1 taxation of individuals, partnership firms/llp and companies · 2015-06-13 · [chapter # 1]...

7.1

1 Taxation of Individuals,

Partnership Firms/LLPand Companies

This Chapter includes

! Basic Concepts and Taxation ofIndividuals

! Taxation of Companies.

! Taxation of Firm/Limited LiabilityPartnership (LLP)

Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions

CS Professional Programme (Module III)

SHORT NOTES

2005 - Dec [3] Write notes on the following:(i) Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act,

1961. (5 marks)Answer:Minimum Alternate Tax under Section 115JB of the Income-tax Act, 1961.Where in the case of a company, the income tax payable on the total income as

7.2 O Solved Scanner CS Prof. Prog. M-III Paper 7 (New Syllabus)

computed under the Income tax Act, in respect of previous year relevant to theassessment year 2015-16 or thereafter is less than 18.5% its book profit, such bookprofit shall be deemed to be the total income of the assessee and tax payable by theassessee on such total income (book profit) shall be the amount of the income-tax atthe rate of 18.5%.

Every company for the purposes of this section shall prepare its Profit and LossAccount for the relevant Previous Year in accordance with the provisions of Part IIand III of Schedules III to the Companies Act, 2013. However, while preparing theannual accounts including profit and loss account, the accounting policies, theaccounting standards followed for preparing such accounts including profit and lossaccount and the methods and rates adopted for calculating the depreciation shall bethe same as have been adopted for the purpose of preparing such accountsincluding profit and loss account as laid before the company at its annual generalmeeting in accordance with the provision of Section129 of the Companies Act,2013.For the purpose of MAT, book profit means the net profit as shown in the profit andloss account for the relevant previous year prepared as aforesaid and would besubject to some adjustments as mentioned in section 115 JB of the Income Tax Act,1961.Every company to which section 115 JB applies shall furnish a report from CharteredAccountant certifying that the book profit has been computed in accordance with theprovisions of Section 115JB alongwith the return of income filed.

DESCRIPTIVE QUESTIONS

2007 - June [3] (a) What is ‘minimum alternate tax’ (MAT) ? What is the treatment offollowing debited to profit and loss account while calculating book profit:

(i) Wealth-tax(ii) Provision for doubtful debt(iii) Penalty for non-payment of income-tax(iv) Dividend tax(v) Banking cash transaction tax(vi) Proposed dividend(vii) Excise duty due, but not paid(viii) Provision for gratuity(ix) Depreciation (12 marks)

Answer:Minimum Alternate Tax (MAT)Where in the case of a company, the income-tax payable on the total income as

[Chapter # 1] Taxation of Individuals, Partnership . . . O 7.3

computed under the Income-tax Act, in respect of previous year relevant to theassessment year 2015-16 or thereafter is less than 18.5% its book profit, such bookprofit shall be deemed to be the total income of the assessee and the tax payable bythe assessee on such total income (book profit) shall be the amount of the incometax at the rate of 18.5%.Thus in case of a company income tax payable shall be higher of the following twoamounts:1. Tax on total income computed as per the normal provisions of the Act by

charging applicable normal rates and special rates if any, income included inthe total income of the company is taxable at special rates.

2. 18.5% of book profit. For the purpose of computing "book profit", the net profit as per profit and lossaccount is adjusted for items given under Section 115 JB, by adding them back tonet profit or deducting from it. Treatment of the following debited to P & L Accountwhile calculating book profit:

(i) Wealth Tax–not to be added back. (ii) Provision for doubtful debt–added back to net profit.(iii) Penalty for non-payment of income tax-not to be added back.(iv) Dividend tax –added back to net profit.(v) Banking cash transaction tax–not to be added back.(vi) Proposed dividend–added back to net profit.(vii) Excise duty due, but not paid–not to be added back.(viii) Provision for gratuity–not to be added back.(ix) Depreciation–The whole amount of depreciation is to be added back and the

amount of depreciation which is not on account of revaluation of assets isthen required to be deducted from the net profit.

2009 - June [3] (a) When will the 'book profits' of a company deemed to be the totalincome of the company for the purposes of levy of minimum alternate tax (MAT)under section 115JB ? (3 marks)(b) Indicate briefly the points to be taken into account while preparing annual

accounts for the purpose of MAT. (3 marks)(c) The MAT does not apply to foreign companies operating in India. Do you agree

? Give reasons. (3 marks)Answer:(a) Minimum alternate tax on certain companies under Section 115 JB Wherein

the case of a company, the income tax payable on the total income ascomputed under the Income Tax Act, in respect of previous year relevant to theassessment year


2015-16 or thereafter is less than 18.5% of its book profit, such book profit shallbe deemed to be the total income of the assessee and the tax payable by theassessee on such total income (book profit) shall be the amount of the incometax at the rate of 18.5%.

(b) According to sub-section (2) of section 115 JB requires the company toprepare its profit and loss account for the relevant previous year in accordancewith provisions of Part II and III of Schedule III of the companies Act, 2013.However, while preparing the annual accounts including profit and loss account:(a) The accounting policies of the company;(b) The accounting standards followed for preparing such accounts including

profit and loss accounts;(c) The method and rates adopted for calculating the depreciation by the

company, shall be the same as have been adopted for the purpose ofpreparing such accounts including profit and loss account as laid before thecompany at its annual general meeting in accordance with on theprovisions of section 129 of the Companies Act, 2013. But where thecompany has adopted or adopts the financial year which is different fromthe previous year under the Income Tax Act, (a), (b) and (c) aforesaid shallcorrespond to the accounting policies, accounting standards and themethod and rates for calculating the depreciation which have been adoptedfor preparing such accounts including profit and loss account for suchfinancial year or part of such financial year falling within the relevantprevious year.

(c) No, MAT applies to any company whether it is domestic or foreign. However,where a non-resident companies income is assessed on a presumptive basisunder Section 44 B or 44BB or at a flat rate under Section 115 A on royalty andtechnical fees, the book profit becomes immaterial for regular assessment andthe presumptive income tax will prevail.

2010 - June [2] (a) Answer the following :

(i) What is the quantum of Minimum Alternate Tax (MAT) for a ‘domesticcompany’ and ‘foreign company’ for the assessment year 2015-16?

(c) Discuss the concept of ‘deemed dividend’ under section 2(22).(3 marks each)

Answer:(a) (i) The rates of Minimum Alternate Tax (MAT) for the A.Y. 2015-16 are as

follows:(A) Domestic Company:


(i) If Book Profit does not exceed ` 1 crore:IT 18.5SC —EC (@ 2%) + SHEC (@ 1%) 0.555Total 19.055

(ii) If Book Profit is in the range of ` 1 crore - ` 10 crore:IT 18.5SC 0.925EC (@2%) + SHEC (@1%) 0.58275Total 20.00775

(iii) If Book Profit exceeds ` 10 crore:IT 18.5SC 1.85EC (@ 2%) + SHEC (@ 1%) 0.6105Total 20.9605

(B) Foreign Company:(i) If Book Profit does not exceed ` 1 crore:

IT 18.5SC —EC (@ 2%) + SHEC (@ 1%) 0.555Total 19.055

(ii) If Book Profit is in the range of ` 1 crore - ` 10 crore:IT 18.5SC 0.37EC (@2%) + SHEC (@1%) 0.5661Total 19.4361

(iii) If Book Profit exceeds ` 10 crore:IT 18.5SC 0.925EC (@ 2%) + SHEC (@ 1%) 0.58275Total 20.00775

Answer:(c) Dividend in its ordinary connotation means the sum paid to a shareholder

proportionate to his shareholding in a company out of the total divisible profits.However, under section 2 (22) following disbursement are also treated as dividendif they are paid by a company to a shareholder to the extent of accumulated profits:(i) Any distribution by a company to the extent of accumulated profits involving

the release of the assets of the company;


(ii) Distribution of debentures / deposit certificate to shareholders and bonusshares to preference shareholders;

(iii) Distribution to shareholders on liquidation of the company;(iv) Distribution on reduction of share capital;(v) Loans or advances by a closely held company to certain shareholders/

concerns.

2012 - June [3] What is the difference between ‘minimum alternate tax’ under section115JAA and ‘alternate minimum tax’ under section 115JC? Who is subject to thesetaxes? Also discuss the implication of these tax es in the case of an overseas entityhaving a permanent establishment (PE) in India. (15 marks)

Answer:Minimum Alternate Tax (MAT) under Section 115 JB of the Income Tax Act, 1961 :Where in the case of a company, the Income Tax payable on the total income ascomputed under the Income Tax Act, in respect of previous year relevant to theassessment year 2014-15 & 2015 - 16 or thereafter is less than 18.5% of its book profit such book profit shall be deemed to be the total income of the assessee and taxpayable by the assessee on such total income (book-profit) shall be the amount of theincome-tax at the rate of 18.5%.

Every company for the purpose of this section shall prepare its Profit and LossAccount for the relevant previous year in accordance with the provisions of Part II andIII Schedules III to the Companies Act, 2013. However, while preparing the annualaccounts including Profit and Loss Account, the accounting policies, the accountingstandards followed for preparing such accounts including profit and loss account andthe methods and rates adopted for calculating the depreciation shall be the same ashave been adopted for the purpose of preparing such accounts including Profit andLoss account as laid before the company at its annual general meeting in accordancewith the provision of Section 129 of the Companies Act, 2013.For the purpose of MAT, book profit means the net profit shown in the profit and lossaccount for the relevant previous year prepared as aforesaid and would be subject tosome adjustments as mentioned in section 115 JB of the Income Tax Act, 1961.Every company to which section 115 JB applies shall furnish a report from CharteredAccountant certifying that the book profit has been computed in accordance with theprovisions of section 115 JB alongwith the return of income filed.Alternative Minimum Tax for Limited Liability Partnership [Section 115 JC to115JF]As per newly inserted section 115JC where the regular income tax payable for a


previous year by a limited liability partnership is less than the alternative minimum taxpayable for such previous year, the adjusted total income shall be deemed to be thetotal income of such limited liability partnership and it shall be liable to pay income-taxon such total income at the rate of 18.5%.Meaning of adjusted total income alternate minimum tax and regular income tax[Section 115JC (2) and section 115 JF]

(i) "adjusted total income" shall be the total income before giving effect to this newlyinserted chapter XII-BA as increased by the deduction claimed under any sectionincluded in chapter VI-A under the heading "C-Deduction in respect of certainincomes" and deduction claimed under Section 10AA [Section 115 JC (2)];

(ii) "alternative minimum tax" shall be the amount of tax computed on adjusted totalincome at a rate of 18.5%; and

(iii) "regular income tax" shall be the income tax payable for a previous year by alimited liability partnership on its total income in accordance with the provisionsof the act other than the provisions of this newly inserted Chapter XII-BA.

Report of Chartered Accountant [Section 115 JC (3)]Every limited liability partnership to which this section applies shall obtain a report, insuch form as may be prescribed, from an accountant certifying that the adjusted totalincome and the alternate minimum tax have been computed in accordance with theprovisions of this chapter and furnish such report on or before the due date of filing ofreturn u/s 139 (1).Tax credit for alternate minimum tax [Section 115 JD]1. Credit for tax paid [Section 115JD (1)] : The credit for tax paid by a limited

liability partnership under Section 115 JC shall be allowed to it in accordance withthe provisions of this section.

2. How to compute tax credit [Section 115 JD (2)] : The tax credit of anassessment year to be allowed under Section 115 JD (I) shall be the excess ofalternate minimum tax paid over the regular income tax payable of that year.

