Under Indian Income Tax Law, a person may earn income that is either fully exempt or partially exempt from tax under specific provisions. However, if the total income includes such income on which no income tax is payable (like agricultural income or eligible foreign income), it may impact how tax liability is computed.

Taxpayers often receive income from multiple sources—some taxable, others exempt or relieved under specific provisions. While computing tax on such mixed-income profiles, taxpayers may face situations where certain incomes are included in gross total income but are not liable to tax due to exemptions, treaties (like DTAA), or reliefs granted under special laws.

Section 110 of the Income Tax Act, 1961 provides relief in such cases by ensuring that tax is not levied on income that is otherwise exempt or where a particular section provides relief or exemption from tax, but the person still has taxable income.

Key Objective of Section 110

To provide a mechanism for correctly computing the tax liability where part of the total income is either:

• Exempt, or
• Subject to special relief, and
• No tax is payable on that part under the Income-tax Act or any other law (e.g., DTAA or UN laws).

Where Section 110 Applies:

Examples of Incomes Included But Not Taxable:

1. Foreign Allowances of UN Employees
   • Included in return but exempt under specific UN privilege laws.
2. Foreign Dividend Income
   • DTAA exempts tax in India when taxed abroad (e.g., US dividends taxed in US).
3. Royalty Income
   • Covered under DTAA Article (India-Germany, for example).
4. Technical Service Fee
   • Under DTAA, taxed in source country; exempt in India.
5. Certain Non-resident Business Profits
   • Not taxable in India if no PE (Permanent Establishment).

Computation Process under Section 110:

Step-by-Step Method:

1. Calculate the tax on the total income, including exempt/relieved income.
2. Calculate the tax on the exempt/relieved portion of income separately.
3. Deduct the tax computed on exempt income from the total tax calculated in Step 1.
4. The net amount is the actual tax payable.

Illustrative Example:

• Total Income: ₹10,00,000
• Income exempt under DTAA (say, foreign pension): ₹3,00,000
• Taxable income: ₹7,00,000

Step 1: Compute tax on ₹10,00,000 (as per slab)

Let’s say tax = ₹1,12,500

Step 2: Compute tax on ₹3,00,000 (exempt income)

Let’s say tax = ₹12,500

Step 3: Deduct ₹12,500 from ₹1,12,500

✅ Tax Payable = ₹1,00,000

Case Law Analysis

1. CIT v. Apsara Theatre [1974]

Held that Section 110 applies even where income is exempt under special laws, not just under the Income Tax Act. Relief is valid even if the income is included in computation for formality.

2. Wipro Ltd. v. DCIT [2020] ITAT Bangalore

Allowed Section 110 relief where income was taxed in the USA and exempt in India under Article 23(2) of the India-US DTAA.

3. Mitsubishi Corporation India Pvt. Ltd. v. ACIT

DTAA provisions prevailed over Income Tax Act; Section 110 relief upheld where income was exempt under Article 7.

Documentation and Compliance Checklist:

Conclusion

Section 110 is a key computational relief mechanism in Indian tax law. It ensures that no income is taxed unfairly when it is already exempt under law or a treaty. Correct application of Section 110 requires understanding of multiple tax provisions, foreign income treaties, and tax computation mechanisms.

Whether you’re a professional, NRI, or corporate taxpayer, awareness of Section 110 can help you avoid excess taxation and stay compliant.