Chapter-1 Introduction & Basics of Income Tax

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Chapter-1 Introduction & Basics of Income Tax
What is tax ?
A Compulsory contribution to state revenue, levied by the government on income, profits, value added to the
cost of goods and services and other transactions.
Taxes are levied for common welfare.
Types of taxes
● Taxes can be broadly classified in the following two types
○ Direct taxes
○ Indirect taxes
● Every tax which is levied by any government has the following two effects
○ Immediate effect
■ When a tax is imposed, the immediate effect of the tax is on the person on whom the
tax is imposed
■ and he shall be liable to pay tax.
■ It is also known as impact of tax
○ The next issue involved is who will ultimately be affected by the imposition of tax.
■ Ultimate effect of tax is also known as incidence of tax.
■ If the impact of tax and incidence of tax is on the same person that is to say burden of
tax cannot be shifted then it is known as direct tax and in case of indirect tax the impact
and incidence of tax can be on different persons and we can say that in indirect taxes
burden can be shifted.
● Direct taxes are levied on persons, whereas indirect taxes are generally levied on goods and services.
Direct Taxes are progressive in nature, Indirect taxes are regressive in nature.
Overview of the chapter

● Constitution of India
● What is the law ?
● Why do we need law ?
● Federalism
● 3 organs
● Article 245
● Article 246
● Schedule 7 of the Constitution of India
● How law is made ?
● What is Tax ?
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● How government can collect tax ?- Article 265

● Relationship between law, tax and constitution.
● Amendments
● Why taxes and types of taxes
● Syllabus discussion
● Paper pattern discussion
● How to study ? Books discussion
● How many marks can be scored ?
● Entry no. 82
● Discussion over Income Tax Act
● Administration of Income Tax
● Source of Income Tax Law
● Previous year
● Person
● Assessee
● Assessment
● Overview of Income Tax (GTI, TI, Taxes)
● Rates of Taxes
● Return of Income
Constitution of India
It is the mother of every law in India and almost everything or activity which is happening in India. Indian
constitution is the longest written constitution in the world. Dr. B.R. Ambedkar was the architect of indian
constitution.
It lays down the basic structure of government and how it will function.
It establishes the main organs of the country popularly known as legislative, executive and judiciary.
The Constitution defines the powers and responsibilities of each organ.
The Constitution is divided into 22 parts and each part has articles. Like in acts (laws) we have sections in the
constitution we have articles. In the end there are 12 schedules in our constitutions.
Federalism
Federalism is the mixed or compound mode of government, combining a general government (the central or
‘Federal’ government ) with regional governments (provincial, state,cantonal, territorial or other subunit
governments) in a single political system.
It can be defined as a form of government in which there is a division of powers between two levels of
government of equal status.
In India we two main levels Central level (Union ) & State

3 organs
● Legislative- Makes the law
● Executive -Implements the law
● Judiciary- Interprets the law
Level Legislative Organ Executive Organ Judicial Organ
Central Parliament President + Prime Minister Court

with Council of Ministers
(Popularly known as Central
Government)
State State legislative Assembly Governor + Chief Minister Courts

with council of ministers
What is the law ?

Law means rules and regulation to be followed by people of a particular country or a state or sometimes even
a particular state.
Why do we need law ?

● To bring uniformity. ( To deal similar situation in similar manner)
● To manage activities such as trade and commerce.
● To ensure peace, harmony
Who makes the law ?

Power to make law is given to the legislative organ of union and state (Union represents the central level and
state is for states).
How Law is Made?
Article 245
This article gives power to parliament and state legislative assembly to make law. Parliament will make law
and such laws will be applicable on the entire nation. State legislative assembly will make law and such law will
be applicable on a particular state only.

