CS Executive Tax Laws MCQs, Notes

CS Executive Notes PDF – Basic Concepts of Income Tax

CS Executive Notes - Income Tax Chapter 2 (Basic Concepts of Income Tax)

Introduction to Income Tax Laws

Income tax laws are laws which deal with the taxation of the income of a person.  So, before starting income tax laws, it is important to know two things:

  1. What all we should study for complete understanding of income tax laws?
  2. Which income is considered as the income for the purpose of income tax?

From Income Tax point of view, we have to study following:
Income Tax Act, 1961
: It is our main law. It Contains provisions related to:

  • Determination of Residential Status,
  • Determination of Taxable Income and Tax Liabilities
  • Assessment of Taxable income
  • Filing of returns
  • Appeals, penalties, prosecutions etc.

Rules: Along with Income Tax Act, 1961, we have to study Income Tax Rules, 1962. It contains Procedures for proper implementation of the provisions of Income Tax Act, 1961. So, without the knowledge of income tax rules, knowledge of income tax act is incomplete.

For example according to Section 10 (13A) of Income Tax Act, 1961, HRA means House Rent Allowance is exempted to certain limit. That limit is prescribed under rule 2A of Income Tax Rules, 1962. 

Thus by reading Income Tax Act, 1961 only, u will know what is exempted but by reading Income Tax Rules, 1962 along with Income Tax Act, 1961, u will know what is exempted and how much is exempted.

Circulars: Under Income Tax Act, 1961 circulars are issued by CBDT (Central Board of Direct Taxes). Circulars are kind of official memos. Although circulars are only clarifications issued by CBDT to the officers of Income Tax department; they are not law but they provide us deep clarity in case of any doubt. By reading circulars we come to know how income tax officers are going to deal in a particular scenario.

Judicial Rulings: Income tax related landmark decisions of various courts and appellate tribunals.

See the difference between Act, Rules, Regulations, Circulars, Case Laws

Central Board of Direct Taxes and Central Board of Excise and Customs [CBDT/CBEC]

For proper administration and execution of the provisions of tax laws, under The Central Boards of Revenue Act, 1963, Central Government has constituted two separate Boards of Revenue.
  • Central Board of Direct Taxes (CBDT) for Direct Taxes, and
  • Central Board of Excise and Customs (CBEC) for Indirect Taxes
Each Board shall, subject to the control of the Central Government, exercise such powers and perform such duties, as may be entrusted to that Board by the Central Government. Central Board of Direct Taxes (CBDT) is the top most administrative authority for direct taxes and Central Board of Excise and Customs (CBEC) is the top most administrative authority for Indirect Taxes.

Amendments in Income Tax Act, 1961

Tax laws are directly related to the commercial activities of the people and revenue needs of the Government. Both of the above factors change frequently with the time. Therefore tax laws are also bound to change in the due course of time. 

Concept of Finance Act
These amendments in tax laws are introduced every year in the form of Finance Act. Every year (generally at the end of Feb) a budget is presented before the parliament by Finance Minister and one of the most important components of the budget is Finance Bill. This bill contains various amendments which are proposed to be made in the direct taxes and indirect taxes. This bill also mentions the rate of income tax.

First Schedule to Finance bill provides rates of income tax in 3 parts:

PART I
It gives the rates of income tax for various assessees for the current assessment year. Means it provides the rates of income tax for the income earned during the previous year. We can say that income tax rates prescribed in the Part 1 of Schedule 1 to any Finance Act are applicable on the income earned in the previous year.

For example, the Finance Act, 2021 has given the rates of income tax for assessment year 2021-22 (1st April, 2021 to 31st March, 2022). Here the previous year is 2020-21. Similarly, Finance Act, 2020 has given the rates of income tax for assessment year 2020-21 (1st April, 2020 to 31st March, 2021). Here the previous year is 2019-20. 

PART II
It gives the rates of deduction of tax at source (TDS) from the income earned in the current financial year.

