged in the 1918 Act and 1922 Act. Salary was governed on the receipt basis. Payments in kind were outside the scope of salary and soon it was misused. Under the 1918 Act, one sixth of salary could be allowed to the salary holder, akin to standard deduction.

Payment outside India was exempt from tax and it was much abused by the companies. Even civil servants, on long leave used to be paid outside and there was no double taxation treaty in existence. It was pointed out very late by the Expert Committee in 1935. After an amendment in 1939, salary was taxed on accrual basis.

One more important decision from Privy Council was delivered in favour of employees. In the case of CIT[12] V Fletcher (1937) it was held that lumpsum paid to employees at retirement after long service was not deferred salary, as interpreted by Madras High Court. It was held to be a capital receipt, not subject to tax. It paved way for retirement benefits for Indian employees as well. Later, some more relief was allowed to the employees in the shape of expenses on conveyance used for employment (1956) and entertainment allowance (1958). Under the 1961 Act, section 16(iii) was added to allow any Provincial tax like Professional tax etc. to be deducted. The misuse of a simple head – ‘Salary income’ saw many changes after 1961 in the amendments introduced to wards ‘Perquisites’ and ‘Payment in lieu of salary’. Though changed much now, still it remains one of the least complicated head of income, with minimum deductions and yielding very high revenue.


The 1918 Act also carried a chapter named ‘Liability in Special Cases’. A provision was made here to assess non-residents on incomes deemed to have been accrued or arisen within British India. Incomes of shipping companies was exempt. Under the 1886 Act, tax was levied on income accruing or received by a resident in India or a non-resident through his agent. The word resident was not statutorily defined. Position remained almost same with adoption of the word ‘British India’ in it. From 1/04/1939 the remittance basis was adopted for business profits brought in British India, within three years of accrual. It was also extended to all sources of incomes.

Residence in India was defined and period of stay of 182 days was enacted from 1/04/1939 which is still in force with a recent proposal to reduce the period of stay. A new status of ‘Not Ordinarily Resident’ was also created from 1/04/1939. It was a compromise between the Government, the opposition, and the European interests, as described in Investigation Commission Report 1947. More clarity in section 4, 5, 6 and 9 followed in the Income Tax Act 1961.


Under the 1922 Act, tax was recovered either by the Income tax Officer himself {Sections 45 and 46 (1)] or by the Collector of the District as an arrear of land revenue [Section 46 (2)] or is an arrear of Municipal tax or other local rate Section 46 (3). Except in certain special cases no proceedings could be started for the recovery of any arrears after one year [Section 46 (7)].

Tax recovery involves receipt of advance tax, self-assessment tax and payment by taxpayer against a notice. Only when this demand remains unpaid, recovery is resorted to. Prior to enactment of IT Act 1961, income tax recovery from defaulters was done through State (Provincial) machinery. A ‘Recovery Certificate’ was issued to the District Collector, who would proceed to recover tax as per rules related to recovery of land revenue dues.

A procedural infirmity came to light in the case[13] of ITO v. Seghu Buchiah Setty decision of the Hon’ble Mysore High Court, later confirmed by Hon’ble Supreme Court[14] in its order invalidating demand notices in certain special circumstances.  The problem faced was so serious that the Parliament had to enact the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act 1964. Section 5 of the Act states, “The provisions of this Act shall apply and shall be deemed always to have applied, in relation to every notice of demand served upon an assessee by any Taxing Authority underany scheduled Act whether such notice was or is served before or after the commencement of this Act.” It means that the provisions would not only be retrospective, as regards the 1961 Act, but also as regards the 1922 Act. In effect, this amendment has application from 01 April 1922, though it has been enacted after the Indian Income-tax Act 1922 was repealed.

The Twelfth Report of the Law Commission on the Income-Tax Act was presented to the Union Minister of Law and Justice, by M.C. Setalvad, Chairman, Law Commission of India, on 26 September 1958. It recommended that the procedural sections could not apply in a case where there was no substantive levy of tax. Following it, in the 1961 Income tax Act, such provisions were codified in the Act itself under Schedule II. Till 1966, such recovery was still being managed through the respective State Governments. Tax Recovery Officer was included under the definition of ‘Authority’ under section 2(44) of the IT Act 1961.

Section 297(2)(j) authorises TRO to recover the arrears of taxes due through the modes under the 1961 Act, which was payable under the Income tax Act 1922. A certificate issued to TRO has a force of money decree under section 2(2) of CPC. As such the office of TRO has all the requisite features of a Civil Court. TRO has been given wide powers to attach and auction immovable properties and to take into custody etc. order of TRO are appealable before Tax Recover Commissioner.

