Determination of tax liability which no tax is payable under the provisions of the Act : Clause 190 of the Income Tax Bill, 2025 Vs. Section 110 of the Income-tax Act, 1961

Clause 190 Determination of tax where total income includes income on which no tax is payable.

Income Tax Bill, 2025

Introduction

Clause 190 of the Income Tax Bill, 2025, and Section 110 of the Income-tax Act, 1961, both address the determination of tax liability in cases where an assessee's total income includes income on which no tax is payable under the provisions of the Act. These provisions are pivotal in ensuring fairness in the computation of income tax, preventing the taxpayer from being unduly burdened by the inclusion of exempt or non-taxable income in their total income. The legislative intent behind these sections is to provide a mechanism for deducting the tax attributable to such exempt income, thereby aligning the actual tax liability with the taxable portion of the income.

This commentary analyzes Clause 190 in detail, explores its objective and practical implications, and provides a comparative analysis with the existing Section 110. The discussion further considers the historical and policy context, interpretative issues, and the provision's impact on stakeholders.

Objective and Purpose

The primary objective of Clause 190, mirroring Section 110, is to ensure that taxpayers are not subject to tax on income that is statutorily exempt or otherwise not liable to tax under the Act. The provision operates as a corrective mechanism, particularly relevant in scenarios where the computation of total income, for various statutory or procedural reasons, includes income that is exempt from taxation. The exclusion of such income from the tax base is a fundamental principle of tax equity and fairness.

The legislative intent is rooted in the principle that tax should only be levied on income that is chargeable under the Act. Where the computation of total income, as required by the Act, leads to the inclusion of non-taxable income (for instance, due to clubbing provisions, aggregation rules, or specific statutory mandates), Clause 190 ensures that the taxpayer receives a deduction equivalent to the tax attributable to such income, calculated at the average rate of tax applicable to the total income.

Historically, the predecessor provision-Section 110-was introduced to address specific anomalies arising from the aggregation of exempt income with taxable income, particularly in cases involving the clubbing of minor's income, share of income from a partnership firm, or other statutory inclusions. The Finance Act, 1965, substituted Section 110 in its present form, and its rationale has consistently been to avoid double taxation or taxation of statutorily exempt income.

Detailed Analysis Clause 190 of the Income Tax Bill, 2025

Breakdown of Key Elements

1. Inclusion of Non-Taxable Income in Total Income:

   Clause 190 applies where the computation of total income, as per the provisions of the Act, includes income that is otherwise not chargeable to tax. This is often seen in cases where, for the purposes of determining the applicable tax rate, non-taxable income is aggregated with taxable income.

2. Entitlement to Deduction:

   The provision grants the assessee a right to claim a deduction from the total income-tax liability. This deduction is not from the total income itself but from the calculated tax liability.

3. Quantum of Deduction - Average Rate Calculation:

   The deduction is quantified as the income-tax that would have been payable on the exempt income, had it been taxable, calculated at the average rate of tax applicable to the assessee's total income. The average rate is determined by dividing the total tax liability (before deduction) by the total income, then applying this rate to the exempt portion.

4. Mechanics of Relief:

   This mechanism ensures that the effective tax burden corresponds only to taxable income, and any notional increase in tax liability due to the inclusion of exempt income is neutralized.

Interpretation of Key Terms

• "Total Income": As per the Act, this refers to the income computed in accordance with the provisions of the Act before giving effect to any deductions or exemptions.
• "Income on which no income-tax is payable": This refers to income that is statutorily exempt or not chargeable to tax under the Act. Examples include certain agricultural income, share of profit from a partnership firm, and income exempt under Chapter III.
• "Average Rate of Income-tax": This is computed by dividing the total tax payable on the total income by the total income itself, then multiplying by 100 to get the percentage. The deduction is then calculated by applying this average rate to the exempt income included in the total income.

