CMA Intermediate · Direct and Indirect Taxation

Basic Concepts, Basis of Charge and Capital and Revenue Receipts

This chapter tells you which income is taxable and for whom. You first fix the person's residential status, then apply section 5 of the Income-tax Act, 2025 to see which income enters total income, then test whether a receipt is capital or revenue. Contract profits follow section 57. Solve in that order.

What this chapter covers

This is the foundation chapter of the Income-tax part of Paper 7. It defines the terms the Act uses, such as tax year, person and assessee. It then answers the first question in every tax problem: is this income taxable in India for this person? That depends on residential status and on where the income is received, accrues or arises.

The chapter also covers the line between capital receipts and revenue receipts. Revenue receipts are generally taxable and capital receipts generally are not, unless the Act specifically taxes them. The last topic is revenue recognition for construction and service contracts under section 57, which sets the method for measuring contract profits.

Every later chapter depends on this one. Salary, house property, business income, capital gains and other sources all start with the question of what is in total income. If your residential status or scope of income is wrong, the whole computation is wrong, even if your arithmetic is perfect.

This chapter is short, but it feeds almost every numerical question in the taxation section. A residential status error changes which incomes you include. A capital versus revenue error changes the head of income. Both are conceptual and easy to learn, so the marks are reliable once you practise the tests. Section 57 and the scope rules in section 5 also lend themselves to MCQs, which carry 2 marks each with no negative marking, so you should attempt every one.

Basic Concepts, Basis of Charge and Capital and Revenue Receipts: topics in the order to study them

1Basic Concepts and Definitions under Income-tax Act 2025Every later rule uses these terms, so learn the vocabulary, especially tax year, person and assessee, first.
2Residential Status of AssesseesThe scope of income depends on residential status, so you must be able to fix it before you apply section 5.
3Scope of Total Income and Incidence of TaxOnce status is known, section 5 tells you which income is taxed for a resident, a not ordinarily resident and a non-resident.
4Capital Receipts vs Revenue ReceiptsAfter you know whose income is taxable, you test whether a receipt is income at all and which head it falls under.
5Revenue Recognition for Construction and Service ContractsThis is a self-contained rule from section 57 and is best learned last, when the general ideas of income are clear.

How to prepare Basic Concepts, Basis of Charge and Capital and Revenue Receipts

Treat this chapter as a set of tests you apply in a fixed order. Learn the tests first, then drill them with short problems.

Read the definitions once and write a one-page list of key terms in your own words. Revise it again before the exam.
Learn the residency tests as a decision flow: first resident or non-resident, then ordinarily resident or not ordinarily resident. Practise with small stay-pattern examples.
Make a three-column chart for resident, not ordinarily resident and non-resident. In each column write which income is taxed: received in India, accruing in India, accruing outside India.
Learn section 5(3) and 5(4) as exceptions. Income accruing outside India is not treated as received in India only because it is shown in a balance sheet prepared in India. Income already included as accrued is not included again as received.
For capital versus revenue, collect examples and tests such as nature of the asset, recurrence and purpose. Note that a specific provision of the Act can tax a receipt that looks like capital.
Learn section 57 point by point: percentage of completion as the base method, project completion for services of not more than ninety days, straight line for indeterminate acts over a period, retention money in revenue, and no netting of incidental interest, dividend or capital gains against costs.
Finish with a timed set of MCQs and two or three short written answers. Write the status or test first, then the conclusion, so you earn step marks.

Common mistakes in Basic Concepts, Basis of Charge and Capital and Revenue Receipts

Applying section 5 before fixing residential status.
Fix: Write the status as the first line of every answer, with the test you used, then apply the matching column of your scope chart.
Taxing foreign income of a not ordinarily resident without checking its source.
Fix: Include foreign income only if it is derived from a business controlled in or a profession set up in India.
Counting the same income twice, as accrued and again as received.
Fix: Remember section 5(4). Once income is included on one basis, do not include it again on the other.
Calling a receipt capital or revenue from its label rather than its nature.
Fix: Ask what the receipt is for, whether it replaces a fixed asset or trading income, and whether the Act taxes it specifically. State the reason in your answer.
Using the wrong method for a service contract under section 57.
Fix: Check duration and nature first. Not more than ninety days means project completion. Indeterminate acts over a period means straight line.
Using the old term assessment year or old section numbers.
Fix: Use tax year and the Income-tax Act, 2025 section numbers for the June 2027 term. Check any old notes before relying on them.

Last-day revision: Basic Concepts, Basis of Charge and Capital and Revenue Receipts

Use tax year, not assessment year, for all questions under the Income-tax Act, 2025.
Fix residential status first. Everything else in the chapter depends on it.
A resident is taxed on income received in India, accruing in India and accruing outside India.
A not ordinarily resident is taxed on foreign income only if it is derived from a business controlled in or a profession set up in India.
A non-resident is taxed only on income received or deemed received in India, or accruing or deemed to accrue in India.
Income accruing abroad is not deemed received in India merely because it appears in a balance sheet prepared in India.
Income already included as accrued or arisen is not included again as received.
Revenue receipts are generally taxable. Capital receipts are generally not, unless a provision specifically taxes them.
Section 57: the base method for construction and service contracts is percentage of completion.
Service contracts of not more than ninety days use project completion. Contracts with indeterminate acts over a period use straight line.
Contract revenue includes retention money. Contract costs are not reduced by incidental interest, dividends or capital gains.

Basic Concepts, Basis of Charge and Capital and Revenue Receipts practice questions

Basic Concepts, Basis of Charge and Capital and Revenue Receipts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Basic Concepts, Basis of Charge and Capital and Revenue Receipts: frequently asked questions

Is this chapter important for the CMA Inter Paper 7 exam?

Yes. It sets up every later income-tax computation, and its concepts are tested in MCQs and short written answers. A solid grasp saves you from basic errors elsewhere in the paper.

Should I study residential status before scope of total income?

Yes. Scope of total income depends on residential status. If you study scope first, the three columns of the chart will not make sense.

Do I use assessment year or tax year in answers?

Use tax year. The Income-tax Act, 2025 governs income from 1 April 2026, and the June 2027 term uses its terms and section numbers.

How do I score on MCQs from this chapter?

Learn the rules with their exact conditions, such as the three methods under section 57. Attempt every MCQ, because there is no negative marking and each carries 2 marks.