Article 246
This article divides the power to make law between parliament and state legislative assemblies. As per this
article Parliament can make law on matters which are enumerated in list 1 of schedule 7 of constitution of
India.
State legislative assembly can make law on matters which are enumerated in list 2 schedule 7 of
constitutions of India.
Schedule 7 has 3 lists
● Union list
● State list
● Concurrent list (will not be discussing it for CA Inter)
Each list has some entries or we can say some matters and law can be made on these matters as per article
246.
How can the government collect taxes ?

Article 265- This article of Constitution of India gives power to parliament to levy and collect tax.
Article states that no tax shall be levied or collected except by the authority of law.
Relationship between law, tax and constitution

● For every tax we need a law-Article 265
● For every law we need an entry in one of the lists in the 7th schedule of the constitution of India.
● Hence we can say that for every tax there must be an entry in one of the lists in the 7th schedule of
the constitution of India. If there is no entry a law cannot be made and if a law cannot be made on tax
can be levied or collected.
For income tax there is an entry in the list 1-union list and By using that entry parliament has made
law or income tax. Entry no 82 of List 1 gives power to parliament to make law on Income tax.
Income tax Act, 1961.
Entry no. 82 is read as follows

Taxes on income other than agricultural income. (Agricultural income part will be discussed later on).

Syllabus discussion
(In videos or Classes only )
Paper Pattern discussion

( In videos or Classes only )
Books which should be studied along with classes or videos

Minimum marks that you should score in tax = 60

Discussion over income tax act, 1961

( In Videos or Classes Only)
Discussion on Finance Act.


Administration of income tax

● Ministry of Finance
● Department of Revenue
● CBDT
● Income Tax Department
○ Officers etc.
Sources of income tax law

1. Income tax Act, 1961
2. The Finance Act (Recent Finance Act)
3. Income Tax Rules
➢ Power to make rule - CBDT
➢ Section 295
✧ The Board may, subject to the control of the Central Government, by notification in the
Gazette of India, make rules for the whole or any part of India for carrying out the
purposes of this Act
4. Circulars & Notifications (Not so important for CA Inter)

➢ Circulars
✧ Issued by CBDT
✧ Primarily issued for implementing the provision of law
✧ Binding upon income tax authority
✧ Not binding on assessee
✧ Assessee can take benefit
➢ Notifications
✧ For procedural aspects
✧ Issued by CG or CBDT
✧ Binding on everyone
5. Case Laws (Not so important for CA Inter) or Known as Judicial Decisions

➢ Supreme Court - Binding on all authorities
➢ High Court - Binding on authorities in the jurisdiction
Formation of Section / Clause / Subsection / Proviso / Explanation

➔ The Act is divided into chapters and schedules
➔ Income tax act contains 298 sections and XIV schedules
➔ A Chapter contains related sections
◆ A Section may have
● Sub-sections
● Clauses
● Sub-clauses

● Proviso
○ Exception to the main section or sub section or clause
○ Conditional application of main section or sub-section or clause
● Explanation
○ For clarification
Important websites
1. www.icai.org
2. https://www.incometaxindiaefiling.gov.in
3. https://www.incometaxindia.gov.in/
4. www.edu91.org

Overview of income tax (gti,ti ,etc)

1. Basics
2. Residential Status
3. Classification of Income
4. Computation of Income under each head
5. Clubbing
6. Set-off or carry forward and set-off of losses
7. Computation of Gross Total Income
8. Deductions from Gross Total Income
9. Total Income
10. Computation of Income Tax
11. Return of Income
12. Assessment
What is gross total income?

Income of the person computed under the following five heads
1. Salaries
2. House property
3. PGBP (Profits and gains of business and profession).
4. Capital Gains
5. Other Sources
The aggregate income under these heads is defined as Gross total income. Total income is calculated by
deducting the deductions u/c VI-A from GTI. In other words we can also say that Gross Total Income is Total
Income before deductions u/c VI-A.

