Basic Concepts of Income Tax – Part I

Covering source of income tax and charge of income tax


Updated upto A.Y.2019-20 

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. The taxation is the primary source of revenue to the Government for incurring such public welfare expenditure. In other words, Government is taking taxes from 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. Government may levy taxes on income, business profits or wealth or add it to the cost of some goods, services, and transactions.

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.Basic Concepts of Income Tax - Part I

Constitutional Validity of Taxes

Constitutional Source

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 tax proposed to be levied must be within the legislative competence of the legislature imposing the tax.
Article 245 of the Constitution states:

  1. Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.
  2. No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.
Also Read  Basic Concepts of Income Tax - Part III

Article 246 read with Schedule VII divides subject matter of law made by legislature into three categories:

List IUnion list (only Central Government has power of legislation on subject matters covered in the list)
List II State list (only State Government has power of legislation on subject matters covered in the list)
List IIIConcurrent list (both Central & State Government 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).

Entry 82 to the Union List empowers Central Government to levy tax on income other than agricultural income. By virtue of that power, Central Government has enacted Income Tax Act, 1961.

Central Board of Direct Tax (CBDT) working under Department of Revenue, Ministry of Finance is the administrative body of the Direct-tax laws.

Income tax Act, 1961 (Amended up to date)

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:

  • determination of taxable income;
  • determination of tax liability;
  • procedure for assessment, appeals, penalties and prosecutions; and
  • powers and duties of Income tax authorities.
Annual Amendments
  • Income tax Act has undergone several amendments from the time it was originally enacted through the Union Budget. Every year, a Finance Bill is presented before the Parliament by the Finance Minister. The Bill contains various amendments which are sought to be made in the areas of direct and indirect taxes levied by the Central Government.
  • When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the President, it becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in the Income Tax Act.
  • If on the 1st day of April of the Assessment Year, the new Finance Act has not been enacted, the provisions in force in the preceding Assessment Year or the provisions proposed in the Finance Bill before the Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become effective [Sec. 294]
Besides these amendments, whenever it is found necessary, the Government introduces amendments in the form of various Amendment Acts and Ordinances.
Income tax Rules, 1962 (Amended up to date)
  • As per Sec. 295, the Board may, subject to the control of the Central Government, make rules for the whole or any part of India for carrying out the purposes of the Act.
  • Such rules are made applicable by notification in the Gazette of India.
  • These rules were first made in 1962 and are known as Income tax Rules, 1962.
  • Since then, many new rules have been framed or existing rules have been amended from time to time and the same has been incorporated in the aforesaid rules.
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Circulars and Clarifications by CBDT
  • U/s 119, the Central Board of Direct Taxes may issue certain circulars and clarifications from time to time, which have to be followed and applied by the Income tax authorities.

Effect of circulars: These circulars or clarifications are binding upon the Income tax authorities, but the same are not binding on the assessee. However, assessee can claim benefit under such circulars.These circulars are not binding on the Income Tax Appellate Tribunal or on the Courts.

Judicial decision
  • Decision of the Supreme Court: Any decision given by the Supreme Court shall be applicable as law till there is any change in law by the Parliament. Such decision shall be binding on all the Courts, Tribunals, Income tax authorities, assessees, etc.
  • Decisions given by a High Court or ITAT: Decisions given by a High Court or ITAT are binding on all assessees and Income tax authorities, which fall under their jurisdiction, unless it is over ruled by a higher authority.

As per sec. 2(25A), “India” means

  • the territory of India as referred to in article 1 of the Constitution,
  • its territorial waters, seabed and subsoil underlying such waters,
  • continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and
  • the air space above its territory and territorial waters

Charge of Income-tax (Sec. 4)

Income of the previous year of a person is charged to tax in the immediately following assessment year.

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