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Practice MCQsCA InterTaxation - Income-tax Law

Income-tax Basics: Constitution, Levy & Capital vs Revenue

12 min read14 October 20260 viewsConferenza Conferenza

The Income-tax Act, 2025 rests on three foundational pillars: the constitutional authority to levy tax, the statutory definition of what counts as income, and the ability to distinguish capital receipts from revenue. Get these wrong in the exam and you will bleed marks across assessment questions. This article walks you through the essential concepts that the examiner tests repeatedly—backed by 18 real, exam-standard MCQs.

Constitutional Authority & the Principle of Legality

Article 265 of the Constitution of India is the governing principle: no tax shall be levied or collected except by authority of law. This is not optional or advisory. It means the government cannot arbitrarily impose a tax; Parliament must pass legislation first. The Income-tax Act itself is that enabling law. Understand this as the backbone of Indian tax administration: legality trumps convenience.

Under Entry 82 of the Union List (List I) of the Seventh Schedule, Parliament holds the sole power to make laws on taxes on income other than agricultural income. This is a constitutional allocation of power, not a delegation. State Legislatures cannot levy income-tax on non-agricultural income—they would be acting ultra vires.

The Income-tax Act, 2025 came into force on 1st April, 2026 and extends to the whole of India. This Act now governs all income-tax assessment, collection and administration.

The Scope of Income-tax: Capital vs Revenue

The Income-tax Act is fundamentally an Act that taxes income, not capital. A capital receipt—money you receive as a return of or addition to your capital—is not taxable unless it falls within a specific head of income defined in the Act. Conversely, a revenue receipt (or income receipt) is taxable because it is earned periodically and represents a gain from your assets or efforts.

The real challenge is classification. No single universal test exists for deciding whether a receipt is capital or revenue in nature. The answer depends entirely on the facts and circumstances of each case. Ask yourself:

  • Is this receipt referable to fixed capital (e.g., land, plant) or circulating capital (e.g., stock in trade)?
  • Is it periodic or a one-off gain?
  • Did it arise from the use of a capital asset, or from the capital asset itself?

A receipt referable to fixed capital is typically a capital receipt. A receipt referable to circulating capital is typically a revenue receipt. For example, if you sell inventory, it is revenue; if you sell the factory building, it is capital (though capital gains tax applies separately under the Act).

Agricultural Income: Definition & Scope

Section 2(5) defines agricultural income narrowly: rent or revenue derived from land situated in India and used for agricultural purposes. Three conditions must be met:

  1. The income must be rent or revenue (not salary or interest).
  2. The land must be situated in India.
  3. The land must be used for agricultural purposes.

Income from agricultural land outside India (e.g., Sri Lanka) is fully taxable as income under the Act, not exempt. Salary paid to a farm manager, dividends from a company, or interest on a farm loan are not agricultural income—they fall under other heads.

Rent received by a tenant (not the owner) from a sub-tenant is agricultural income if the land is used for agriculture. Ownership is not a prerequisite. Similarly, fees received for renewal of a grant of agricultural land on lease constitute revenue derived from land and are classified as agricultural income.

Basic Exemption Limits & Tax Slabs (A.Y. 2026-27)

Under the default tax regime (section 202(1)), the tax structure for individuals in A.Y. 2026-27 is as follows:

Up to ₹4,00,0000%
₹4,00,001 – ₹8,00,0005%
₹8,00,001 – ₹12,00,00010%
₹12,00,001 – ₹16,00,00015%
₹16,00,001 – ₹20,00,00020%
₹20,00,001 – ₹24,00,00025%
Above ₹24,00,00030%

Key points:

  • The basic exemption limit is ₹4,00,000 (no tax payable up to this amount).
  • The highest slab rate is 30%.
  • These figures apply to the default regime. Always verify the latest published slabs against the current Finance Act before your exam.