Mechanism of Deduction

The provision ensures that the assessee's tax liability is reduced to the extent of tax that would have been attributable to the exempt portion of the income, had it not been included in the total income. The calculation involves:

1. Computing total income as per the Act (including the exempt income).
2. Calculating total tax payable on such total income.
3. Determining the average rate of tax (Total tax payable / Total income).
4. Multiplying the average rate by the exempt income to arrive at the deduction.
5. Deducting this amount from the total tax payable to arrive at the final tax liability.

Illustrative Example

Suppose an assessee has a total income of Rs. 10,00,000, which includes Rs. 2,00,000 of income exempt from tax. The total tax payable on Rs. 10,00,000 is Rs. 1,12,500. The average rate is 11.25%. The deduction allowable under Clause 190 would be 11.25% of Rs. 2,00,000 = Rs. 22,500. The final tax liability would thus be Rs. 1,12,500 - Rs. 22,500 = Rs. 90,000.

Ambiguities and Potential Issues in Interpretation

• Scope of "Income on which no tax is payable": The provision does not distinguish between income exempt under Chapter III and income not chargeable to tax for other reasons (e.g., share of profit from a partnership firm). Judicial and administrative clarification may be required to confirm the scope.
• Interaction with Other Provisions: In cases where multiple deductions or exemptions apply, the sequencing and interplay with other sections (such as Section 10, 10A, 10B, etc.) may create computational complexities.
• Average Rate Calculation: The provision prescribes the use of the average rate, which may differ from slab rates or special rates applicable to certain incomes (e.g., capital gains). Clarification may be required on whether special rates are to be factored in.
• Procedural Aspects: The provision is silent on documentation or procedural requirements for claiming the deduction. This may lead to administrative discretion or disputes.

Practical Implications

Impact on Taxpayers

Clause 190 ensures that taxpayers are not penalized for the technical inclusion of exempt income in their total income. This is particularly relevant for:

• Individuals: Where income of a minor child, spouse, or other relatives is clubbed with the assessee's income, but is otherwise exempt.
• Partners in Firms: Where the share of profit from a partnership firm is included in the partner's total income but is exempt u/s 10(2A).
• HUFs and Trusts: Where income exempt under specific provisions is included in the computation of total income.

Compliance and Procedural Aspects

Taxpayers must accurately identify income that qualifies for the deduction under Clause 190 and compute the deduction at the average rate. Failure to do so may result in excess tax payment or disputes with tax authorities. Tax return forms and computation sheets must provide for the disclosure and computation of such deductions.

Tax authorities must verify the correctness of claims under Clause 190, ensuring that only statutorily exempt income is considered and that the average rate is correctly applied.

Administrative and Regulatory Implications

From an administrative perspective, Clause 190 simplifies the process of rectifying over-taxation due to the inclusion of exempt income. It reduces litigation and administrative burden by providing a clear statutory mechanism for deduction. However, ambiguities regarding the scope and computation may give rise to interpretative disputes, necessitating further clarification through rules or circulars.

Comparative Analysis: Clause 190 of the Income Tax Bill, 2025, and Section 110 of the Income-tax Act, 1961

Text of Section 110

Where there is included in the total income of an assessee any income on which no income-tax is payable under the provisions of this Act, the assessee shall be entitled to a deduction, from the amount of income-tax with which he is chargeable on his total income, of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable.

Structural and Substantive Comparison

• Textual Similarity:

  A comparison of the language of Clause 190 and Section 110 reveals that they are, for all practical purposes, identical. Both provisions use almost verbatim language, reflecting a legislative intent to carry forward the existing principle into the new legal regime proposed by the Income Tax Bill, 2025.

• Contextual Placement:

  Section 110 is part of Chapter XII of the Income-tax Act, 1961, while Clause 190 is placed in Chapter XIII of the Income Tax Bill, 2025. Both chapters deal with "Determination of tax in certain special cases," indicating continuity in legislative approach.