3. Interest not payable on tax credit allowed [Section 115 JD (3)] : No interestshall be payable on tax credit allowed under sub-section (1).

4. Tax credit to be carried forward and set-off upto next 10 assessment years[Section 115 JD (4)] : The amount of tax credit determine u/s 115 JD (2) shall becarried forward and set-off in accordance with the provisions of Section 115 JD (5)and 115 JD (6) mentioned below but such carry forward shall not be allowedbeyond the 10th assessment year immediately succeeding the assessment year forwhich tax credit become allowable u/s 115 JD (1).

5. Tax credit is allowed to the maximum extent of the excess of regular incometax over alternate minimum Tax : In any assessment year in which the regular


income - tax exceeds the alternate minimum tax, the tax credit shall be allowed toset-off to the extent of the excess of regular income-tax over the alternate minimumtax and the balance of the tax credit, if any shall be carried forward.

6. Effect of assessment order to be adjusted [Section 115 JD (6)] : If the amountof regular income tax or the alternate minimum tax is reduced or increased as aresult of any order passed under this act, the amount of tax credit allowed underthis section shall also be varied accordingly.

2012 - Dec [1] (a) Discuss briefly the treatment of un-availed tax credit of minimumalternate tax (MAT) in case of conversion of a private company or unlisted publiccompany into a limited liability partnership (LLP). (3 marks)Answer:Section 115JAA provides that where tax is paid by a company for any assessment yearin relation to deemed income under Section 115JA(1) or 115JB(1), a tax credit will beallowed in subsequent years.

However, newly inserted Section 115JAA(7) w.e.f. 1.04.2011, Assessment Year2011-12 and onwards, provides that in case of conversion of a private company orunlisted public company into a Limited Liability Partnership Act, 2008, the provisions ofSection 115JAA shall not apply to the successor LLP, that is to say tax credit will not beallowed to such LLP.

2012 - Dec [3] (a) Discuss with the help of an example, the cascading effect of dividenddistribution tax and the remedial action taken by the government. (7 marks)Answer:According to Section 115-O, the domestic company shall, in addition to the income taxchargeable in respect of its total income, be liable to pay additional income tax on anyamount declared, distributed, or paid by such company by way of dividend (whetherinterim or otherwise), whether out of current or accumulated profits such additionalincome tax shall be payable @ 15% plus surcharge plus education and secondary andhigher education cess. Such tax is known as Dividend Distribution Tax (DDT). Suchdistributed dividend is exempt in the hands of recipients. As per Section 10 (34), anyincome by way of dividends referred to in Section 115-O shall be exempt from incometax. However, this provision resulted in a cascading effect in the case of holdingcompany declaring dividend out of dividend received from its subsidiary.

To mitigate cascading effect of DDT, Section 115-O (1A) of the Act provides thatdividend liable for DDT in case of a company is to be reduced by an amount of dividendreceived from its subsidiary after payment of DDT if the following conditions aresatisfied:

(i) the amount of dividend is received from its subsidiary;


(ii) the subsidiary has paid tax under this section on such dividend; and(iii) the domestic company (holding company) is not a subsidiary of any other

company.Note: Dividend and Income Distribution Tax Section 115-0 of the Act provides that a domestic company shall be liable for paymentof additional tax at the rate of 15%, on any amount declared, distributed or paid by wayof dividends to its shareholders. This tax on distributed profits is final tax in respect ofthe amount declared, distributed or paid as dividends and no credit in respect of it canbe claimed by the company or the shareholders: Section 115 R of the Act similarly provides for levy of additional income tax in respectof income distributed by the mutual funds to its investors at the rates provided. Prior to introduction of Dividend Distribution Tax (DDT), the dividends were taxable inthe hands of the shareholders. The gross amount of dividend representing thedistributable surplus was taxable, and the tax on this amount was paid by theshareholders at the applicable rate which varied from 0 to 30%. However, after theintroduction of DDT, a lower rate of 15% is currently applicable but this rate is beingapplied on the amount paid as dividend after reduction of distribution tax by thecompany. Therefore, the tax is computed with reference to the net amount. Similar caseis there when income is distributed by mutual funds. Due to difference in the base of the income distributed or the dividend in which thedistribution tax is calculated, the effective tax rate is lower than the rate provided in therespective sections. In order to ensure that tax is levied on proper base, the amount of distributable incomeand the dividends which are actually received by the unit holder of mutual fund orshareholders of the domestic company need to be grossed up for the purpose ofcomputing the additional tax. Therefore, it is proposed to amend Section 115-0 in order to provide that for thepurposes of determining the tax on distributed profits payable in accordance with theSection 115-0, any amount by way of dividends referred to in subsection (1) of the saidsection, as reduced by the amount referred to in sub section (1A) [referred to as netdistributed profits], shall be increased to such amount as would, after reduction of thetax on such increased amount at the rate specified in sub section (1), be equal to thenet distributed profits. Thus, where the amount of dividend paid or distributed by a company is ̀ 85, then DDTunder the amended provision would be calculated as follows:

Dividend amount distributed = ` 85

Increase by ` 15 [i.e.(85*0.15)/(1-0.15)]


Increased amount = ` 100

DDT @ 15% of ` 100 = ` 15

Tax payable u/s 115-0 is = ` 15

Dividend distributed to shareholders = ` 85

Effective rate of dividend distribution tax

The effective rate of dividend distribution tax payable shall be as under:

Tax payable u/s 115-0 on ` 85 distributed = ` 15

Therefore DDT rate on ` 100 distributed shall be 15 / 85 × 100 = 17.64706%

Add: Surcharge @ 10% of 17.647 = 1.76470%

Total 19.44176%

Add: EC & SHEC @ 3% = 0.58235%

Total effective DDT rate applicable = 19.99412%

Hence, the effective rate of DDT has been increased from 16.995% to 19.994%approximately. Similarity, it is proposed to amend Section 115R to provide that for the purpose ofdetermining the additional income tax payable in accordance with sub section (2) of thesaid section, the amount of distributed income shall be increased to such amount aswould, after reduction of the additional income tax on such increased amount at the ratespecified in the sub section (2) be equal to the amount of income distributed by theMutual Fund. These amendments will take effect from 1st October, 2014.

2013 - Dec [3] (b) What is the time-limit in the following different cases:(i) To file return of income under section 139(1) by an assessee who is required to

furnish audit report under section 92E.(ii) To file a revised return, if the assessee discovers any omission or wrong

statement in the originally filed return. (2 marks each)Answer:

(i) 30th November of the assessment year.(ii) Revised return can be filed at any time:

(i) before the expiry of one year from the end of the relevant assessment yearor

(ii) before the completion of the assessment, whichever is earlier.

2014 - June [2] (b) A CEO of an unlisted public company approached you with aproposal to convert the company into a Limited Liability Partnership (LLP) without


attracting any liability towards capital gain tax. Draft a suitable reply. (5 marks)Answer:To,CEOXYZ LTD.Sir,As per Section 45 of the Income Tax Act, 1962, Income will be chargeable as Capitalgains if there is a capital asset and there is transfer of the capital asset during relevantprevious year.

But as per Section 47 (xiiib) Nothing contained in Section 45 shall apply to any transferof a capital asset or intangible asset by a private company or unlisted public company(hereafter in this clause referred to as the company) to a limited liability partnership orany transfer of a share or shares held in the company by a shareholder as a result ofconversion of the company into a limited liability partnership in accordance with theprovisions of Section 56 or Section 57 of the Limited Liability Partnership Act.Provided that:(a) all the assets and liabilities of the company immediately before the conversion

become the assets and liabilities of the limited liability partnership;(b) all the shareholders of the company immediately before the conversion become the

partners of the limited liability partnership and their capital contribution and profitsharing ratio in the limited liability partnership are in the same proportion as theirshareholding in the company on the date of conversion;

(c) the shareholders of the company do not receive any consideration or benefit,directly or indirectly, in any form or manner, other than by way of share in profit andcapital contribution in the limited liability partnership;

(d) the aggregate of the profit sharing ratio of the shareholders of the company in thelimited liability partnership shall not be less than 50%, at any time during the periodof 5 years from the date of conversion;

(e) the total sales, turnover or gross receipts in the business of the company in any ofthe three previous years preceding the previous year in which the conversion takesplace does not exceed ` 60,00,000; and

(f) no amount is paid, either directly or indirectly, to any partner out of balance ofaccumulated profit standing in the accounts of the company on the date ofconversion for a period of 3 years from the date of conversion.

Thanking YouCompany Secretary


XYZ LTD.

2014 - June [2A] (Or) (i) A corporate assessee, who inadvertently failed to claimdeduction under section 80IB during the initial years, cannot claim deduction under thesaid section for the remaining years during the period of eligibility, in spite of fulfillmentof stipulated conditions. Examine the assertion contained in the above para in thebackground of judicial decision. (5 marks)

(ii) Whether MAT credit admissible under section 115JAA has to be set-off againstthe assessed tax payable before calculating interest under sections 234A, 234Band 234C. (5 marks)

(iii) Discuss the provisions regulating determination of fair market value of ESOPs.(5 marks)

Answer:(i) Where assessee is a company entitled to deduction under section 80 IB which

it did not claim in the initial years, it can claim the said deduction for theremaining years during the period of eligibility, if the conditions are satisfied.[Praveen Soni v CIT (2011) (Del)]

(ii) No, MAT credit admissible in terms of Section 115JAA has to be set off againstthe tax payable before calculating interest only under sections 234B and 234C.[CIT v Deccan Creations Pvt. Ltd. (2011) (Kar)]

(iii) Determination of Fair Market Value (FMV) of ESOPs on the date of exerciseof option:(a) Where shares in the company are listed on a single stock exchange:

FMV will be average of opening and closing prices of shares on the date ofexercise of option. If on the date of exercise of option there is no trading inshares, the FMV shall be the closing price of the share on any recognisedstock exchange on a date closest to the date of exercise of option andimmediately preceding such date of exercise of option.

(b) Where shares in the company are listed on more than one recognisedstock exchange: FMV will be average of opening and closing price ofshares on the date of exercise of option on a recognised stock exchangewhich records the highest volume of trading in the shares.

If on the date of exercise of option there is no trading in shares, the FMVshall be the closing price of the share on a recognised stock exchangewhich records the highest volume of trading on a date closest to the dateof exercise of option and immediately preceding such date of exercise of


option.(c) Where shares in the company are not listed on a recognised stock

exchange: FMV will be value on a “specified date” as determined by aCategory I merchant banker registered with SEBI.

Specified date means the date of exercise of option or any date earlierthan the date of exercise of option, not being a date which is more than180 days earlier than the date of exercise of option.

2015 - June [1] (c) Explain whether the benefit of exemption under section 54EC wouldbe available in the case of ‘capital gains arising on transfer of depreciable a(s5s emt’a. rks)

2015 - June [2] (b) Comment on the following in the context of provisions contained inthe Income-tax Act, 1961:

(i) The provisions of section 115JB are applicable in case of foreign com(2p amnaierkss.)(ii) The provisions of dividend distribution tax are applicable to an undertaking or

enterprise engaged in developing, operating and maintaining a special economiczone (SEZ). (3 marks)

2015 - June [2] (c) Explain the meaning of ‘eligible expenses’ for the purposes ofclaiming benefit under section 35D. Also enumerate these eligible expenses(.5 marks)

PRACTICAL QUESTIONS

2007 - June [3] (b) Sun Bright Ltd., an Indian company, furnishes following particularsof its income for the previous year 2014-15. Calculate its total income and income-taxliability for the assessment year 2015-16:

`Income from business 5,20,000Dividend received during the year:

— from Indian company 20,000— from foreign company 5,000

Gains from transfer of capital assets:— short term capital gains 25,000— long term capital gains 50,000

Agricultural income in India 35,000Additional information:

(i) Income from business includes '1,50,000 profit earned from a new small scale


industry set up on 1st October, 2014 which is eligible for deduction under section80-IB.