Components of Income-tax Law in India

Income-tax law in India is built from several layers:

  • The Income-tax Act, 2025 (the primary statute).
  • The Annual Finance Act (amends rates, thresholds and rules each year).
  • Income Computation and Disclosure Standards (ICDS) (standardise computation methods).
  • Circulars and Notifications (issued by the Central Board of Direct Taxes, clarify interpretation).
  • Legal decisions of courts (bind lower courts and inform practice).

Note: The Central Goods and Services Tax Act (CGST) is a separate indirect tax law and is NOT a component of income-tax law.

Practice Questions

Q1. Article 265 of the Constitution of India lays down a fundamental principle governing the levy of taxes in India. Which of the following correctly states that principle?

  1. Taxes may be levied by an executive order of the Central Government
  2. Only the Parliament, and never a State Legislature, may levy any tax
  3. No tax shall be levied or collected except by authority of law
  4. Taxes may be collected without legislation during a financial emergency
Show answer & explanation

Correct answer: C. Article 265 enshrines the principle of legality: every tax must rest on statutory authority. The government cannot collect tax by executive fiat, even in emergencies. This is a constitutional safeguard against arbitrary taxation.

Q2. Under the default tax regime u/s 202(1) for A.Y. 2026-27, up to what amount of total income is no tax payable by an individual (basic exemption limit)?

  1. Rs 4,00,000
  2. Rs 3,00,000
  3. Rs 2,50,000
  4. Rs 5,00,000
Show answer & explanation

Correct answer: A. The basic exemption limit for A.Y. 2026-27 under the default regime is ₹4,00,000. No tax is payable on total income up to this amount. This is a volatile figure that changes annually; always cross-check with the latest Finance Act.

Q3. Under section 2(5), which of the following is included in the meaning of "agricultural income"?

  1. Rent or revenue derived from land situated in India and used for agricultural purposes
  2. Dividend from a company carrying on agricultural operations
  3. Salary paid to a farm manager
  4. Interest on a loan advanced to a farmer
Show answer & explanation

Correct answer: A. Section 2(5) defines agricultural income as rent or revenue derived from land situated in India used for agriculture. Dividends, salaries, and interest are not agricultural income—they fall under other heads of income. The word "revenue" is key: it must flow from the land itself.

Q4. The Income-tax Act contemplates a levy of tax on:

  1. Both income and capital equally
  2. Income, and not on capital
  3. Capital, and not on income
  4. Only casual capital receipts
Show answer & explanation

Correct answer: B. The Income-tax Act is fundamentally an Act that taxes income. Capital receipts are generally not taxable unless they fall within a specific definition of income in the Act (such as capital gains under section 45). Do not confuse the Act's scope with the broader tax framework, which includes capital gains tax, GST, and stamp duty.

Q5. The Constitution grants the power to make laws on taxes on income other than agricultural income to a specific legislature through a particular entry in the Seventh Schedule. Which authority holds this power?

  1. Parliament, under Entry 82 of the Union List (List I)
  2. The State Legislatures, under the State List (List II)
  3. Both Parliament and State Legislatures, under the Concurrent List (List III)
  4. The Central Board of Direct Taxes, by delegated authority
Show answer & explanation

Correct answer: A. Entry 82, Union List gives Parliament alone the power to legislate on income-tax (other than agricultural income). States cannot levy income-tax on non-agricultural income—this is a rigid constitutional boundary, not a delegation that can be shared or transferred.

Q6. Under the default tax regime u/s 202(1) for A.Y. 2026-27, the slab of total income from Rs 4,00,001 to Rs 8,00,000 is chargeable to tax at what rate?

  1. 10%
  2. 5%
  3. 15%
  4. Nil
Show answer & explanation

Correct answer: B. Income from ₹4,00,001 to ₹8,00,000 is taxed at 5% under the default regime for A.Y. 2026-27. This is the first bracket above the exemption limit. Remember, only the amount within each slab is taxed at that rate; the calculation uses progressive brackets.

