SM Chp - 01

Basics of Income Tax

Power to levy taxes

❖ Article 265 of the Constitution of India provides that “no tax shall be levied or collected except
by authority of law”. Thus, to levy any tax, a law needs to be framed by the government.

Every Law made is categorised into 3 lists as per Seventh Schedule to Article 246

Union List [List I] State List [List II] Concurrent List [List III]

All Laws made by Parliament Laws made by Legislature Laws made by Parliament
of States (+) State in concurrence

Entry 82 – Taxes on
Entry 46 – Taxes on Goods & Services
Income, other than
Agricultural Income Tax (GST)
Agricultural Income

Types of Taxes
Direct Taxes Indirect Taxes
a) Taxes levied directly on the income or wealth a) Taxes levied on price of goods or service
of a person
b) Burden of tax cannot be shifted to another b) Person paying the tax passes on the incidence
person to another person
c) Progressive in nature. i.e., higher income, c) Regressive in nature. i.e., impacts every
higher the proportion of taxes thereby customer regardless of their income, thereby
reducing inequalities further enhancing inequalities
d) Eg: Income tax, Equalisation levy d) Eg: GST. Customs Duty

Components of Income Tax Law

Income Tax Act, Annual Finance Act Judicial

1961 Income Tax Rules, Circulars / Precedents
1962 Notifications

Legislative Body Administrative Body Judicial Body

(Parliament) (CBDT) (Court/Tribunals)

A. Income Tax Act, 1961

❖ It extends to whole of India
❖ Contains Sections 1 to 298 and Schedules I to XIV.
❖ All Amendments made in Income Tax Act is by way of Annual Finance Acts and other legislations
like Taxation Laws (Amendment) Act passed by Parliament

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B. Income Tax Rules, 1962

❖ Administrative body of Direct Taxes is Central Board of Direct Taxes (CBDT)
❖ Power to issue rules under Income Tax Act lies with CBDT
❖ While Act provides for intention of law enacted, Rules provides for proper administration of the
Act.

C. Annual Finance Act

Bill approved by Rajya Sabha
Finance Bill is introduced by the is presented before the
finance minister and later President for his consent.
approved by the members President

Lok Sabha

Rajya Sabha

• Bill is introduced in the second Official Gazette

House for Second reading.
• Rajya Sabha has the powers to
accept, recommend Lok Sabha to
make changes or reject the Bill
Finance Bill becomes an
Act and presented in the
Official Gazette

Amendments made through

Finance Act are read along
with Income Tax Act

Rate of Income Tax Applicable for a Particular AY is mentioned in First Schedule of Finance Act
Part I: Rate of Income Tax of previous Assessment Year i.e. AY 2022-23
Part II: Rate of TDS for relevant Financial Year i.e. FY 2022-23 (AY 2023-24)
Part III: Rate of Income Tax for relevant Financial Year i.e. FY 2022-23 (AY 2023-24)
Part IV: Rules for computing Net Agricultural Income
Note: Amendments applicable for AY 2023-24 are laid down in Finance Act, 2022

D. Circulars / Notifications
Circulars Notifications
a) Issued by CBDT a) Issued by CBDT or by Central Govt.
b) Deals with specific problems or clarifying doubts b) Gives effect to specific provisions of the Act
regarding scope and meaning of any provision in (Eg; notifying persons, sectors etc.) or to
the Act. modify Income Tax Rules.
c) Binding only on the Department. (Assessee can c) Binding on both Assessee and Department
also take advantage of beneficial circulars)

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E. Judicial Precedents
In case of ambiguity or issues in implementation of law, decisions passed by Court/Tribunals can be
relied upon when facts in both the case are similar
➢ Decision of Supreme Court (SC) is the “law of the land” and binding on whole of India unless the
Act is amended
➢ Decision of High Court (HC) is binding only on the jurisdictional state unless overruled by SC

I. Relevant Definitions
A. India [Sec 2(25A)]: means:
✓ Territory of India (States and Union Territory)
✓ Territorial Waters of India, seabed & subsoil underlying such waters (Upto 12 Nm from base line)
✓ Continental Shelf & Exclusive Economic zone (13 - 200 Nm from base line)
✓ Any other specified maritime zone & air space above its territory & Territorial Waters.

B. Person [Sec 2(31)]: includes:

Individual

Artificial
Juridical HUF
Person

Person
Local
Company
Authority

AOP/BOI Firm

C. Assessee [Sec 2(7)]: means a person by whom tax or any other sum is payable under the Act and
includes:
→ Every person in respect of whom any proceedings under this Act has been taken for assessment
of his income (or) income of any other person for which he is assessable (or) loss sustained by
him or such other person (or) refund due to him or such other person
→ Every person deemed to be an assessee or “Assessee in default” under any provisions of the Act

Notes:
1. Any other sum refers to interest, penalty, H&E cess, TDS or TCS payable under the Act
2. Income of any other person refers to cases where he is a representative assessee. Eg: Legal Heir,
Partner or director of the firm

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3. “Assessee in default” arises in cases where a person fails to deduct / remit TDS or TCS or pay
advance tax within the prescribed time limits.