(ii) Business expenses already charged from business income include ` 10,000revenue expenditure and ` 30,000 capital expenditure on family planningprogramme for employees.

(iii) Company has debited following donations in the profit and loss account of thebusiness of company:— Rajiv Gandhi Foundation: ` 50,000; and— Prime Minister’s National Relief Fund: ` 25,000. (8 marks)

Answer: Computation of Total Income for the Assessment Year 2015-16

Amount `

Income from Business as per P/L A/c 5,20,000

Add: Disallowed Expenditure(a) Donation 75,000(b) Capital Expenditure on Family (+)Planning (` 30,000-6,000) 24,000 99,000

6,19,000Capital Gains on long term 50,000Capital Gain on short-term 25,000 75,000Dividend from Indian Co. ExemptDividend from Foreign Co. 5,000 5,000Agriculture Income Exempt –Gross Total Income 6,99,000Less: Deduction(a) Under Section 80IB 30% of 1,50,000 45,000(b) Under Section 80-G

(i) PMNRF 25,000(ii) 50% of Rajiv Gandhi Foundation 25,000 50,000 (95,000)Total Income 6,04,000

Tax Liability(i) 20% on LTCG [50,000] 10,000(ii) 30% on other Income [5,54,000] 1,66,200

1,76,200(iii) Surcharge NIL


1,76,200(iv) 2% Education Cess & 1% SHEC 5,286Tax Liability 1,81,486

2008 - June [1] A company claims deduction of certain expenditures in computation ofits total income under the Income-tax Act, 1961. Consider the allowability or otherwiseof the following expenditures giving brief reasons for your answers:

(i) Payments made by the company for sponsoring a sports tournament.(ii) Water pollution treatment plant installed permanently in the factory in compliance

with statutory requirements.(iii) As a holding company, it has borrowed money and advanced the same to its

subsidiary in whose business it has deep interest. The subsidiary uses the samefor its business. The company claims interest paid on such borrowings as adeduction.

(iv) Expenditure incurred for earning share income from a firm.(v) Provision made in the accounts of the company on a scientific basis in respect

of liabilities estimated to arise under warranty provided to customers in respectof products sold. (4 marks each)

Answer:(i) This is an activity of business promotion through advertisement and the

sponsoring of the tournaments carries with it. Hence it is allowable as a revenueexpenditure.

(ii) It is a revenue expenditure because expenses incurred under a statutorystipulation rather than on personal wish.

(iii) Where it is obvious that a holding company has deep interest in its subsidiaryand hence if the holding company advances borrowed money to its subsidiaryand the same has been used by the subsidiary for some business purpose, thenthe assessee will be entitled to a deduction of interest under Section 36(1) (iii).

(iv) According to Section 14-A, if the income is exempt any expenditure incurred onearning that income shall not be allowed as deduction.

(v) Warranty provided on a scientific basis or past experience is allowable asdeduction.

2009 - Dec [2] (b) Modern Ltd. entered into an agreement with Synergy Ltd. for grantingon lease to Synergy Ltd. its 8000 sq. mtr. land lying vacant adjacent to the factorypremises of Synergy Ltd. for a period of 12 years commencing from May, 2002. Underthe terms of the agreement, Synergy Ltd. had to build a factory building, pay an annualrent @`100 per sq. mtr. of the leased land of 8,000 sq. mtr. and surrender the building


to Modern Ltd. at the end of the lease without any consideration. Synergy Ltd. compliedwith the terms and conditions of the lease agreement.

The depreciated value of the building surrendered and taken possession byModern Ltd. in May, 2014 was `4.22 crore. Accounts department of Modern Ltd. is ofthe opinion that an equivalent amount is to be taken in the accounts of the year 2014-15as income received.Critically examine the matter and offer your comments. (3 marks)Answer:Accounts Department's opinion of Modern Ltd. is incorrect. The depreciated value of thebuilding is of course to be brought into the books of accounts.

However, the equivalent amount viz. ` 4.22 crores cannot be treated as incomefrom the business. By its very nature it is a capital receipt and is not a revenue income.The amount cannot be treated as a revenue receipt unless it is conclusively establishedthat this represented deferred rent as the lease rent was unreasonably low. FurtherModern Ltd. is not in the business of real estate to treat the benefit as incidentalrevenue receipt earned during the course of such business.

2010 - Dec [3] (a) The book profits of a company in the previous year 2014-15computed in accordance with section 115JB is ̀ 15 lakh. If the total income computedfor the same period as per the provisions of the Income-tax Act, 1961 is ` 3 lakh,calculate the tax payable by the company in the assessment year 2015-16 and alsoindicate whether the company is eligible for any tax credit. (5 marks)Answer :1. Calculation of tax liability u/s 115JB:

Particulars Details AmountBook profit Given 15,00,000Tax Liability 18.5% of ` 15 lakhs 2,77,500Add: Surcharge NILTax Liability after surcharge 2,77,500Add: Education cess and SHEC @ 3% 3% of ` 2,77,500 8,325Tax Liability after cess 2,85,825

2. Calculation of tax liability as per Income Tax Act, 1961:

Particulars Details Amount

Total Income Given 3,00,000

Tax Liability 30% of ` 3 lakhs 90,000

Add: Education cess and SHEC @ 3% 2,700

Tax Liability after cess 92,700


3. Computation of Final Tax payable:


Tax Liability Tax Liability u/s 115B> Normal Tax liability 2,85,825

Actual tax liability 2,85,825

The company is eligible for MAT tax credit of ̀ 1,93,125 (` 2,85,825 - ̀ 92,700), whichcan be carried forward for 10 years or is to be awaited within 10 years u/s 115JAA.

2012 - Dec [2] (b) Whether minimum alternate tax (MAT) under section 115JB ispayable in advance and interest under sections 234B and 234C is payable on failureto pay such advance tax? Also explain whether MAT credit admissible under section115JAA has to be set-off against the assessed tax payable before calculating theinterest under sections 234A, 234B and 234C.You may take help of decided case law, if any. (6 marks)Answer :Companies liable to pay tax on the basis of MAT under section 115JB are required topay advance tax and interest under sections 234B and 234C is payable on failure to paysuch advance tax. [JCIT v Rolta India Ltd. (2011)]

For the purpose of computing interest chargeable under section 234A, 234B and234C, credit of MAT under section 115JAA has to be set off against the assessed taxpayable. [CIT v Tulsian NEC Ltd. (2011)]

2013 - June [2] (a) The net profit of Renuka Ltd., an Indian company, as per its profitand loss account prepared as per the Income-tax Act, 1961 is ̀ 90,00,000 after debitingand crediting following items:

`Provision for income-tax 5,00,000Provisions for deferred tax 3,00,000Proposed dividend 7,50,000Depreciation including depreciation on revaluation of assets

` 20,00,000 debited to profit and loss account 60,00,000Profit from industrial unit in SEZ area 80,000Provision for permanent diminution in the value of investments 70,000Compute tax liability under section 115JB for the assessment year 2015-16.

(9 marks)Answer:Computation of Tax Liability of Renuka Limited for Assessment Year2015-16.


(a) Computation of Book Profits :

`

Net Profit as per Profit & Loss A/c 90,00,000

Add: Non-admissible expenditure :— Provision for Income-tax 5,00,000— Provision for Deferred tax 3,00,000— Proposed Dividend 7,50,000— Depreciation 60,00,000 75,50,000

1,65,50,000

Less: Inadmissible Incomes and Expenditure : Depreciation allowed 40,00,000Provision for diminution 70,000 40,70,000Book Profits 1,24,80,000

(b) Computation of Tax liability under section 115 JB

Book Profit u/s 115 JB 1,24,80,000

18.5% of Book Profit 23,08,800

Add: Surcharge (as total income is exceed ` 1,00,00,000/-) hencesurcharge is applicable @ 5% 1,15,440

Tax & Surcharge 24,24,240

Add: Education Cess & SHEC @ 3% 72,727

Tax liability u/s 115 JB (R/off) 24,96,970

Total Tax liability as per normal tax rates @ 30% of ` 1,24,80,00037,44,000

Add: Surcharge @ 5% 1,87,200

Add: Education Cess @ 2%, and SHEC @ 1% 1,17,936

Here, the tax liability as per MAT provision is less than the tax liabilityas per normal tax provisions, therefore the tax payable shall be `40,49,136.

40,49,136

2013 - June [3] (a) A limited liability partnership (LLP) has following income for theassessment year 2015-16: `Profit from business eligible for deduction @ 100% of profits

under section 80-IA 32,00,000Profit from other business 48,00,000


Compute the tax payable by the LLP, assuming that it has no other income during theassessment year 2015-16. (5 marks)

Answer:(i) Computation of Total Income and Income Tax Payable

For Assessment Year 2015-16.As per the normal provisions of the Act `Profits & gains of business or profession (Total) 80,00,000Less : Deduction under section 80-IA 32,00,000

Total Income 48,00,000Tax payable @ 30% 14,40,000Add : EC @ 2% & SHEC @ 1% 43,200

Tax Payable 14,83,200(ii) Computation of Alternate Minimum Tax (AMT)

`Profits & Gains of business or profession 48,00,000Add : Deduction under section 80IA 32,00,000

Adjusted Total Income 80,00,000AMT @ 18.5% 14,80,000Add: EC @ 2% & SHEC @ 1% 44,400

AMT Payable 15,24,400

Here, as per Section 115JC, since the income tax payable as per normal provisions ofthe Income Tax Act is less than the AMT, the LLP would be liable to pay ` 15,24,400as tax.

2013 - Dec [2] (b) X Ltd. charged depreciation on its fixed assets at the rate prescribedin the income tax rules. However, the Assessing Officer disallowed the same andallowed the rate as prescribed in the Companies Act, 2013 for the purpose ofcomputation of book profit under section 115JB for the previous year 2014-15. Examinethe legality of action taken by the Assessing Authority. (5 marks)Answer:The action of the Assessing Officer is not sustainable in law. He has limited power tolook into that the books of account have been properly maintained as per IndianCompanies Act, 2013. He does not have the power to question the profit shown in theprofit and loss account. This issue was settled by the Supreme Court in MalayalaManorama Co. Ltd. v. CIT (2008) 300 ITR 251. The Apex Court observed that for thepurpose of computation of book profit under section 115JB, the Assessing Officer’spower is restricted to examining whether the books of account are certified by the


authorities under the Companies Act as having been properly maintained in accordancewith the Companies Act. Thereafter, he only has the limited power of making additionsand deductions as provided for in Explanation 1 to section 115JB. The AssessingOfficer does not have the jurisdiction to go behind the net profit shown in the profit andloss account except to the extent provided in Explanation 1 to section 115JB. Where anassessee is consistently charging depreciation in its books of account at the ratesprescribed in Income-tax Rules and the accounts of the assessee have been preparedand certified as per the provisions of the Companies Act, the Assessing Officer does nothave any jurisdiction under section 115JB to rework the net profit of the assessee bysubstituting the rates of depreciation prescribed under the Companies Act.

Applying the ratio of the Supreme Court decision to this case, it may be concludedthat the action of the Assessing Officer is not correct.