• Legislative Continuity and Policy Rationale:

  The replication of Section 110 in Clause 190 underscores the continued relevance of the principle and the legislature's intention to maintain consistency in the treatment of exempt income within the computation of total income.

Differences and Developments

• Modernization and Clarity:

  While the core provision remains unchanged, the Income Tax Bill, 2025 may introduce supporting rules or clarifications in the future to address ambiguities identified in the operation of Section 110. The Bill may also incorporate more detailed definitions or procedural guidance in the accompanying rules or schedules.

• Integration with Other Provisions:

  The new Bill may align Clause 190 more closely with other contemporary provisions, especially those dealing with digital disclosures and electronic filing, to enhance procedural efficiency.

• Potential for Expanded Scope:

  While not evident from the text of Clause 190 itself, the legislative process may consider expanding the scope to cover new categories of exempt income arising from emerging economic activities (e.g., digital assets, ESG investments, etc.).

Comparative Table

Aspect	Section 110 of the Income-tax Act, 1961	Clause 190 of the Income Tax Bill, 2025
Text	Deduction from tax liability equal to average rate on exempt income	Same as Section 110
Scope	All income included in total income but not taxable under the Act	Same as Section 110
Procedural Guidance	Limited, relies on general assessment procedure	Expected to be clarified in future rules
Legislative Context	Chapter XII, Income-tax Act, 1961	Chapter XIII, Income Tax Bill, 2025
Modernization	Based on 1960s tax regime	Part of comprehensive tax law overhaul

 

Legislative Context and Evolution

Section 110 was substituted by the Finance Act, 1965, to address the issue of double taxation or taxation of exempt income in the context of clubbing and aggregation provisions. Its purpose has remained consistent through subsequent amendments. Clause 190 in the 2025 Bill represents a re-enactment of this established principle in the context of the new legislative framework, ensuring continuity and legal certainty.

Substantive Features and Continuity

• Scope: Both provisions apply to cases where exempt income is included in the total income.
• Mechanism: Both prescribe deduction of tax at average rate on exempt income.
• Computation: Both require computation of average rate and application to exempt income.
• Purpose: Both aim to prevent taxation of income not chargeable under the Act.

There is no substantive change in the scope, applicability, or mechanism of the provision in the transition from Section 110 to Clause 190.

Potential for Reform or Clarification

Given the continuity, the issues and ambiguities that existed u/s 110 may persist under Clause 190 unless addressed by subordinate legislation or judicial interpretation. The following areas may warrant further clarification:

• Definition of "income on which no income-tax is payable"- whether it includes only income exempt under Chapter III or other categories as well.
• Applicability to special rates - whether average rate includes special rates applicable to certain heads of income.
• Procedural requirements - documentation and evidence for claiming the deduction.

Conclusion

Clause 190 of the Income Tax Bill, 2025, is a direct successor to Section 110 of the Income-tax Act, 1961, and continues the established legal principle of ensuring that taxpayers are not taxed on income that is statutorily exempt or not chargeable to tax. The provision is crucial for upholding tax equity and preventing double taxation, particularly in cases involving aggregation or clubbing of income. The mechanism of deduction at the average rate is both practical and equitable, though it may give rise to interpretative and procedural issues that warrant further clarification.

The practical implications for taxpayers and tax authorities are significant, necessitating accurate computation and verification of deductions. The continuity between Section 110 and Clause 190 ensures legal certainty, but also perpetuates certain ambiguities that may need to be addressed through subordinate legislation or judicial interpretation. Comparative analysis suggests that the Indian approach is tailored to its unique computational framework, and while effective, may benefit from further simplification or clarification.

Overall, Clause 190 remains a cornerstone provision for the fair determination of tax liability in special cases where exempt income is technically included in total income, ensuring that the legislative intent of taxing only chargeable income is realized in practice.

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Full Text:

Clause 190 Determination of tax where total income includes income on which no tax is payable.

 

Dated: 28-4-2025