Basic Concepts
Previous year and Assessment Year
Income earned in a year is taxable in the next year. To Understand this we need to understand 2 concepts
Previous Year - Section 3

For the purposes of this Act, “previous year” means the financial year immediately preceding the assessment
year.
Provided that, in the case of

● a business or profession newly set up , the previous year shall be the period
○ beginning with the date of setting up of the business or profession
○ and ending with the said financial year.
● or a source of income newly coming into existence the previous year shall be the period
○ beginning with the date on which the source of income newly comes into existence
○ and ending with the said financial year.
Example -
N Starts Business on 5th October 20 _ _ .
First Previous year
Second previous year
Assessment year - Section 2(9)

● The term has been defined under section 2(9)
● This means a period of 12 months commencing on 1st April every year. (As defined in bare act)
● This year in which assessment is done is called the assessment year while the year in respect of the
income of which assessment is done is called the previous year.
Assessment

Person section 2(31)
The term ‘person’ is important from another point of view also viz., the charge of income-tax is on every ‘person’.
The definition is inclusive i.e. a person includes,
1. An individual,
2. A Hindu Undivided Family (HUF)
3. A company,
4. A firm,
5. An AOP or BOI, whether incorporated or not,
6. A local authority, and
7. Every artificial juridical person e.g., an idol or deity.


Assessee section 2(7)

● Assessee means a person by whom any tax or any other sum of money is payable under this Act and
Includes
a. every person in respect of whom any proceeding under this Act has been taken for the
assessment
■ of his income or
● of the income of any other person in respect of which he is assessable,
■ or of the loss sustained by him or by such other person,
■ or of the amount of refund due to him or to such other person ;
b. every person who is deemed to be an assessee under any provision of this Act ;
c. every person who is deemed to be an assessee in default under any provision of this Act ;
● For example, A representative assessee is deemed to be an assessee under section 160.

● For example, a person who was required to deduct TDS fails to do so is considered as assessee in default.
Charging Section - Section 4

Income-tax is a tax levied on the total income of the previous year of every person.

Return of Income

Senior Citizen and Super Senior Citizen

Senior citizen is a resident individual who is at least 60 years of age at any time during the previous year but
less than 80 years on the last day of the previous year.
A super senior citizen is a resident individual who is at least 80 years of age at any time during the previous
year.
A person born on 1st April would be considered to have attained a particular age on 31st March, the day
preceding the anniversary of his birthday. In particular, the question of attainment of age of eligibility for being
considered a senior/very senior citizen would be decided on the basis of above criteria.
Therefore, a resident individual whose 60 th birthday falls on 1st April, 20_ _ , would be treated as having
attained the age of 60 years in the P.Y.20_ _- _ _

Computation of Tax
Following concepts are relevant
1. Rate of Tax
2. Rebate
3. Surcharge
4. Marginal Relief
5. Health & Education cess
6. Advance tax paid
7. TDS
8. Self assessment tax
9. 288A - Rounding off of Total Income
10. 288B - Rounding off of tax etc.

Tax Rates For Individuals For Assessment Year 2022-23.
Individual (Age less than Senior Citizen (Age Super senior citizen (Age
60 years) (HUF, AOP, BOI, above 60 Years) (Must above 80 years) (Must be
AJP) be an Individual who is a an Individual who is a
resident of India) resident of India)
Up to Rs, 2,50,000 Nil Nil Nil
Rs. 2,50,000 to Rs. 5% Nil Nil

3,00,000
Rs. 3,00,000 to Rs. 5% 5% Nil

5,00,000
Rs. 5,00,000 to Rs. 20% 20% 20%

10,00,000
Above Rs. 10,00,000 30% 30% 30%
● Surcharge: 10% of income tax, where the total income exceeds Rs.50 lakh but does not exceed Rs.1 crore.
● Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore but does not exceed 2 Crores
● Surcharge : 25% of the income tax, where the total income exceeds 2 crore but does not exceed 5 crores
● Surcharge : 37% of the income tax, where the total income exceeds 5 Crore.
● Marginal relief (To be discussed in videos and classes)
● Cess - Health & Education Cess 4% of Income Tax
● Rebate u/s 87A
○ Allowed only to resident individual
○ Total Income is less than equal to Rs. 5,00,000
○ Rebate amount = Rs. 12,500 or tax payable whichever is less
○ One more point is there, we will study it later on. (Related to LTCG u/s 112A)
Rounding off of income.