2013 - Dec [3] (a) Comment in brief on allowability of following expenditure whilecomputing the income under the head ‘profits and gains of business or profession’ forthe assessment year 2015-16:

(i) Kanha commenced operations of the business of setting-up a warehousingfacility for storage of sugar on 1st June, 2014. He incurred capital expenditure onpurchase of building during the period from January, 2014 to March, 2014exclusively for the above business and capitalised the same in its books ofaccount on 1st June, 2014.

(ii) Ms. Radha incurred expenditure on purchase of computer software andcapitalised such expenditure in her books of account.

(iii) Murli is operating a pharmaceutical factory. he incurred expenditure in providingfreebees to medical practitioners. (3 marks each)

Answer:(i) Deduction of 100% of the capital expenditure is available under section 35AD

for Assessment year 2015-16 in respect of specified business of setting up andoperating a warehousing facility for storage of sugar, if following conditions arefulfilled:(a) Operations are commenced on or after 01-04-2014.(b) If expenditure is incurred prior to the commencement of its operations wholly

and exclusively for the specified business, and the amount is capitalised inthe books of accounts of the assessee on the date of commencement of itsoperations; and

(c) Expenditure should not be incurred on acquisition of any land, goodwill orfinancial instrument.Hence, 100% deduction will be allowed for capital expenditure incurred and


capitalised, excluding the expenditure incurred on acquisition of land.(ii) The expenses incurred by assessee on purchase of computer softwares are

revenue in nature in view of rapid advances and changes in technical know how.Thus, such expenditure shall be allowable.

(iii) As per Circular No. 5/2012, Dated 1-8-2012, some pharmaceutical and alliedhealth sector industries are providing freebees (freebies) to medical practitionersand their professional associations in violation of the regulations issued byMedical Council of India (the 'Council') which is a regulatory body constitutedunder the Medical Council Act,1956.The Claim of any expense incurred in providing above mentioned or similarfreebies in violation of the provisions of Indian Medical Council (ProfessionalConduct, Etiquette ans Ethics) Regulations, 2002 shall be inadmissible undersection 37(1) of the Income Tax Act being an expense prohibited by the law.This disallowance shall be made in the hands of such pharmaceutical or alliedhealth sector Industries or other assessee which has provided aforesaidfreebees and claimed it as a deductible expense in its accounts against income.The sum equivalent to value of freebees enjoyed by the aforesaid medicalpractitioner or professional associations is also taxable as business income orincome from other sources as the case may be depending on the facts of eachcase.Thus, expenditure incurred by Murli in providing freebees to medical practitionersis disallowed.

2014 - Dec [1] (b) XYZ LLP has income of ̀ 72,00,000 under the head 'profits and gainsof business or profession’. One of its business is eligible for deduction@ 100% of profitsunder section 80-IB for the assessment year 2015-16. The profit from such businessincluded in the business income is ` 58,00,000. Compute the tax payable by the LLP,assuming that it has no other income during the previous year 2014-15. (5 marks)(c) The book profits of a company in the previous year 2014-15 computed in

accordance with section 115JB are ` 60,00,000. If the total income for the sameperiod computed as per the provisions of the Income-tax Act, 1961 is ̀ 12,00,000,calculate the tax payable by the company in the assessment year 2015-16 and alsoindicate whether the company is eligible for any tax credit. (5 marks)

Answer:(b) (i) Computation of Total Income and Income Tax Payable for Assessment Year

2014-15.`

As per the normal provision of the Act


Profits & Gains of business or Profession (Total) 72,00,000Less: Deduction under section 80-IB 58,00,000Total income 14,00,000Tax payable @ 30% 4,20,000Add: EC @ 2% SHEC @ 1% 12,600Tax Payable 4,32,600

(ii) Computation of Alternate Minimum Tax (Amount)`

Profits & Gains of business or profession 14,00,000Add: Deduction under section 80 IB 58,00,000Adjusted Total Income 72,00,000AMT @ 18.5% 13,32,000Add: EC @ 2% & SHEC @ 1% 39,960

13,71,960Here, as per Section 115JC, Since, the income tax payable as per normalprovisions of the Income Tax Act is less than the AMT, the LLP would be liable to pay ` 13,71,960 as tax.

Particulars Amount (`)

(iii) Computation of Alternate Minimum Tax (AMT)

Adjusted Total Income (including profit u/s 80-IB 72,00,000

AMT on adjusted Total Income @ 18.5% 13,32,000

Education Cess & SHEC @ 3% (2% + 1%) 39,960

Total Tax 13,71,960

(iv) Tax payable (higher of AMT or Normal Tax 13,71,960

(v) Tax Credit 9,39,360

Note:Since the regular income tax payable is less than AMT, the adjusted totalincome would be deemed to be the income of LLP and it would be liable totax @ 18.5% plus cess. Further the LLP would be eligible for credit in 10subsequent years to the extent of difference between the AMT and NormalTax, in the year in which the tax payable under regular provisions exceeds theAMT.

Answer:(c)1. Calculation of tax liability u/s 115 JB:


Particulars Details AmountBook profit Given 60,00,000Tax liability 18.5% of 60 lakh 11,10,000Add: Surcharge NILTax liability after surcharge 11,10,000Add: Edu. cess & SHEC @ 3% 33,300Tax liability after cess 11,43,300

2. Calculation of tax liability as per Income Tax Act, 1961:


Total income Given 12,00,000

Tax liability 30% of 12 lakh 3,60,000

Add: Edu. cess & SHEC @ 3% 10,800

Tax liability after cess 3,70,800

3. Computation of final tax payable:


Tax liability Tax liability u/s 115J B>Normal Tax liability 11,43,300

Actual Tax liability 11,43,300

The company is eligible for MAT tax credit of ̀ 7,72,500 (` 11,43,300 - ̀ 3,70,800)which can be carried forward for 10 years or is to be awaited within 10 years u/s115 JAA.

2014 - Dec [2A] (Or) (a) You are the Financial Controller in a manufacturing companyhaving turnover exceeding ` 800 crore. Write a report for your Managing Directorhighlighting the legal position pertaining to the following:

(i) Tax on distributed income by a company for buy-back of unlisted shares.(ii) Time-limit for completion of assessment/ reassessment when a reference is

made to the Transfer Pricing Officer (TPO).(iii) Allowance for acquisition and installation of new plant and machinery under

section 32AC.(iv) Tax consequences of assignment of keyman insurance policy before maturity

by employer-company to its employee. (15 marks)Answer:

(i) A company, having distributable reserves, has two options to distribute the sameto its shareholders either by declaration and payment of dividends to the


shareholders or by way of purchase of its own shares (i.e. buy back of shares)at a consideration fixed by it. In the first case, the payment by company issubject to DDT and income in the hands of shareholders is exempt. In thesecond case the income is taxed in the hands of shareholder as capital gains.Unlisted Companies, as part of tax avoidance scheme, are resorting to buy backof shares instead of payment of dividends in order to avoid payment of tax byway of DDT particularly where the capital gains arising to the shareholders areeither not chargeable to tax or are taxable at a lower rate.

In order to curb such practice the Act has amended the Act, by insertionof new Chapter XII-DA, to provide as under:(1) Tax on distributed income to shareholders [Section 115QA]

(A) Additional income tax on buy back of shares [Section 115QA(1)](i) In addition to the income tax payable by the company on its total

income as per the provisions of the Act, the domestic company shallbe liable to pay additional income tax @ 20% on any amount ofdistributed income paid by the company on buy back of shares notbeing shares listed on a recognised stock exchange.

(ii) Rate of additional income tax is 20%+10%SC+3%Cess i.e. 22.66%(B) Additional income tax payable even if the total income of domestic

company is exempt [Section 115QA(2)]Notwithstanding that no income tax is payable by a domestic companyon its total income computed in accordance with the provisions of thisAct, the tax on the distributed income under section 115QA(1) shall bepayable by such company.

(C) Time limit for deposit of additional income tax [Section 115QA(3)] The principal officer of the domestic company and the company shall beliable to pay the tax to the credit of the Central Government within 14days from the date of payment of any consideration to the shareholderson buy back of shares referred to in Section 115QA(1).

(D) Additional income tax to be treated as final payment [Section115QA(4)]The tax on the distributed income by the company shall be treated asthe final payment of tax in respect of the said income and no furthercredit therefore shall be claimed by the company or by any other personin respect of the amount of tax so paid.


(E) Income charged to tax not allowed as deduction [Section115QA(5)]No deduction under any other provision of this Act shall be allowed to:(a) the company; or(b) a shareholderIn respect of the income which has been charged to tax under section115QA(1) or the tax thereon.

(2) Interest payable for delayed payment of tax [Section 115QB]Where the principal officer of the domestic company and the company failsto pay the whole or any part of the tax on the distributed income referred toin Section 115QA(1), within the time allowed under section 115QA(3) of thatsection, he or it shall be liable to pay simple interest @ 1% for every monthor part thereof on the amount of such tax for the period beginning on thedate immediately after the last date on which such tax was payable andending with the date on which the tax is actually paid.

(3) When company is deemed to be assessee in default [Section 115QC]If any principal officer of a domestic company and the company does not paytax on distributed income in accordance with the provisions of Section115QA, then, he or it shall be deemed to be an assessee in default inrespect of the amount of tax payable by him or it and all the provisions of thisAct for the collection and recovery of income tax shall apply.Exemption to the shareholder on account of buy back of shares[Section 10(34A)] [W.e.f. A.Y. 2014-15]Since, the company has to pay additional income tax on buy back of shares,any income arising to an assessee, being a shareholder, on account of buyback of shares (not being listed on recognised stock exchange), shall beexempt.

(ii) Where a reference under section 92CA(1) is made, an order under section92CA(3) may be made at any time before 60 days prior to the date on which theperiod of limitation referred to in Section 153, or as the case may be , in Section153B for making the order of assessment or re-assessment or re-computationor fresh assessment, as the case may be, expires.

(iii) The date of installation of machinery or plant costing more than 100 crores forinvestment allowance @ 15% u/s 32AC extended to 31.03.2017 and 15% shallalso be allowed to any assessee who installed new asset of 100 crore or less butmore than 25 crores in any previous year upto 31.03.2017.

(iv) Where maturity amount is received by the legal heir on the death of employeeunder keyman insurance policy, then such amount is taxable as Income from


other sources in the hands of recipient.