Chapter XVII of I.T. Act 1961 deals with Collection & recovery of taxes”. Part D, sections 222 to 232 of the 1.T. Act 1961 and Schedules II and III of the Act, and the Income Tax (Certificate Proceedings) Rules, 1962 together constitute a self- contained code prescribing the various modes for the recovery of arrears of taxes. These provisions were also applicable to the recovery of arrears of Wealth-tax and Gift-tax.

Section 228 provided for Recovery of Indian tax in Pakistan and Pakistan tax in India. It was omitted with effect from 1st April 1989.Section 228A provides for Recovery of tax in pursuance of agreements with foreign Countries through CBDT. By the authority under Income Tax (Certificate Proceeding) Rules, TRO could authorize another officer of either Centre or State to exercise such powers. It also allowed transfer of certificate of recovery from one TRO to another. Unlike assessment proceedings, a new TRO appointed after transfer of his predecessor can continue proceedings from the stage where the earlier officer was conducting, without the requirement of a fresh notice.


The practice of collecting Income Tax at the source dates back as far as 1803 Act of England. The immediate effect of taxing income at the source was to increase very largely the revenue derived from the tax, and although the rate was reduced to less than half what it was previously, the revenue derived from the tax showed no appreciable decline. It had many advantages from the point of view of the Revenue Authorities, as it saved expenses in collecting the tax and prevented tax evasion. It has been confined to property, dividends, and interest.

During the early days of Income tax, the income that suffered deduction could not be again assessed in the hands of the recipients.  However, all income must be included in the “total” income. The assessee was then given credit for the tax deducted. If one had suffered too much tax by deduction, he could also claim repayment of the excess. Moreover, if a person entitled to deduct tax at the source omitted to do so, he was not entitled to recover it from subsequent payments, since payments voluntarily made under a mistake of law could not be recovered.

Under the Act No. XXXII OF 1860, this was present under Schedule 3. It covered all profits arising from interests, annuities, or dividends payable in India to any person, whether residing in India or elsewhere, out of the public Revenues of India. Rules prescribed for this schedule had the requirement of setting apart and retaining a part of such payment before paying. The Collector was authorized to exempt retaining of such tax before payments.

The Act of 1886 was specific in Schedule C, (Interest on Securities), being covered in section 13(1) to deduct and pay to the Government account and 13(2), consequences of failure. The Act of 1922 made it compulsory to deduct tax at source for the private employers also. Since then, it has enlarged itself into so many transactions that almost 37.5% of Direct tax collection in FY 2018-19 was attributed to TDS[15].

This ‘temporary tax’ has survived through four centuries, undergoing transformation each time with the need of the time.

Architect of the Modern Budget system in India, Right Hon’ James Wilson was moved to the house of Dr. Alexander Macrae, at 9 Middleton Row, Calcutta (now Kolkata), for better treatment. Before his death on the 11th of August 1860, he is said to have murmured his last words- ‘Take care of my income tax. . . . ‘


[1]The Proceedings of the Indian Legislative Council 1918

[2](1921) I L R 48 Cal 161

[3]103 ITR 785

[4] I L R48 Cal 766 (1920),

[5]5 ITC 1 PC,

[6]1ITC 75 (FB) (Mad).

[7]2 ITC 486

[8]Finance (No. 2) Act, 1998, with effect from 1.10.1998.

[9](1939) 7 ITR 245

[10]GIFC No 399 dated 27/01/1887

[11]GI No 246F dated 18/01/1912

[12]1937, 5 ITR 428 (PC)

[13](1960) 38 ITR 204

[14][(1964) 52 ITR 538 (SC)]

[15]Source- Administrative Handbook 2021.


About Author:

Mr. Chandra Prakash Bhatia, IRS (IT: 2006) Addl. CIT (ReAC) (Tech. Unit), KolkataMr. Chandra Prakash Bhatia, IRS (IT: 2006) | Addl. CIT,  Kolkata

Shri Chandra Prakash Bhatia, Additional Commissioner, is an IRS Officer of 2006 Batch. He has served in various units of Income Tax Department. He has been posted mostly in Bihar and Jharkhand and West Bengal. Though a science graduate, he has special interest in studying the ‘Medieval Financial History’. For last three years, he served in Gujarat and had a close view of the art, culture and history of this area. He is a member of the Editorial Board of Taxalogue. At present, he is posted as Additional Commissioner of Incoem Tax at Kolkata.

Author Bio

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Telegram

taxguru on telegram GROUP LINK

Download our App


More Under Income Tax


Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

December 2023