288A. The amount of total income computed in accordance with the foregoing provisions of this Act shall be rounded off to the nearest
multiple of ten rupees and for this purpose any part of a rupee consisting of paise shall be ignored and thereafter if such amount is not
a multiple of ten, then, if the last figure in that amount is five or more, the amount shall be increased to the next higher amount which
is a multiple of ten and if the last figure is less than five, the amount shall be reduced to the next lower amount which is a multiple of
ten; and the amount so rounded off shall be deemed to be the total income of the assessee for the purposes of this Act.
Rounding off amount payable and refund due.

288B. Any amount payable, and the amount of refund due, under the provisions of this Act shall be rounded off to the nearest multiple
of ten rupees and for this purpose any part of a rupee consisting of paise shall be ignored and thereafter if such amount is not a
multiple of ten, then, if the last figure in that amount is five or more, the amount shall be increased to the next higher amount which is
a multiple of ten and if the last figure is less than five, the amount shall be reduced to the next lower amount which is a multiple of
ten.

Types of Company

Rates of tax on other entities

1. Firm / LLP / - 30%
a. Surcharge = 12% if income exceeds Rs. 1 Crore.
b. Cess - 4%
2. Local Authority - 30% | Cess 4 % | Surcharge same as Firm / LLP
3. Company
a. Domestic Company
i. AY 20 _ _ - _ _
1. Turnover of Financial Year _ _ - _ _ does not exceed Rs. 400 Crores - 25%
2. In other cases = 30%
3. In addition cess and surcharge is levied as follows:
a. Cess: 4% of corporate tax
b. Surcharge: Taxable income is more than 1Cr. but less than 10Cr.: 7% Taxable income
is more than 10Cr. :12%
In case of a domestic manufacturing company (set up and registered on or after 1.10.2019 and commences manufacture
of article or thing before 31.3.2023) exercising option u/s 115 BAB: 15% of income derived from or incidental to
manufacturing or production of an article or thing.
In case of a domestic company exercising option u/s 115 BAA: 22% of total income Domestic company can opt for section
115 BAA or section 115 BAB, as the case may be, subject to certain conditions.
The total income of such companies would be computed without giving effect to deductions under section 10AA, 32AD,
33AB, 33ABA, 35AD, 35CCC, 35CCD, 80-IA to 80RRB (except section 80JJAA or section 80M), additional depreciation under
section 32(1)(iia) etc. and without set-off of brought forward loss and unabsorbed depreciation attributable to such
deductions.
These sections will be dealt with in detail at Final Level.
b. Foreign Company
i. 40%
ii. Surcharge: (2/5) The amount of income-tax shall be increased by a surcharge at the rate of 2% of
such tax, where the total income exceeds one crore rupees but not exceeding ten crore rupees and
at the rate of 5% of such tax, where the total income exceeds ten crore rupees.
iii. Cess - 4%
4. Co-operative Society
a. Where the total income does not exceed Rs. 10,000 - 10% of Total Income
b. Where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000 - 1,000 plus 20% of the amount
by which the total income exceeds Rs. 10,000
c. Where the total income exceeds Rs. 20,000 - 3000 + 30% of the amount by which the total income exceeds
Rs. 20,000.
i. CESS - 4%
ii. Surcharge = 12% if income exceeds Rs. 1 Crore