D. Assessment [Sec 2(8)]: Procedure by which income of an assessee is determined by the Assessing
Officer.

E. Income: Income is defined u/s 2(24) as an “inclusive” definition which covers within its ambit all
incomes discussed in subsequent chapters.

Note:
1. Income is taxable irrespective of whether received regularly or once in a lifetime. E.g., lottery
2. Income generally refers to net receipts [Gross Income (-) Deduction allowable]. However, in
exceptional cases, whole of gross receipt shall be taxable without allowing any deduction or
expense Eg: Winnings taxable u/s 115BB
3. Income can be in the form of cash or in kind
4. Income from illegal sources is also taxable. However, these may be subject to higher rates &
penalties

➢ Distinguishing Capital Receipt & Revenue Receipt

Particulars Revenue Receipt Capital Receipt
Meaning Income from circulating capital Income from assets which owner keeps in
which is turned over to yield his possession for making profits i.e.
income or loss in the process receipt referrable to fixed capital
Tests to be applied
- Course of business Profits arising from transaction Gains from transaction outside the
undertaken regularly in business normal dealings of business
or incidental to or associated to
the business
- Shares/Security Acquired in ordinary course as Acquired as investor with intention of
dealer in shares (except FII) acquiring controlling interest, obtaining
managing or selling agency, directorship
in the profit or loss on their sale
Taxability Always Taxable Taxable only if covered in Sec 2(24)

➢ Determining Capital receipt & Revenue Receipt

Transaction Nature of receipt
✓ Liquidated damages received for delay in procurement of capital asset Capital
✓ Compensation received for termination of agency business being only Capital
income source

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Transaction Nature of receipt

✓ Compensation received for termination of one agency business out of
various agencies held Revenue
✓ Compensation for premature termination of employment Capital
✓ Compensation for termination or modification of business contracts Capital
✓ Gifts received Capital

II. Charge of Income Tax [Sec 4] E B

Income Tax shall be charged on the total income earned by a person during the Previous year, at the
rates in force and shall be assessable in the Assessment Year A
C D

A. Assessment Year [Sec 2(9)]: means period of 12 months commencing on 1st April every year. Year in
which income is earned is previous year and as such is taxable in the immediately following year
which is termed as Assessment Year. For eg: Income earned in PY 2022-23 is taxable in AY 2023-24

B. Previous year [Sec 3]: means FY immediately preceding the AY. This is the year in which activities
which are to be assessed are carried out.
✓ Under Income Tax, PY & AY are always recognized from April – March. Entities following different
reporting year will be required to align their accounts for the limited purpose of determining and paying
taxes.
✓ PY may or may not be a complete period of 12 months (e.g., in case of new business/profession, PY shall
be from date of setting up). However, AY shall always be 12 months.

C. Rates in Force: Income is chargeable to tax at the rates prescribed in First Schedule of the Finance
Act.
Exception: In case income is taxable at special rates provided in the Income Tax Act, same shall
override.

D. Assessable: Generally Income of PY is assessable in its AY. However, in the following cases, Income of
PY shall be assessable in the PY itself (i.e. PY & AY will be same)
a) Ship of a Non-Resident entering into India, will be permitted to leave the Indian port only after
taxes has been paid @ 7.5% for the freight earned for carriage in India [Sec 172]
b) Individual leaving India with no present intention of returning back [Sec 174]
c) If AOP/BOI/AJP formed for a particular purpose is likely to be dissolved in the same year itself
[Sec 174A]
d) If Person is likely to charge, sell, transfer, dispose of or part with his asset to avoid payment of
his liability under this Act [Sec 175]
e) If a business or profession is discontinued [Sec 176]

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E. Format of presentation of Total Income

Particulars ₹
Income from Salaries [Sec 15 – 21] xxx
Income from House Property [Sec 22 – 27] xxx
Profits and Gains of Business or Profession [Sec 28 – 44DB] xxx
Capital Gains [Sec 45 – 55A] xxx
Income from Other Sources [Sec 56 – 59] xxx
Income from all Heads xxx
Less: Brought Forward losses / Unabsorbed Depreciation [Sec 70 – 79] (xxx)
Gross Total Income xxx
Less: Chapter VI-A deduction [Sec 80 – 80U] (xxx)
Less: Deduction u/s 10AA (xxx)
Total Income (rounded off to nearest ₹ 10) xxx .

Yesterday is History, Tomorrow is a Mystery,

But Today is a Gift.
That is why it’s called the PRESENT
- Master Oogway

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