Q7. Mr. P owns agricultural land in Sri Lanka. Income derived from agricultural operations carried out on such land is:

  1. Exempt as agricultural income
  2. Fully taxable, since the land is not situated in India
  3. Partly agricultural income and partly taxable
  4. Exempt up to Rs. 5,000 only
Show answer & explanation

Correct answer: B. Section 2(5) requires that land be situated "in India" to qualify as agricultural income. Income from land outside India, no matter how agricultural, is fully taxable as income from other sources or business income, as applicable. Territorial requirement is non-negotiable.

Q8. A capital receipt is chargeable to income-tax:

  1. In every case, as all receipts are income
  2. Never, under any circumstances
  3. Only if it falls within the scope of the definition of income
  4. Only if received in cash and not in kind
Show answer & explanation

Correct answer: C. A capital receipt is not taxable in itself, but the Act contains specific provisions (e.g., section 45 on capital gains) that treat certain capital receipts as income. The form of receipt (cash vs kind) is irrelevant. Always ask: does this fall within a statutory definition of income?

Q9. A student is listing the instruments that together make up income-tax law in India. Which of the following is NOT recognised as a component of income-tax law?

  1. The Annual Finance Act
  2. The Central Goods and Services Tax Act
  3. Circulars and Notifications
  4. Legal decisions of courts
Show answer & explanation

Correct answer: B. The CGST Act is a separate indirect tax statute. It has no place in income-tax law. Do not conflate GST (a consumption tax) with income-tax (a tax on income). This is a common error; be precise about the boundaries of each law.

Q10. Under the default tax regime u/s 202(1), what is the highest slab rate of income-tax applicable to an individual for A.Y. 2026-27?

  1. 25%
  2. 35%
  3. 30%
  4. 42.744%
Show answer & explanation

Correct answer: C. The highest slab rate under the default regime for A.Y. 2026-27 is 30%. (The 42.744% figure appears when surcharge and cess are added, but that is not the basic rate.) Memorise the slab structure, not individual pieces of it.

Q11. Rent received by the original tenant of agricultural land from a sub-tenant is:

  1. Not agricultural income, since the tenant is not the owner
  2. Income from other sources
  3. Agricultural income, since ownership of land is not necessary
  4. Business income
Show answer & explanation

Correct answer: C. Rent from a sub-tenant is agricultural income if the land is used for agriculture, even if the receiver is a tenant and not the owner. Section 2(5) refers to "rent or revenue derived from land"—possession and use, not ownership, are the key. This is a frequent source of confusion in assessments.

Q12. Which statement best describes the test for deciding whether a receipt is capital or revenue in nature?

  1. A single universal test is applied to all cases
  2. The receipt is always capital unless it is periodic
  3. The amount involved decides the nature conclusively
  4. No single infallible test exists; it depends on the facts and circumstances of each case
Show answer & explanation

Correct answer: D. Courts have repeatedly held that there is no single test for capital vs revenue. The distinction depends on the nature, purpose and context of each transaction. Memorised rules will fail you; develop judgment by studying landmark decisions and their reasoning.

Q13. The Income-tax Act, 2025, which replaced the earlier income-tax legislation, took effect from a specified date. On what date did the Income-tax Act, 2025 come into force?

  1. 1st April, 2025
  2. 1st April, 2027
  3. 1st October, 2026
  4. 1st April, 2026
Show answer & explanation

Correct answer: D. The Income-tax Act, 2025 came into force on 1st April, 2026. This is a structural fact that defines the current legislative framework. Know this date firmly; it will appear in questions on statutory validity and applicability.

Q14. Under the default tax regime u/s 202(1) for A.Y. 2026-27, income falling in the slab Rs 20,00,001 to Rs 24,00,000 is taxed at:

  1. 20%
  2. 15%
  3. 30%
  4. 25%
Show answer & explanation

Correct answer: D. Income from ₹20,00,001 to ₹24,00,000 is taxed at 25% under the default regime for A.Y. 2026-27. This is a mid-high bracket; ensure you memorise the full slab structure, as the examiner will test your recall across multiple brackets.

