Basics of Income Tax Act
Basic Concepts, Basis of Charge and
1.1
Capital & Revenue Receipts
“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from
I
the Earth to give it back a thousand folds” – Kalidas in Raghuvansh eulogizing King Dalip
ncome Tax has been in force in different forms since years. If we go through the history of India, we get
relevant information regarding the taxation system of India. In ancient history, it is mentioned about such
system which was imposed on the income, expenditure and other subject. When most of the European
civilization were in hopping stage, the Maurya Empire in India had a well-developed taxation policy.
Kautilya, a minister in the Maurya Empire, had wrote book (Arthashastra) on taxation around 327 B.C., is good
evidence of contemporary Indian thinking on State administration, economics and fiscal policy. In modern India,
income tax was introduced for the first time in 1860 by Sir James Wilson in order to meet the losses sustained by
the Government on account of the Military Mutiny of 1857. The Act was replaced with new Act from time to time
and the present the Income-tax Act, 1961 comes into force from 01/04/1962.
Why Taxation
In a Welfare State, the Government takes primary responsibility for the welfare of its citizens, as in matters of
health care, education, employment, infrastructure, social security and other development needs. To facilitate
these, Government needs revenue. Taxation is the primary source of revenue to the Government for incurring such
public welfare expenditure. In other words, Government is taking taxes from the public through its one hand and
through another hand; it incurs welfare expenditure for public at large. However, no one enjoys handing over his
hard-earned money to the government to pay taxes. Thus, taxes are compulsory or enforced contribution to the
Government revenue by public. The government may levy taxes on income, business profits or wealth or add it
to the cost of some goods, services, and transactions.
Basic Reasons to impose taxation
• To provide basic facilities for every citizen of the country: Whatever money is received by the government
from taxation is spent by it for the welfare of the citizens of the country. Some of the services provided by the
government are: health care, electricity, roads, education system, free houses for the poor, water supply, police,
firefighters, judiciary system, disaster relief, taking care of bridges and other things of public welfare.
• To finance multiple governments: All the local governments of the state like village panchayats, block
panchayats and municipal corporations receive funds from the finance commission.
• Protection of the life: Taxpayers receive the protection of life and wealth from the government in case of
external aggression, internal armed rebellion or any other situation.
The Institute of Cost Accountants of India 3
,Direct Taxation
Direct Tax & Indirect Tax
There are two types of taxes: Direct Tax and Indirect Tax
Tax, of which incidence and impact fall on the same person,
is known as Direct Tax, such as Income Tax. On the other
hand, tax, of which incidence and impact fall on two
different persons, is known as Indirect Tax, such as GST,
etc. It means, in the case of Direct Tax, tax is recovered
directly from the assessee, who ultimately bears such taxes,
whereas in the case of Indirect Tax, tax is recovered from
the assessee, who passes such burden to another person &
is ultimately borne by consumers of such goods or services.
Type of Taxation
Direct Tax Indirect Tax
● Incidence and impact fall on the ● Incidence and impact fall on two different persons
same person
● Tax is recovered from the assessee, who passes such burden to another
● Assessee, himself bears such person. Thus, it does not pinch the taxpayer.
taxes. Thus, it pinches the
● Levied on goods and services. Thus, this type of tax leads to inflation
taxpayer.
and have wider base.
● Levied on income
● E.g. GST, Customs Duty, etc.
● E.g. Income Tax
● Regressive in nature i.e., all persons will bear equal wrath of tax on
● Progressive in nature i.e., higher goods or service consumed by them irrespective of their ability.
tax are levied on person earning
● Useful tool to promote social welfare by checking the consumption of
higher income and vice versa.
harmful goods or sin goods through higher rate of tax.
Direct tax: Progressive in nature Indirect Tax: Regressive in nature
Constitutional Validity of Taxes
The Constitution of India is the supreme law of India. Any tax law, which is not in conformity with the Constitution,
is called ultra vires the Constitution and held as illegal and void.