2015 - June [1] (a) Amar, an individual, resident of India, receives the followingpayments after TDS during the previous year 2014-15:

`(i) Professional fees on 17.08.2014 2,40,000(ii) Professional fees on 04.03.2015 1,60,000

Both the above services were rendered in Pakistan on which TDS of ` 50,000 and `30,000 respectively has been deducted. He had incurred an expenditure of ̀ 2,40,000for earning both these receipts/income. His income from other sources in India is `3,00,000 and he has made payment of ` 70,000 towards LIC.Compute the tax liability of Amar and also the relief under section 91, if any, forassessment year 2015-16. (5 marks)

(b) Apple Industries Ltd. provides the following information for the financial year 2014-15:Net profit as per statement of profit and loss after debiting/crediting thefollowing: ` 120 lakhProposed dividend ` 30 lakhProfit from unit established in SEZ ` 20 lakhProvision for income-tax ` 18 lakhProvision for deferred tax ` 10 lakhProvision for permanent diminution in value of investments ` 3 lakhDepreciation debited to statement of profit and loss ̀ 10 lakh includesdepreciation on revaluation of assets to the tune of ` 1 lakh

Brought forward losses and unabsorbed depreciation as per books of the company areas follows:

(` in lakh)Previous Year Brought Forward Losses Unabsorbed Depreciation2010-11 1 42011-12 1 12012-13 10 5

Compute the book profit of the company as per section 115JB for the assessment year2015-16. (5 marks)

2015 - June [2A] (Or) (i) (a) Tinoo Ltd. is eligible to claim deduction of ` 2 crore undersection 80-IA. It has filed its return of income after the due date as specified in section139(1). Discuss the allowability of deduction under section 80-IA. (2 marks)


(b) Sahil sold a residential house on 15th March, 2015 to Neeraj for ̀ 30 lakh of whichvalue applied by stamp valuation authority was ` 38 lakh. Sahil purchased thishouse in March, 2004 for ̀ 12 lakh but the stamp duty value of the same was ̀ 15lakh. In the context of these transactions, compute the following —(i) Income out of this transaction, if any, in the hands of Neeraj.(ii) Cost of acquisition to Neeraj. (2 marks)

(c) An HUF, resident in India, has a gross total income of ` 5,40,000 for theassessment year 2015-16. It made a payment of ` 50,000 for life insurancepremium of one of its members. Whether the HUF is entitled to claim the rebate asper section 87A? (1 mark)

CS Executive Programme (Module I)

SHORT NOTES

2008 - Dec [4] (b) Write short notes on the following:(i) The activities of a co-operative society which are eligible for deduction under

section 80P. (3 marks)

Answer:The activities of a co-operative society which are eligible for deduction @ 100% underSection 80P are as follows:

(i) Income from banking business & providing credit facilities to its members(ii) Cottage Industry(iii) Marketing agricultural produce(iv) Purchase of agricultural implements (v) Processing of agricultural produce without aid of power of its member(vi) Collective disposal of Labour for its members(vii) Primary Society engaged in supply of milk, oilseeds, fruits etc(viii) Investment in securities (ix) Letting of Godowns & warehouses.

2009 - Dec [2] (b) Write short notes on the following:(i) Taxation of zero coupon bonds(ii) Share of profit from partnership firm (3 marks each)

Answer:(i) Zero coupon bonds means


1. Bond issued by an infrastructure capital company or infrastructure capitalfund or public sector company on or after 1st June, 2005.

2. Bond in respect of which no payment and benefit is received or receivablebefore maturity or redemption from infrastructure capital company orinfrastructure capital fund or public sector company.

3. Bonds which Central Government may, by notification in the Official Gazettespecify in this behalf.

Maturity and redemption of Zero coupon bonds to be treated as transfer. Theprofits arising on the transfer of zero coupon bonds shall be subject to capitalgains tax. In case of short term capital asset, the same will be taxable as perassessee specific income tax slab rates.

In case of long term capital asset, the assessee will have either of the twooptions to pay minimum tax u/s 112(1):Option I: 20% of long term capital gain after indexation of the cost of suchbonds; or Option II: 10% of long term capital gains before indexation of the costof such bonds;

(ii) Share of Profits from partnership firmShare of profits which a partner receives from the firm (after deduction ofremuneration and interest allowable) shall be fully exempt in the hands of thepartners. However, only that part of the interest and remuneration which wasallowed as a deduction to the firm shall be taxable in the hands of the partnersin their individual assessment under the head ‘profits and gains of business orprofession’.

2010 - June [2] (b)Write short notes on the following:(ii) Taxation of zero coupon bonds(iii) Profit in lieu of salary. (3 marks each)

Answer:(ii) Please refer 2009 - Dec [2] (b) (i) on page no. 76(iii) Profit in lieu of salary

Following Items are Included in this CategoryCompensation: By virtue of Sec. 17(3) (i), any compensation due to or receivedby an employee from his employer or former employer at or in connection withthe termination of his employment or modification in terms of his employment istaxable as profit in lieu of salary.Other PaymentsAny payment in the form of:• Gratuity


• Commuted value of pension• Retrenchment compensation• House rent allowance

Received or due to be received to the extent which is not exempt, and whichit does not consist of contribution made by the employee, or interest thereon, istaxable as profits in lieu of salary.Keyman Insurance Policy: Surrender value of the policy endorsed in favour ofthe employee, or the sum received by him at the time of retirement, will betaxable as profit in lieu of salary.Lump-sum Incentives:Any amount due or received- before joining employment or after leavingemployment, it is Taxable as profit in lieu of salary.

2010 - Dec [6] (a) Write short notes on the following:(ii) Capital gains in case of damage or destruction of capital asset(iii) Clubbing of income of a minor child (v) Tax on income of foreign institutional investors from capital gains arising from

transfer of their securities. (3 marks each)Answer:

(ii) Where any person receives at any time during any previous year any money orother assets under insurance from an insurer on account of damages to, ordestruction of any capital asset, as a result of:(a) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of

nature; or(b) Riot or civil disturbance; or(c) Accidental fire or explosion; or(d) Action by an enemy or action taken in combating an enemy (whether with

or without a declaration of war)Then, any profits or gains arising from receipts of such money or other assetsshall be chargeable to income-tax under the head “capital gains” and shall bedeemed to be the income of such person of the previous year in which suchmoney or other asset was received and for the purposes of section 48, value ofany money or the fair market value of other assets on the date of such receiptsshall be deemed to be the full value of the consideration received or accruing asa result of the transfer of such capital asset.

(iii) Clubbing of Income of a minor childAs per this section, income of a minor child will be clubbed in the income of theparent, whose total income before such clubbing is higher.


Following points are relevant to be noted in this regard – C If the child earns any income by doing manual work or due to a special skill,

such income will not be clubbed. C A special deduction of ` 1,500 per child will be allowed to the parent, in

whose income it is clubbed.

C Child’s income will be added to the income of parent, whose income beforesuch clubbing is higher, in case of separated couple, income of the child willbe added in the income of the parent who maintains the child in theprevious year.

C Any income of a minor child, suffering from any disability of the naturespecified in section 80U will not be clubbed.

(v) Tax on foreign institutional investors from capital gains arising from transfer oftheir securities [Section 115AD]Where the total income of the above assessee includes:(a) Income received in respect of securities other than units of mutual funds

covered under section 10(23D) or of Unit Trust of India; or(b) Income by way of short term or long term capital gains arising from the

transfer of such securitiesThe income-tax on the total income shall be chargeable as under:(a) On the income in respect of securities referred to in clause (a) above @

20%(b) On the income by way of short term capital gains covered under section

111A @ 15%(c) On the income by way of long term capital gains referred to in clause (b)

above @10%(d) On the balance income included in total income special/normal rate as the

case may be.

2011 - Dec [5] (a) Write short notes on the following:(i) Deduction in respect of interest on loan taken for higher education.

(3 marks)Answer:The deduction under section 80E is available to an individual if following conditions aresatisfied:1. Deduction available only to Individual not to HUF or other type of Assessee.2. Deduction amount:– The amount of interest paid is eligible for deduction and

moreover there is no cap on the amount to be deducted. You can deduct the entire


interest amount from your taxable income. However there is no benefit availableon the repayment of principal amount of the loan.

3. Deduction available if Interest is been paid during the previous year and was paidout of income chargeable to tax which means if repayment is made from incomenot chargeable to tax than deduction will not available.

4. Interest should have been paid on loan taken by him from any financial institutionor any approved charitable institution for the purpose of pursuing his highereducation. Interest on Loan taken from relatives or friends will not be eligible fordeduction under section 80E.

5. Loan should have been taken for the purpose of pursuing higher studies ofIndividual, Spouse, Children of Individual or of the student of whom individual islegal Guardian.

6. The whole of the amount paid during previous year towards interest is allowed asdeduction and deduction shall be allowed for 8 assessment years starting from theassessment year in which the assessee starts paying the interest on loan, or untilthe interest thereon is paid by the assessee in full, whichever is earlier.

2012 - June [5] (b) Write short notes on the following:(i) Scientific research expenditure(ii) Capital assets (3 marks each)

Answer:(i) Scientific Research Expenditure

Section 35 of the Act provides tax incentives for scientific research expenditure.Where the assessee himself carries on scientific research and incurs revenue& capital expenditure, deduction is allowed for such expenditure only if theresearch relates to his business. Further, Expenditure incurred during 3 yearsprior to commencement of business shall be deemed to be the expenditure ofthe year in which business commenced.

Where the assessee does not himself carry on scientific research but makescontribution to an approved scientific research association, university, college orapproved institutions to be used for scientific research, related or unrelated tothe business of assessee, deduction shall be allowed to the extent of 175% ofthe sum paid.

(Where any sum is paid to a National Laboratory, approved for this purposeby the ICAR or ICMR or CSIR etc. or to any university, or to I.I.T. (Indian Instituteof Technology), a weighted deduction of 175% or 200% of the sum paid shall beallowed as deduction.)


(ii) Capital AssetsSection 2 (14) of the Income-tax Act defines the term "Capital Assets: to

means:Property of any kind held by an assessee whether or not connected with his

business or profession, but does not include:(i) Any stock-in-trade, consumable stores, or raw materials, held for the

purposes of business or profession(ii) Personal effects (excluding jewellery, archaeological collections, drawings,

painting. Sculptures or any work art.)(iii) Rural Agricultural land in India. In other words, it must not be an Urban

agricultural land. Rural agricultural land means an agricultural land in Indiaprovided it is not situated in !(a) Any area which is comprised within th jurisdiction of a municipality

having a population of 10,000 or more.(b) Any area within the distance, measured aerially :

C More than 2 kms. from the local limits of any Municipality orCantonment Board having a population of more than 10,000 but notexceeding 1,00,000; or

C More than 6 kms. from the local limits of any Municipality orCantonment Board having a population of more than 1,00,000 butnot exceeding 10,00,000 ; or

C More than 8 kms. from the local limits of any Municipality orCantonment Board having a population of more than 10,00,000.

(iv) 6½% Gold Bond, 1977 or 7% Gold Bonds, 1980 or National Defence GoldBonds, 1980 issued by the Central Government.

(v) Special Bearer Bonds, 1991 issued by Central Government.(vi) Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

Note:Definition of “Capital Asset” Amended [Section 2(14)] [W.E.F. 2015-16]The existing Section 2(14) defines the term “capital asset” as under: “Capital asset” mean property of any kind held by an assessee, whether or notconnected with his business or profession, but does not include:

(i) any stock-in-trade, consumable stores or raw materials held for the purpose ofhis business or profession;

(ii) .................... to .................. (vi) ......The foreign portfolio investors (referred as foreign institutional investors in the Act) facea difficulty in characterisation of their income arising from transaction in securities as


to whether it is capital gain or business income. Further, the fund manager managingthe funds of such investor remains outside India under the apprehension that itspresence in India may have adverse tax consequences. Therefore, in order to end this uncertainty, Section 2(14) has been amended by theFinance (No. 2) Act, 2014 as under: “capital asset” means: (a) Property of any kind held by an assessee, whether or not connected with his

business or profession; (b) Any securities held by a Foreign Institutional Investor which has invested in such

securities in accordance with the regulations made under the Securities andExchange Board of India Act, 1992,

but does not include: (iii) Any stock-in-trade [other than the securities referred to in sub-clause (b)],

consumable stores or raw materials held for the purpose of his business orprofession,

(iv) .............to vi...............Hence, securities held by the F.I.I. will now be treated as capital asset only and thetransfer of such securities would always result into capital gain whether such F.I.I. hasany permanent establishment in India or not. Under no circumstances, such transfer ofsecurities held by F.I.I. can now be treated as business income. Further, explanation 2 has been inserted to provide as under:For the purpose of this clause:(a) The expression “Foreign Institutional Investor” shall have the meaning assigned to

it in clause (a) of the Explanation to Section 115AD;(b) The expression “securities” shall have the meaning assigned to it in clause (h) of

Section 2 of the Securities Contract (Regulation) Act, 1956.

