# Sources of Income Tax Law

## Income Tax Law vs Income Tax Act

Income Tax Law (Wider Scope)	Income Tax Act (Narrower Scope)
Includes Act + Rules + Notifications + Circulars + Annual Finance Act + Judicial decisions	The Act is only ONE part of the wider "Law"

## Components Explained

### 1. Income Tax Act

What to do? (Kya karna hai)
E.g., "File Income Tax Return by 31st July in prescribed Form"

### 2. Income Tax Rules

How to do? (Kaise karna hai)
E.g., "In which form to file the ITR" — answered by the Rules
Came into effect from 1.4.1962 → hence called Income Tax Rules, 1962

### 3. Notifications

Feature	Notifications
Issued by	Central Government
Purpose	To give effect to provisions of the Act
Binding on	Both Department AND Assessee

The CBDT is also empowered to make & amend Rules for the purpose of the Act (via notifications).

### 4. Circulars

Feature	Circulars
Issued by	CBDT (Central Board of Direct Taxes)
Purpose	To deal with specific problems & clarify doubts about scope/meaning of certain provisions
Used by	Guidance of officers and/or assessees
Binding on	Department ONLY (not assessees)
Special rule	Assessees CAN take advantage of BENEFICIAL circulars

### 5. Legal Decisions of Courts (Case Laws)

It is not possible for Parliament to make laws on every issue.
Judiciary hears disputes between Assessee and the Department and delivers decisions.
These decisions become precedents (case laws).

## Income Tax Act, 1961 — Quick Facts

Passed: September 1961
Came into force: 1st April 1962
Contains: 298 Sections and 14 Schedules
Extends to: Whole of India

Worked example

### Example 1

Example 1: CBDT issues a circular saying that a particular deduction should be allowed liberally to small taxpayers. Can the Assessing Officer (AO) reject this circular? Answer: No, circulars are binding on the Department. The AO must follow it.

### Example 2

Example 2: A circular states that interest on a particular bond is taxable. An assessee argues the bond is exempt under a statutory provision. Can the assessee ignore the circular? Answer: Yes — circulars are binding only on the Department, not on assessees. The assessee can take a position contrary to a circular if not beneficial to him.

### Example 3

Example 3: A beneficial circular allows deduction of certain expenses. The Department later withdraws it. Can the assessee still claim deduction for the earlier years when the circular was in force? Answer: Yes — assessees can take advantage of beneficial circulars for the period they were in force.

⚠️ Common exam mistakes

Saying circulars are binding on both Department and Assessee → Wrong. Only on Department.
Confusing notifications (binding on both) with circulars (binding only on Department).
Thinking Income Tax Act and Income Tax Law are the same. Act is just one component.
Forgetting that the Act was PASSED in 1961 but came into FORCE on 1.4.1962.

Reference:

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Sources of Income Tax Law (Act, Rules, Notifications, Circulars, Case Laws)

Worked example

⚠️ Common exam mistakes