Q15. Fees received for renewal of grant of agricultural land on lease is best described as:

  1. Rent, hence not agricultural income
  2. Capital gains
  3. Non-agricultural income
  4. Revenue derived from land, hence agricultural income
Show answer & explanation

Correct answer: D. Renewal fees are a form of revenue derived from land used for agriculture, so they qualify as agricultural income under section 2(5). Do not confuse rent (periodic) with renewal fees (one-off); both are revenue, not capital, in this context.

Q16. A receipt referable to fixed capital and a receipt referable to circulating capital are respectively:

  1. A capital receipt and a revenue receipt
  2. A revenue receipt and a capital receipt
  3. Both capital receipts
  4. Both revenue receipts
Show answer & explanation

Correct answer: A. Receipts referable to fixed capital (land, buildings, machinery) are typically capital receipts. Receipts referable to circulating capital (inventory, stock) are typically revenue receipts. This is a shorthand rule that works in most cases and is frequently tested.

Q17. Regarding the territorial application of the governing statute, the Income-tax Act, 2025 extends to –

  1. the whole of India
  2. the whole of India except certain notified tribal areas
  3. only the States and not the Union Territories
  4. India as well as any country that has a tax treaty with India
Show answer & explanation

Correct answer: A. The Income-tax Act, 2025 extends to the whole of India, including Union Territories. Territorial scope under the Act is all-encompassing within India's borders. Residency status and tax residence (used in section 6) are separate concepts affecting taxability, not statutory reach.

Q18. Under the default tax regime u/s 202(1), the slab of total income from Rs 12,00,001 to Rs 16,00,000 is taxed at what rate for A.Y. 2026-27?

  1. 15%
  2. 10%
  3. 20%
  4. 25%
Show answer & explanation

Correct answer: A. Income from ₹12,00,001 to ₹16,00,000 is taxed at 15% under the default regime for A.Y. 2026-27. This is a middle bracket. Drill the slab structure repeatedly; you will see variants of this question in nearly every exam.

You can practise thousands more free MCQs on the Conferenza app—ranging from basic concepts to advanced assessment scenarios.

Recommended Study Resources

For a structured lecture series on CA Inter Taxation—Income-tax Law, explore faculty like CA Arushi Aggarwal's Income-tax Law lectures (from ₹3000), CA Shirish Vyas's comprehensive coverage (from ₹4999), and CA Vijender Aggarwal's deep-dive batch (from ₹6999). For self-study, Systematic Approach to Income Tax (CA Inter) (₹1020) is a concise, high-yield resource.

FAQs

Q. Can a State Legislature levy income-tax on non-agricultural income?
No. Entry 82 of the Union List grants this power to Parliament alone. A State trying to levy such a tax would be ultra vires and void.

Q. Is rent from agricultural land situated outside India taxable?
Yes. Section 2(5) requires the land to be situated in India. Income from foreign agricultural land is taxable under the heads applicable in India (e.g., income from other sources).

Q. What is the difference between a capital receipt and capital gains?
A capital receipt is any money you receive as a return of or addition to capital. Capital gains are a specific type of income, taxable under section 45 of the Act when you dispose of a capital asset. Not all capital receipts are capital gains.

Q. Are the tax slabs for A.Y. 2026-27 final, or could they change?
The figures given are correct for A.Y. 2026-27 under the default regime. However, the Annual Finance Act can amend these. Always verify with the latest official ICAI/CBIC material before your exam or filing.

Master these fundamentals now, and you will have a solid foundation for every assessment question and case study that follows. Head to Conferenza's full course catalogue to deepen your learning with expert faculty across all taxation topics.

#Income-tax law#basic concepts#Article 265#agricultural income#capital vs revenue#CA Inter taxation#MCQ practice
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