Which one of the following statements regarding the levying, collecting and distribution of Income Tax is correct ?

The Constitution (Article 270) provides that taxes on income (other than agricultural income) shall be levied and collected by the Government of India and distributed between the Union and the States; therefore the Union levies, collects and distributes the proceeds of income-tax between itself and the States, making option (1) correct. Claims that the Union retains all proceeds or that all proceeds are distributed only to States contradict this provision. Moreover, surcharges on certain taxes are a separate matter: proceeds of surcharges (Article 271) go exclusively to the Centre, so the statement that only the surcharge is shared is incorrect [1].

Sources

1. [1] Indian Polity, M. Laxmikanth(7th ed.) > Chapter 15: Centre-State Relations > B. Taxes Levied and Collected by the Centre but Assigned to the States (Article 269): The following taxes fall under this category: > p. 154