DISTINGUISH BETWEEN

2008 - Dec [3] (b) Distinguish between of the following:(i) ‘House rent allowance’ and ‘rent free house’.(ii) ‘Cost of acquisition’ and ‘cost of improvement’.(iii) ‘Fair rent’ and ‘annual rent’. (3 marks each)

Answer: (i) ‘House rent allowance’ and ‘rent free house’

S. No. House Rent Allowance Rent free house


1 It is dealt under section 10(13A) andRule 2A.

It is a kind of perquisite. It is dealtunder section 17(2)(i) of the Act.

2 While calculating salary and basic pay,dearness allowance and commission (ifterms of employment provide) isincluded.

Under calculation of salary, apartfrom basic pay, DA andCommission, Bonus, fees and othertaxable allowance are also included

3 Only taxable portion (after deduction) isadded to the Gross Salary of theassessee.

In this case, it is included in theGross Salary of the assessee asperquisite.

(ii) ‘Cost of acquisition’ and ‘cost of improvement’:The distinction between ‘Cost of acquisition’ and ‘cost of improvement’ can beexplained in the following lines. The above two terms are associated with thecapital assets.

Cost of Acquisition:Cost of acquisition of an asset is the value for which it was acquired by theassessee. Expenses of capital nature for completing or acquiring the title to theproperty are includible in the cost of acquisition. Cost of acquisition alwaysprecedes cost of improvement.Cost of Improvement:It is the capital expenditure incurred by the assessee in making anyadditions/improvement to the capital asset. It also includes any expenditureincurred to protect or complete the title to the capital assets or cure such title.Any expenditure incurred to increase the value of the capital asset is treated ascost of improvement. Any cost of improvement incurred before 1.4.1981 is nottaken into consideration for calculating capital gains chargeable to tax.

(iii) ‘Fair rent’ and ‘annual rent’:Fair rent means the sum of for which the property might reasonably be expectedto let from year to year. This rent is also known as notional rent. It will be equalto the rent which a similar property fetches in the neighborhood.Where as annual rent means the actual rent. This happens only where the houseproperty has been actually let. Again annual rent means (i) if property is let outthroughout the previous year the annual rent received or receivable for that yearand (ii) if the property is let out for a part of the year the amount which bears thesame proportion to actual rent received or receivable for the period of letting as


the period of twelve month bears to the period of letting.

2009 - June [3] (a) Distinguish between the following:(ii) 'Long-term capital gain' and 'short-term capital gain'. (2 marks)

Answer:Distinguish between Short - term capital gain and long - term capital gain:Short term capital gain:S.T.C. gains means any gains arising from transfer of a Capital Asset for which theholding period is less than 36 months from date of purchase except for shares &securities of such companies listed on recognised stock exchanges & traded throughsuch exchanges & on which securities transaction tax is paid where the holding periodless than 12 months shall be termed as short term. If Capital Asset as defined u/s2(42A). Short Term Capital gains also includes S.T.C. Loss termed as negative gains.Long term capital gain:L.T.C. Gains means any gains arising from transfer of any Capital Asset, for which theholding period is 36 months or more, except for shares & securities of such companieslisted on recognised Stock Exchanges & traded through such exchanges on whichsecurities transaction tax is paid, the holding period shall be 12 months or more fromthe date of purchase. Such Assets Shall be termed as Long Term Capital Assets.

2009 - Dec [3] (a) Distinguish between the following:(ii) ‘Recognised provident fund’ and ‘statutory provident fund’. (4 marks)(iv) ‘Exemptions’ and ‘deductions’. (4 marks)

Answer:(ii) Recognized Provident Fund is set-up under the provisions of Employee's

Provident Fund Act, 1952. This fund is maintained by the private sectororganizations and factories.

Apart from this where provident fund maintained by other organization isrecognized by the income-tax authorities, such fund is also deemed asrecognized provident fund. On the other hand statutory provident fund is set-upunder the provisions of Provident Fund Act, 1925. This fund is applicable to theemployees of Central Government, State Government and Semi-Government.Under this fund only the employee's contribution is deposited. The Governmentdoes not contribute any amount while in case of RPF both employer andemployee can deposit the contribution. Employer's contribution to RPF up to12% of salary is exempted and any amount in excess of 12% is included in grosssalary of the employee. Interest up to 9.5% p.a. is exempted and any amount ofinterest in excess of 9.5% p.a. included in the gross salary of the employee.

(iv) Exemptions from tax are covered under section 10 and 11 of the income tax act


and deductions are covered under chapter VIA of the Income Tax act.Certain incomes are exempt and they are not considered during the

calculation of total income such as interest from PPF, dividends from Indiancompanies, agricultural income, income from NRE account, etc. These areknown as exempt incomes.

But deductions are done from taxable income suppose you invest in ELSS,PPF, LIC ,etc. pay medical insurance or donate to approved charitableinstitutions then you get deductions from your gross total income. There arehowever limitations to the quantum of deductions. as per provision laid down inSec. 80.

2010 - June [3] (b) Distinguish between the following:(iii) ‘Exemption to capital gains under section 54G’ and ‘exemption to capital gains

under section 54GA’. (2 marks)Answer:Exemption under section 54G is available for capital gains on transfer of assets in casesof shifting of industrial undertakings from urban areas whereas exemption under section54GA is available for capital gains on transfer of shifting of industrial undertaking fromurban area to any special economic zone.Under section 54G the transfer is affected in the course of or in consequence of shiftingthe undertaking from an urban area to any area whereas under section 54GA thetransfer is effected in the course of or in consequence of shifting the undertaking froman urban area to any special economic zone.

2010 - Dec [5] (a) Distinguish between the following:(i) ‘Long-term capital gains’ and ‘short-term capital gains’.

(iii) ‘Normal depreciation’ and ‘additional depreciation’. (4 marks each)Answer:

(i) Please refer 2009 - June [3] (a) (ii) on page no. 84

(iii) Normal depreciation & additional depreciation(a) Normal depreciation is available in respect of all tangible assets and

intangible asset such as building, machinery, plant, furniture, patent, etc.while additional depreciation is available only in the case of Plant &Machinery.

(b) Normal depreciation is available in respect of both types of new and oldwhile additional depreciation is available only in respect of new plant &machinery which is acquired and installed after 31st March, 2005


(c) Normal depreciation is computed by applying different rates of depreciationprescribed for a particular asset while additional depreciation is computedby applying a uniform rate of depreciation viz. 20% of the actual cost of newplant & machinery

(d) The system of “block of assets” is quite relevant for computing normaldepreciation while it is not relevant for computing additional depreciation

(e) Any plant & machinery which is used in business of the assessee is eligiblefor normal depreciation while certain plant & machinery, even if new, are noteligible for additional depreciation like ships and aircrafts, plant & machinerywhich was already used by a person either in India or abroad, plant &machinery which is used in any office premises or any residentialaccommodation or in a guest house, any office appliances or road transportvehicle or plant & machinery the entire cost of which has already beenallowed as deduction either by way of depreciation or otherwise.

2011 - June [4] (b) Distinguish between the following:(i) 'Cost of acquisition' and 'cost of improvement'.

(iii) 'Short-term capital gains' and 'long-term capital gains'.(3 marks each)

Answer:(i) Please refer 2008 - Dec [3] (b) (ii) on page no. 83

(iii) Please refer 2009 - June [3] (a) (ii) on page no. 84

2011 - Dec [4] (a) Distinguish between the following:(ii) ‘Allowances’ and ‘perquisites’.(iv) ‘Exemption under section 54G’ and ‘exemption under section 54GA’.(v) ‘Statutory provident fund’ and ‘public provident fund’.

(3 marks each)

Answer:(ii) ‘Allowances’ and ‘Perquisites’

S.No. Allowance Perquisites

1. An allowance is a cash paymentto employees on regular basis inaddition to salary to meet certainexpenses incurred by him inconnection with duties of his office

Perquisites means any casual emolument,fee or profit attached to an office orposition in addition to salary or wages.


or to compensate him for anyexpend i tu re re l a t i ng toperformance of his duty inparticular circumstances or atparticular place or under acontract.

2. An allowance may be whollytaxable, partially taxable or whollyexempt.

It is a personal advantage & benefit of therecipient. It may also be given voluntary orunder a contract, in cash or in kind by wayof goods, service benefit or amenities.

(iv) ‘Exemption under section 54G’ and ‘exemption under section 54GA’

S.No. Exemption under section 54G Exemption under section 54GA

1. This exemption is available onCapital Gain on Transfer of Capitalassets in Case of Shifting ofIndustrial Undertaking from UrbanArea.

This exemption is available on CapitalGain on Transfer of Capital assets inCase of Shifting of IndustrialUndertaking from Urban Area to anySEZ.

2. This exemption is available anindividual, HUF, company or anyother person who transfers thecapital assets (being plant,machinery, land or building or anyright in the land or building) beingused for the purpose of industrialundertaking situated in an urbanarea to any area other than urbanarea.

This exemption is available anindividual, HUF, company or any otherperson who transfers the capital assets(being plant, machinery, land or buildingor any right in the land or building) beingused for the purpose of industrialundertaking situated in an urban area toa special economic zone (SEZ).

(v) ‘Statutory provident fund’ and ‘public provident fund’

S.No. Statutory Provident Fund Public Provident Fund

1. Statutory Provident fund is set upunder the Provident Fund Act, 1925and is maintained by Governmentor Semi-Government offices orbodies, local authorities, railways,universities, colleges, corporations,

While provident fund is governed byPublic Provident Fund Act, 1968 tomobilize public savings.


banks and recognized educationalinstitutions, etc.

2. Only salaried person can becomemembers of Statutory ProvidentFund.

Any person can become the member ofPublic Provident Fund.

3. The contribution of members isdeducted by the employers fromthe salary of their employees.

Members of PPF have to open providentfund account at any branch of the SBI orits subsidiaries and specified branchesof nationalized banks.

4. Amount of contribution to SPF iscomputed at a specified rate onaccount of salary of an employees.

Member can deposit any amount subjectto a minimum of ` 500 and a maximumof ` 1,00,000 per year.

2012 - June [6] (b) Distinguish between the following:(i) ‘Firm’ and ‘association of persons’. (3 marks)

Answer:A firm refers to a partnership firm. Partnership has been defined under the PartnershipAct, 1932 as "relationship between persons who have agreed to share the profits of abusiness carried on by all or any of them acting for all.” Persons who have entered intopartnership with one another are individually called partners and collectively a firm andthe name under which their business is carried on, is call the firm’s name.

An association of persons (AOP) implies a voluntary getting together for a commondesign or particular venture to engage in an income producing activities.

2012 - Dec [6] (c) Distinguish between the following:(i) ‘Recognised provident fund’ and ‘unrecognised provident fund’.

(iii) ‘Taxation of unrealised rent received’ and ‘taxation of arrears of rent received’.(3 marks each)

Answer: (i) Recognized Provident Fund is set-up under the provisions of Employee's

Provident Fund Act, 1952. This fund is maintained by the private sectororganizations and factories.

Apart from this where provident fund maintained by other organization isrecognized by the income-tax authorities, such fund is also deemed asrecognized provident fund. On the other hand statutory provident fund is set-upunder the provisions of Provident Fund Act, 1925. This fund is applicable to theemployees of Central Government, State Government and Semi-Government.Under this fund only the employee's contribution is deposited. The Government


does not contribute any amount while in case of RPF both employer andemployee can deposit the contribution. Employer's contribution to RPF up to12% of salary is exempted and any amount in excess of 12% is included in grosssalary of the employee. Interest up to 9.5% p.a. is exempted and any amount ofinterest in excess of 9.5% p.a. included in the gross salary of the employee.