Some of the provisions of the Constitution are given below:
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. It
means the tax proposed to be levied must be within the legislative competence of the legislature imposing the tax*.
Article 246 read with Schedule VII divides the subject matter of law made by the legislature into three categories:
* Kunnathat Thathunni Moopil Nair –vs.- The State of Kerala 1961 AIR 552 (SC)
4 The Institute of Cost Accountants of India
, Basics of Income Tax Act
• Union list (only the Central Government has the power of
legislation on subject matters covered in the list)
• State list (only the State Government has the power of legisla-
tion on subject matters covered in the list)
• Concurrent list (both Central & State governments can
pass legislation on subject matters).
If a state law relating to an entry in List III is repugnant to a Union
law relating to that entry, the Union law will prevail, and the state
law shall, to the extent of such repugnancy, be void. (Article 254).
Following major entries in the respective list enable the legislature to make law on the matter:
Union List (List I) Entry 82 - Taxes on income other than agricultural income i.e. Income-tax
State List (List II) Entry 46 - Taxes on agricultural income.
Administration of Tax Laws
The administrative hierarchy of tax law is as follows:
Taxpoint:
Both of the Boards have been
constituted under the Central
Board of Revenue Act, 1963.
CBDT deals with levy and
collection of all direct tax
whereas matters relating to levy
and collection of Central indirect
tax are dealt by CBIC.
If any difficulty arises in giving
effect to the provisions of this Act the Central Government may, by general or special order, do anything not
inconsistent with such provisions which appears to it to be necessary or expedient for the purpose of removing
the difficulty [Sec. 298]
Sources or Component of Income Tax Law in India
1. Income tax Act, 1961 (Amended up to date) [Provides What to do?]
The provisions of income tax extend to the whole of India and became effective from 1/4/1962 (Sec. 1). The Act
contains provisions for:
(a) determination of taxable income;
(b) determination of tax liability;
(c) procedure for assessment, appeals,
penalties and prosecutions; and
Sources of Income Tax
(d) powers and duties of Income-tax
authorities.
The Institute of Cost Accountants of India 5
Basic Concepts, Basis of Charge and
1.1
Capital & Revenue Receipts
“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from
I
the Earth to give it back a thousand folds” – Kalidas in Raghuvansh eulogizing King Dalip
ncome Tax has been in force in different forms since years. If we go through the history of India, we get
relevant information regarding the taxation system of India. In ancient history, it is mentioned about such
system which was imposed on the income, expenditure and other subject. When most of the European
civilization were in hopping stage, the Maurya Empire in India had a well-developed taxation policy.
Kautilya, a minister in the Maurya Empire, had wrote book (Arthashastra) on taxation around 327 B.C., is good
evidence of contemporary Indian thinking on State administration, economics and fiscal policy. In modern India,
income tax was introduced for the first time in 1860 by Sir James Wilson in order to meet the losses sustained by
the Government on account of the Military Mutiny of 1857. The Act was replaced with new Act from time to time
and the present the Income-tax Act, 1961 comes into force from 01/04/1962.
Why Taxation
In a Welfare State, the Government takes primary responsibility for the welfare of its citizens, as in matters of
health care, education, employment, infrastructure, social security and other development needs. To facilitate
these, Government needs revenue. Taxation is the primary source of revenue to the Government for incurring such
public welfare expenditure. In other words, Government is taking taxes from the public through its one hand and
through another hand; it incurs welfare expenditure for public at large. However, no one enjoys handing over his
hard-earned money to the government to pay taxes. Thus, taxes are compulsory or enforced contribution to the
Government revenue by public. The government may levy taxes on income, business profits or wealth or add it
to the cost of some goods, services, and transactions.
Basic Reasons to impose taxation
• To provide basic facilities for every citizen of the country: Whatever money is received by the government
from taxation is spent by it for the welfare of the citizens of the country. Some of the services provided by the
government are: health care, electricity, roads, education system, free houses for the poor, water supply, police,
firefighters, judiciary system, disaster relief, taking care of bridges and other things of public welfare.