Certain cases when income of a previous year will be assessed in the previous year itself
Income earned in a year is taxable in the next year. This is known as the previous year rule. However there are
certain exceptions in which income earned in a year is taxable in the same year.
1. Shipping business of non-resident [Section 172]
○ Where a ship, belonging to a non-resident, carries passengers, livestock, mail or goods shipped at
a port in India, the ship is allowed to leave the port only when the tax has been paid or
satisfactory arrangement has been made for payment thereof.
○ 7.5% of the freight paid or payable to the owner to any person on his behalf, whether in India or
outside India on account of such carriage is deemed to be his income which is charged to tax in
the same year in which it is earned.
2. Persons leaving India [Section 174]
○ Where it appears to the Assessing Officer that any individual may leave India during the current
assessment year or shortly after its expiry and
○ he has no present intention of returning to India,
○ Suppose Mr. X is leaving India for the USA on 10.6.20_ _ and it appears to the Assessing Officer
that he has no intention to return. Before leaving India, Mr. X will be required to pay income tax
on the income earned during the P.Y. 20 _ _ - _ _ as well as the total income earned during the
period 1.4.20 _ _ to 10.06.20 _ _
3. AOP / BOI / Artificial Juridical Person formed for a particular event or purpose
[Section 174A].
○ If an AOP/BOI etc. is formed or established for a particular event or purpose and

○ the Assessing Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or
in the next year,
○ he can make an assessment of the income up to the date of dissolution as income of the
relevant assessment year.
4. Persons likely to transfer property to avoid tax (Section 175)
○ During the current assessment year,

○ If it appears to the Assessing Officer that a person is likely to
➢ charge,
➢ sell,
➢ transfer,
➢ dispose of or
➢ otherwise part with any of his assets
○ to avoid payment of any liability under this Act,

○ the total income of such a person shall be assessed in the year in which it is earned.
5. Discontinued business [Section 176]
○ Where any business or profession is discontinued in any assessment year, the income of the
period from the expiry of the previous year up to the date of such discontinuance may, at the
discretion of the Assessing Officer, be charged to tax in that assessment year.


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These notes are incomplete without our videos. Study from these notes at your own risk.

Chapter-1 Introduction & Basics of Income Tax

Taxes are levied for common welfare.

Overview of the chapter

To get the best out of these notes visit www.neerajaroraclasses.com Basics | 1 of 21

● How government can collect tax ?- Article 265

The Constitution defines the powers and responsibilities of each organ.

In India we two main levels Central level (Union ) & State

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Level Legislative Organ Executive Organ Judicial Organ

Central Parliament President + Prime Minister Court

State State legislative Assembly Governor + Chief Minister Courts

What is the law ?

Why do we need law ?

Who makes the law ?

How Law is Made?

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How can the government collect taxes ?

Relationship between law, tax and constitution

Income tax Act, 1961.

Entry no. 82 is read as follows

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Paper Pattern discussion

Books which should be studied along with classes or videos

Minimum marks that you should score in tax = 60

Discussion over income tax act, 1961

Discussion on Finance Act.

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Administration of income tax

Sources of income tax law

4. Circulars & Notifications (Not so important for CA Inter)

5. Case Laws (Not so important for CA Inter) or Known as Judicial Decisions

Formation of Section / Clause / Subsection / Proviso / Explanation

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Overview of income tax (gti,ti ,etc)

What is gross total income?

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Previous year and Assessment Year

Previous Year - Section 3

Provided that, in the case of

Assessment year - Section 2(9)

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Person section 2(31)

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Assessee section 2(7)

● For example, A representative assessee is deemed to be an assessee under section 160.

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Charging Section - Section 4

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Senior Citizen and Super Senior Citizen

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Tax Rates For Individuals For Assessment Year 2022-23.

Up to Rs, 2,50,000 Nil Nil Nil

Rs. 2,50,000 to Rs. 5% Nil Nil

Rs. 3,00,000 to Rs. 5% 5% Nil

Rs. 5,00,000 to Rs. 20% 20% 20%

Above Rs. 10,00,000 30% 30% 30%

Rounding off of income.

Rounding off amount payable and refund due.