For example, the Finance Act, 2021 has given the rates at which tax is to be deducted at source from the income which will be earned during financial year 2021-22 (during the period of 1st April, 2021 to 31st March, 2022).

PART III
It gives the rates of deduction of advanced tax on the income which will be earned during the current financial year. For example, the Finance Act, 2021 has given the rates for the computation of advance tax on the income which will be earned during the assessment year 2021-22 (1st April, 2021 to 31st March, 2022).

Amendments in Income Tax Rules, 1962

With the change in the provisions of Income Tax Act and government policies, Income Tax Rules are also bound to change. Under Section 295 of Income Tax Act, 1961, Central Board of Direct Taxes (CBDT), is authorised to make and amend rules by issuing notifications. CBDT can exercise this power subject to the control of the Central Government. Thus notifications issued by CBDT become the part of Income Tax Rules. In other words we can say the notifications issued by CBDT are collectively known as Income Tax Rules.

It should be noted the CBDT has no power to amend Income Tax Act. This can be done only by parliament by passing finance act.

Concept of Income under Income Tax Act, 1961

Meaning of Income
As we have discussed that income tax is a tax on the income of a person. Therefore it should be very clear that “Which income shall be considered as income for the purpose of Income Tax?”

The term “income” is defined u/s 2(24) of Income Tax Act, 1961. It is an inclusive definition and contains a long list of incomes which shall be considered as income under income tax laws. Thus the list of incomes specified under section 2(24) is not the conclusive one. Other incomes may be considered as income under income tax laws if such income either comes within the general meaning of income or is expressly considered as income under any of the provisions of Income Tax Act, 1961.

In general, income means cash actually received from a source which has the potential to generate periodical earning for a considerable period of time. For example by doing job or business, by providing professional services, by making investments or by letting out property on rent, one can generate periodical earning for a considerable period of time. Mere windfall income like income from gambling, horse racing etc. cannot be considered as income in normal life because such income depends entirely upon the luck and there is no permanency in such income.

Thus we can say that any type of income can be considered as income under income tax act, if such receipt is not specifically excluded from the scope of income under the provisions of income tax laws.

Application of Income vs. Diversification of Income

Application of Income
Suppose Mr. Aallu got a teaching job in a school. He did not take his first salary. School showed his salary as donation by Mr. Aallu to the school. This is application or you can say utilisation of income for the purpose of donation. Such income is completely taxable. Here, he had foregone his salary after it got accrued and became due. And forgoing of income after it comes into existence is considered as application of income.

Once you get the right to receive the income, government gets the right to impose the taxes on such income. Now whether you utilize that income for your personal purpose or you donate that income to someone or you lose that income in some other way, it’s your personal matter. J And government is least concerned with your personal matters.

Diversification of Income
Suppose Mr. Aallu joined a school as a teacher with the condition that he will not take any salary from the school. Here, salary or right to receive salary never came into existence. This is diversification of income before the income is accrued or become due. In this case there is no taxable income as no income actually comes into existence.

Difference between Exemptions and Deductions

Under Income Tax Laws, all incomes are not taxable. Some incomes are exempted from tax and some incomes are taxable but they are allowed to be deducted from the total income subject to certain conditions.

Exemption means a particular income is not to be included in the gross income.

Deduction means a particular income shall first be included in the gross income and then some portion of that income is allowed to be deducted from the gross income if certain conditions are satisfied.  

Multiple Choice Questions (MCQs)


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Which is the most superior Law?
Income Tax Act, 1961, came into force on
Income Tax Act, 1961, extends to
Which of the following is not law?
Amendments in Income Tax Act, 1961 are done by
Amendments in Income Tax Rules, 1962 are done by
_____________ to Finance bill provides rates of income tax in 3 parts:
_____________ gives the rates of income tax for various assessees for the current assessment year.
The term income is defined under:
CBDT is constituted under:
CBDT is responsible for administration of:

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