(iii) Taxation of unrealized rent received and taxation of arrears of rent receivedProvisions regarding taxation of unrealized rent are given under section 25AA,where the assesses cannot realize rent from a property let to a tenant andsubsequently the assesses has realized any amount in respect of such rent theamount so realized shall be deemed to be the income chargeable under thehead income from house property and accordingly charged to income tax as theincome of that previous year in which such rent is realized whether or not theassessees is the owner of that property in the previous year. While in case of taxation of arrears of rent, section 25B provides that if anyarrears of rent are received in subsequent year the same will be taxed in theyear of receipt whether the property is owned by the assesses in the year ofreceipt or not, deduction of sum equal to 30% of such amount of rent shall beallowed towards receipts and collection of rent.


2008 - Dec [3] (a) Attempt the following:(ii) “Expenditure on scientific research is allowed as deduction even if contribution

is made to other institutions for scientific research.” Explain the statement.(iii) A Person receives money from an insurer on account of damage to a capital

asset resulting from accidental fire. Whether such money shall be taxable ascapital gains? Explain. (3 marks each)

Answer:(ii) • Contribution made to an approved Scientific Research Association/

University/ College/ Institution, a weighted deduction of 175% of thecontribution paid is available [Section 35(1) (ii)]. Such association has, as itsobject, undertaking of scientific research related or unrelated to the businessof the assessee

• The payment is made to an approved university, college or institution for the


purpose of scientific research that is related or unrelated to the business ofthe assessee, a weighted deduction of 125% is allowed.

• The payment is made to an approved university, college or institution for thepurpose of research for social sciences that is related or unrelated to thebusiness of the assessee

Contribution made to an approved Scientific Research Company, a weighteddeduction of the contribution paid is available subject to following conditions[Section 35(1)(iia)]• The Taxpayer may be any Person as defined under the Income Tax Act,

1961;• The Payee Company is registered in India;• The scientific research may/ may not be related to the business of the

company;• The Payee Company has as its main object Scientific research and

development;• The Payee Company is, for the purposes of this clause, for the time being

approved by the prescribed authority in the prescribed manner;• The Payee Company fulfils such other conditions as may be prescribed.However deduction under Section 35(1)/ (2) would continue to be allowed beingRevenue/ Capital expenditure incurred.

Contribution made to Notified Institutions, wherein weighted deduction isavailable to the extent of 200% of such payment made [Section 35(2AA)]The Notified institutions are:

(i) National Laboratory.(ii) University.(iii) Indian Institute of Technology.(iv) Specified persons as approved by the prescribed authority.

• The above payment is made under a specific direction that it should beused by aforesaid persons for undertaking scientific researchprograms approved by the prescribed authority.

(iii) Yes, such money shall be taxable as capital gains.Where any capital asset is destroyed as a result of fire, earthquake or for anyother reasons, e.g. sinking of a ship, etc, such destruction of asset will beincluded in the extended meaning of the word ̀ transfer'. Section 2(47) of the Actwhich defines `transfer' does not include destruction of an asset.

2008 - Dec [6] (b) Indicate the amount of deduction available to an assessee from hisgross total income under section 80GG in respect of rent paid. Point out thecircumstances when the deduction will be denied. (7 marks)


Answer:Deduction in respect of Rent Paid (Section 80GG)Deduction admissible under this section is:C Actual rent paid less 10% of Adjusted Total IncomeC 25% of such Adjusted Total IncomeC Amount calculated at ` 2,000 p.m. Whichever is leastAdjusted Total Income is the adjusted total income under section 80G except exemptedincome less long term capital gain. However, certain conditions as given below arerequired to be fulfilled/satisfied for claiming u/s 80GG

(i) The assessee should not be receiving any house rent allowance exempt undersection 10(13A) or rent free accommodation

(ii) The accommodation should be occupied by the assessee for the purpose of hisown residence

(iii) The assessee fulfills such other conditions or limitations as may be prescribedhaving regard to the area or place in which such accommodation is situated andother relevant consideration.

(iv) The assessee or his spouse or his minor child or an HUF of which he is amember does not own any accommodation at the place where he ordinarilyresides or performs duties of his office or employment or carries on his businessor profession.

(v) If the assessee owns any accommodation at any place other than that referredto above, such accommodation should not be in occupation of the assessee andits annual value is not required to be determined.

(vi) Allowed only to an individual assessee after furnishing Form 10BA along withreturn of income.

2009 - June [4] (c) Discuss the items which are disallowed as deduction under section40 (b) while computing firm's income from business and profession. (3 marks)Answer:Section 40 (b) deals with the amount which are not deductible in case of a firm.Therefore deductions on accounts of interest and remunerations to the partners can beclaimed u/s 36 or 37, as the case may be, but it will be subject to conditions prescribedby section 40(b) which are as follows:1. Payment of salary, bonus, commission or remuneration, by whatever name called

to non – working partner shall not be allowed as deduction.2. Remuneration to working partners and interest to any partner will be allowed as

deduction only when it is authorized by partnership deed.3. Payment of remuneration/interest although authorized by partnership deed but

which relates to a period prior to the date of such partnership deed shall not be


allowed.4. Interest payable to a partner shall be allowed as deduction subject to a maximum

of 12% simple interest p.a.If the partnership deed provides for an interest @ less than 12% p.a. then

deduction of interest shall be allowed to that extent.5. Payment of remuneration to a working partner although relates to period after the

date of partnership deed and authorized by the partnership deed shall be allowedas deduction to the extent provided in the partnership deed but subject to themaximum limits provided in the act.

2009 - Dec [4] (a) What are the special provisions for computing profits and gains ofretail business? (5 marks)

(b) What are the provisions relating to clubbing of income arising to spouse from theassets transferred ? (5 marks)

Answer:(a) Provisions under section 44 AD shall become Applicable in case of an assessee

engaged in any business except the business of plying, hiring or leasing goodscarriage, 8% of the total turnover or such higher income as may be returned by theassessee shall be deemed to be the profits of such business. This provisionapplies only if the total turnover of sales of such retail business does not exceed` 1 crore. In calculating such presumptive profits @ 8% of sales the said provisionsshall have to be considered:(i) All deductions u/s 30 to 38 including deprecation shall be deemed to have

been allowed [i.e no expenditure shall be allowed as deduction from suchincome @ 8% of T/o]

(ii) Provisions of Sec. 44AA & 44AB pertaining to maintaining of books ofAccounts & disallowance with reference to monetary limits of transactions shallnot apply. However all such data which [i.e. maintenance of books of accountsis not required] shall show the calculation of sales, stock, debtors, creditorsshall be maintained by the assessee.

(iii) In case of an assessee which is a firm to which prov. of 44AD are applied, thesalary/remuneration & interest paid to its partners shall be deducted from theincome computed under this provisions & the allowance ofsalary/Remuneration & interest shall be subject to the conditions & limitsspecified in sec 40(b)

(iv) WDV of assets used for the purpose of such business shall be calculated asif depreciation has been actually provided.

(b) As per the provision of Sec 64(1) (iv) in computing the total income of the


individual, all such income arising directly or indirectly to the spouse of suchindividual from assets transferred to the spouse by such individual otherwise thenfor adequate consideration or in connection with an agreement to live apart shallbe clubbed in the income of transferor. However any further income earned onsuch clubbed income shall be taxable in the hands of spouse.Income from assets transferred to any person for the benefit of the spouse of thetransferor as per the provision of sec. 64(1) (vii) shall be taxable in the hands oftransferor of the asset.

Condition for clubbing:1. The relationship of husband and wife must exist both at the time of transfer of asset

and at the time of accrual of income.2. Consideration must be NIL or inadequate.

3. Where such assets or cash transfer by way of gift to the spouse is invested by thetransferee in any business (except by way of capital contribution in a partnershipfirm), the income shall be clubbed in the following manner.

No clubbing provision shall persist where both the spouse are prof. qualified and arepartners earning income by virtue of the qualifications.

2009 - Dec [5] (c) “Loss under any head of income for any assessment year can be set-off against the income from other heads of income but when it has to be carried forwardfor being set-off, it can only be set-off from income under the same head.” E(x5p mlaainr.ks)Answer:Income of a person is computed under five heads. ‘Sources’ of income derived by anindividual may be many but yet they could be classified under the same head. Forinstance, an individual may have a dual employment, yet the income would be classifiedunder the head ‘Salaries’. However, given the mechanism of computing taxable salaryincome, it would be safe to say that an individual cannot incur losses under this headof income. Consider a situation where Harsh has two properties – one, occupied by himand the other, let out. Harsh pays interest on loan of ` 1.50 lakh on the propertyoccupied and derives net rental income of ̀ 1.50 lakh from the let-out property. In caseof a self-occupied property, income is computed as nil and interest expenditure resultsin loss. The loss of ` 1.50 lakh can be set off against rent income of ` 1.50 lakh; theincome chargeable under the head ‘House property’ will be ‘Nil’.

An exception to intra head set off is loss under the head ‘Capital gains’, which mayarise from transfer of any capital asset. Long-term capital loss arises from transfer of


shares or units where holding period is more than 12 months and in respect of otherassets holding period is more than 36 months prior to sale. Transfer of assets held forless than prescribed period results in short-term capital loss. Long-term capital losscannot be set off against short-term capital gains. but S. Term loss can be adjustedagainst S.T.C.G or LTCG.

Further, loss incurred from speculation loss (e.g. from shares or commodities)cannot be set off against any other income.

Also, it is unlikely that the benefit of set off of loss under an activity or source willbe available, where the income from an activity or source is exempt from taxation.

2009 - Dec [6] (b) What are ‘capital assets’ ? What items are not included in capitalassets? (5 marks)Answer:As per the definition of capital asset under section 2(14), Capital asset means propertyof any kind, whether fixed, circulating, movable, immovable, tangible or intangible. Thefollowing are however excluded:

(i) Any stock in trade, consumable stores or raw materials held for the purposes ofbusiness or profession.

(ii) Personal Assets of the assessee, i.e., movable property (including wearingapparels of the assessee and furniture) held for personal use, but excludes:• Jewellery;• Archaeological collections;• Drawings;• Paintings;• Sculptures;• Any work of art.

(iii) Rural agricultural land in India.(iv) Gold Deposit Bonds issued under Gold Deposit scheme 1999.(v) Special Bearer bonds 1991 issued by the Central Government.(vi) 6.5% Gold Bonds 1977; 7% Gold Bonds 1980 or National Defense Gold bonds

1980 issued by the Central Government.Note:Definition of “Capital Asset” Amended [Section 2(14)] [W.E.F. 2015-16]The existing Section 2(14) defines the term “capital asset” as under: “Capital asset” mean property of any kind held by an assessee, whether or notconnected with his business or profession, but does not include: (i) any stock-in-trade, consumable stores or raw materials held for the purpose of hisbusiness or profession; (ii).................... to .................. (vi) ......