• To finance multiple governments: All the local governments of the state like village panchayats, block
panchayats and municipal corporations receive funds from the finance commission.
• Protection of the life: Taxpayers receive the protection of life and wealth from the government in case of
external aggression, internal armed rebellion or any other situation.
The Institute of Cost Accountants of India 3
,Direct Taxation
Direct Tax & Indirect Tax
There are two types of taxes: Direct Tax and Indirect Tax
Tax, of which incidence and impact fall on the same person,
is known as Direct Tax, such as Income Tax. On the other
hand, tax, of which incidence and impact fall on two
different persons, is known as Indirect Tax, such as GST,
etc. It means, in the case of Direct Tax, tax is recovered
directly from the assessee, who ultimately bears such taxes,
whereas in the case of Indirect Tax, tax is recovered from
the assessee, who passes such burden to another person &
is ultimately borne by consumers of such goods or services.
Type of Taxation
Direct Tax Indirect Tax
● Incidence and impact fall on the ● Incidence and impact fall on two different persons
same person
● Tax is recovered from the assessee, who passes such burden to another
● Assessee, himself bears such person. Thus, it does not pinch the taxpayer.
taxes. Thus, it pinches the
● Levied on goods and services. Thus, this type of tax leads to inflation
taxpayer.
and have wider base.
● Levied on income
● E.g. GST, Customs Duty, etc.
● E.g. Income Tax
● Regressive in nature i.e., all persons will bear equal wrath of tax on
● Progressive in nature i.e., higher goods or service consumed by them irrespective of their ability.
tax are levied on person earning
● Useful tool to promote social welfare by checking the consumption of
higher income and vice versa.
harmful goods or sin goods through higher rate of tax.
Direct tax: Progressive in nature Indirect Tax: Regressive in nature
Constitutional Validity of Taxes
The Constitution of India is the supreme law of India. Any tax law, which is not in conformity with the Constitution,
is called ultra vires the Constitution and held as illegal and void.
Some of the provisions of the Constitution are given below:
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. It
means the tax proposed to be levied must be within the legislative competence of the legislature imposing the tax*.
Article 246 read with Schedule VII divides the subject matter of law made by the legislature into three categories:
* Kunnathat Thathunni Moopil Nair –vs.- The State of Kerala 1961 AIR 552 (SC)
4 The Institute of Cost Accountants of India
, Basics of Income Tax Act
• Union list (only the Central Government has the power of
legislation on subject matters covered in the list)
• State list (only the State Government has the power of legisla-
tion on subject matters covered in the list)
• Concurrent list (both Central & State governments can
pass legislation on subject matters).
If a state law relating to an entry in List III is repugnant to a Union
law relating to that entry, the Union law will prevail, and the state
law shall, to the extent of such repugnancy, be void. (Article 254).
Following major entries in the respective list enable the legislature to make law on the matter:
Union List (List I) Entry 82 - Taxes on income other than agricultural income i.e. Income-tax
State List (List II) Entry 46 - Taxes on agricultural income.
Administration of Tax Laws
The administrative hierarchy of tax law is as follows:
Taxpoint:
Both of the Boards have been
constituted under the Central
Board of Revenue Act, 1963.
CBDT deals with levy and
collection of all direct tax
whereas matters relating to levy
and collection of Central indirect
tax are dealt by CBIC.
If any difficulty arises in giving
effect to the provisions of this Act the Central Government may, by general or special order, do anything not
inconsistent with such provisions which appears to it to be necessary or expedient for the purpose of removing
the difficulty [Sec. 298]
Sources or Component of Income Tax Law in India
1. Income tax Act, 1961 (Amended up to date) [Provides What to do?]
The provisions of income tax extend to the whole of India and became effective from 1/4/1962 (Sec. 1). The Act
contains provisions for:
(a) determination of taxable income;
(b) determination of tax liability;
(c) procedure for assessment, appeals,
penalties and prosecutions; and
Sources of Income Tax
(d) powers and duties of Income-tax
authorities.
The Institute of Cost Accountants of India 5