The foreign portfolio investors (referred as foreign institutional investors in the Act) facea difficulty in characterisation of their income arising from transaction in securities asto whether it is capital gain or business income. Further, the fund manager managingthe funds of such investor remains outside India under the apprehension that itspresence in India may have adverse tax consequences. Therefore, in order to end this uncertainty, Section 2(14) has been amended by theFinance (No. 2) Act, 2014 as under: “capital asset” means: (a) Property of any kind held by an assessee, whether or not connected with his





(iv) .............to vi...............Hence, securities held by the F.I.I. will now be treated as capital asset only and thetransfer of such securities would always result into capital gain whether such F.I.I. hasany permanent establishment in India or not. Under no circumstances, such transfer ofsecurities held by F.I.I. can now be treated as business income. Further, explanation 2 has been inserted to provide as under: For the purpose of this clause: (a) The expression “Foreign Institutional Investor” shall have the meaning assigned to



2010 - June [3] (a) An asset is transferred by a person to another person under a partlyrevocable transfer whereby a part of the asset will revert back to the transferor. Whoshall be liable to pay tax in respect of income from the asset transferred as per section61? (2 marks)Answer: All income arising to any person by virtue of a revocable transfer or partly revocabletransfer of assets shall be chargeable to income-tax as the income of the transferor andshall be included in his total income. Therefore transferor shall be liable to pay tax inrespect of income from the assets transferred as per section 61.


2010 - June [4] (c) Discuss the cases in which payment by way of loan/advance to theextent of accumulated profits by a closely held company is treated as dividend undersection 2(22)(e). (4 marks)Answer:As per section 2(22)(e) of Income Tax Act 1961:“any payment by a company, not beinga company in which the public are substantially interested, of any sum (whether asrepresenting a part of the assets of the company or otherwise) [made after the 31st dayof May, 1987, by way of advance or loan to a shareholder, being a person who is thebeneficial owner of shares (not being shares entitled to a fixed rate of dividend whetherwith or without a right to participate in profits) holding not less than ten per cent of thevoting power, or to any concern, in which such shareholder is a member or a partnerand in which he has a substantial interest (hereafter in this clause referred to as the saidconcern)] or any payment by any such company on behalf, or for- the individual benefit,of any such shareholder, to the extent to which the company in either case possessesaccumulated profits”Private Limited Companies generally give Loan or Advance to their director and familymembers who are again shareholders holding 10% or more voting power or to aconcern in which such shareholder has substantial interest. Such loan or advance istreated as deemed dividend covered under section 2(22)(e) and taxable in the handsof shareholders or concern as the case may be.Following points are to be understood with reference to the above:

(i) Sub-clause (e) applies when distribution or payment referred to therein areconnected with accumulated profits. The undistributed income, whenaccumulated from year to year, generates what is known as "accumulated profit".Accumulated profits shall include all profits of the company till the date ofdistribution or payment.

(ii) Current profits are included in "accumulated profits" in section 2(22)(e) of I.T. Act1961. The expression "accumulated profits" was defined in the 1961 Act so asto include current profit up to date of distribution or payment.

(iii) The phrase "accumulated profits" does not mean aggregate of assessed profitsbut commercial profits. If certain disbursements have been disallowed in theassessment proceedings but the expenditure had in fact been incurred, theyshould be excluded from accumulated profits. In computing commercial profits,all the disbursements made and expenditure incurred for the purpose ofbusiness should be taken into account.

2010 - Dec [5] (b) Discuss the provisions relating to ‘carry forward and set-off ofbusiness losses’. (3 marks)


Answer:Carry forward and set off of lossesThe provision relating to carry forward and set off of losses are given as below:If the losses of any head could not be set off in the same year such losses shall becarried forward to next years. The following losses can be carried forward:1. Losses from House Property2. Losses from general business3. Losses from speculation business4. Losses from specified business5. Capital losses-Short term and Long term6. Losses from horses maintenance7. Losses from firmRules for Carry Forward1. The losses from house property can be carried forward for maximum period of 8

years and be set off only from Income from house property2. Losses from general business can be carried forward for maximum period of 8

years and be set off from the profits of general business as well as profits fromspeculation business

3. Losses of speculation business can be carried forward for maximum period of 8years and be set off only from the profits from speculation business

4. Short term or long term capital losses can be carried forward for 8 years and setoff only against capital gains

5. Losses on owing and maintaining of horse races be carried forward for 4 years andbe set off only from profits under the same head.

2011 - June [6] (a) Describe the provisions relating to chargeability of unexplainedinvestment not recorded in the books of account. (4 marks)(b) "If an individual writes a book, he shall be allowed deduction from his gross total

income". Explain the statement. (4 marks)Answer:(a) Where in the financial year immediately preceding the assessment year the

assessee has made investments which are not recorded in the books of account,if any, maintained by him for any source of income, and the assessee offers noexplanation about the nature and source of the investments or the explanationoffered by him is not, in the opinion of the Assessing Officer, satisfactory, the valueof the investments may be deemed to be the income of the assessee of suchfinancial year.


Answer:(b) If an individual writes a book he shall be allowed a deduction for his gross total

income under section 80QQB of the act 80QQB. (1) Where, in the case of an individual resident in India, being an author, the

gross total income includes any income, derived by him in the exercise of hisprofession, on account of any lump sum consideration for the assignment orgrant of any of his interests in the copyright of any book being a work ofliterary, artistic or scientific nature, or of royalty or copyright fees (whetherreceivable in lump sum or otherwise) in respect of such book, there shall, inaccordance with and subject to the provisions of this section, be allowed, incomputing the total income of the assessee, a deduction from such income,computed in the manner specified in sub-section (2).

(2) The deduction under this section shall be equal to the whole of such incomereferred to in sub-section (1), or an amount of three lakh rupees, whichever isless:

Provided that where the income by way of such royalty or the copyrightfee, is not a lump sum consideration in lieu of all rights of the assessee in thebook, so much of the income, before allowing expenses attributable to suchincome, as is in excess of fifteen per cent of the value of such books soldduring the previous year shall be ignored:

Provided further that in respect of any income earned from any sourceoutside India, so much of the income shall be taken into account for thepurpose of this section as is brought into India by, or on behalf of, theassessee in convertible foreign exchange within a period of six months fromthe end of the previous year in which such income is earned or within suchfurther period as the competent authority may allow in this behalf.

(3) No deduction under this section shall be allowed unless the assesseefurnishes a certificate in the prescribed form and in the prescribed manner,duly verified by any person responsible for making such payment to theassessee as referred to in sub-section (1), along with the return of income,setting forth such particulars as may be prescribed.

(4) No deduction under this section shall be allowed in respect of any incomeearned from any source outside India, unless the assessee furnishes acertificate, in the prescribed form from the prescribed authority, along with thereturn of income in the prescribed manner.

(5) Where a deduction for any previous year has been claimed and allowed inrespect of any income referred to in this section, no deduction in respect ofsuch income shall be allowed under any other provision of this Act in any


assessment year.Explanation.—For the purposes of this section,—(a) “author” includes a joint author;(b) “books” shall not include brochures, commentaries, diaries, guides,

journals, magazines, newspapers, pamphlets, text-books for schools,tracts and other publications of similar nature, by whatever name called;

(c) “competent authority” means the Reserve Bank of India or such otherauthority as is authorised under any law for the time being in force forregulating payments and dealings in foreign exchange;

(d) “lump sum”, in regard to royalties or copyright fees, includes an advancepayment on account of such royalties or copyright fees which is notreturnable.

2011 - Dec [3] (c) Describe the provisions relating to chargeability of cash credits inrespect of which the assessee has no satisfactory explanation.

(5 marks)Answer:Under section 68 of the Act where any sum is found credited in the books of anassessee maintained for any accounting year and the assessee is not in a position tooffer explanation about the nature and sources thereof or the explanation offered by himis not satisfactory in the opinion of the assessing officers, the sum so credited may betreated as the assessee in respect of the accounting year in which the cash credit arefound to have made in the books. This section comes into operation only when thefollowing conditions are satisfied:1. The assessee maintains books of account2. The assessee fails to explain the source and nature of the sum credited; and3. The explanation offered by the assessee is not satisfactory and the assessing

officer comes to the conclusion that it is the undisclosed income of the assessee.2012 - June [3] (c) What is meant by ‘block of assets’? Explain. (3 marks)Answer:Block of AssestsAs per section 2(11), Block of assets means a group of assets falling within a class ofassets comprising,(a) Tangible assets being buildings, machinery, plant or furniture.(b) Intangible assets, being Know-how, patents, copyrights, trademarks, licenses, in

respect of which the same percentage of depreciation is prescribed.Each class of assets other than intangible assets may have different blocks or

groups on which separate rates of depreciation are prescribed and for each such rate,


separate block will be formed.

2012 - Dec [1] {C} (Or) (c) What are the provisions of section 54F in relation to capitalgains on transfer of asset other than a residential house?

(5 marks)Answer:Any long term capital gain, arising to an individual or HUF from the transfer of any longterm capital asset, not being residential house property shall be exempt in full, if theentire net sales consideration is invested in purchase of one residential house withinone year before or 2 years after the date of transfer of such an asset or in theconstruction of one residential house within 3 years after the date of such transfer.Where part of the net sales consideration is invested, then Long term capital gain shallbe exempted proportionately.

The proportionate exemption shall be that amount of capital gains which bears thesame proportion which the amount invested in the new house bears to the netconsideration price of the asset transferred i.e.

The above exemption shall be available only when the assessee does not own morethan one residential house property on the date of transfer of such asset exclusive ofthe one which he has bought for claiming exemption u/s 54F.

2012 - Dec [4] (b) (ii) Explain the provisions relating to taxation of winnings fromlotteries. (3 marks)

(c) “Capital gains arise in the previous year in which the transfer took place.” Are thereany exceptions to this rule? Explain. (5 marks)

Answer:(b) Taxation of winnings from lotteries

Any winnings from lotteries, crossword puzzles, races including horse races, cardgames and other games of any sort or from gambling or betting of any form ornature whatsoever are chargeable to tax as “Income from other sources”. Althoughwinning from lotteries is part of total income of the assessee, such income istaxable at a special rate 30%. Deduction of any expenses, allowances or loss arenot allowed from such winnings.

Answer:(c) Capital gain arises in the previous year in which the transfer of the asset takes

place even if the consideration for the transfer is received or released in later years.However, there are 3 exceptional cases where capital gain is taxable not in the


year of transfer of the asset but in some other year. These exceptions are:(i) Damage or destruction of any capital asset by fire or other calamities(ii) Conversion of capital asset into stock-in-trade(iii) Compulsory acquisition of an asset.

PRACTICAL QUESTIONS

2008 - Dec [5] (a) Gulshan submits the following information relevant for the financialyear 2014-15:

Profit Loss(`) (`)

Salary income 8,00,000 $Income from house property:

House-A 25,000 $House-B $ 30,000

Profits and gains of business or profession:Business-A 12,000 $Business-B $ 20,000Business-C (Speculative) 22,000 $Business-D (Speculative) $ 35,000

Capital gains:Short term capital gains 10,000 $Short term capital loss $ 30,000

Long-term capital gains on sale of building 16,000 $Income from other sources:

Loss on maintenance of race horses $ 15,000Determine the net income of Gulshan for the assessment year 2015-16.

(7 marks)Answer:Income from Salary 8,00,000Income from HP (House A) 25,000

(House B) (30,000) (5,000)Income from Business & Profession Business A 12,000


Business B (20,000) (8,000)Income from speculative businessBusiness C 22,000Business D (35,000) (13,000)Income from Capital gainShort term capital gain 10,000Short term capital loss (30,000)Long term capital gains 16,000 (4,000)Income from other sourcesLoss on maintenance of race horses (15,000)Net Income of Gulshan ` 7,95,000**Notes:• Loss from PGBP can not be set-off against salary income. • Loss from speculative business can be set-off against speculative income only.• Capital loss would be allowed to adjusted against capital gain only.• Loss on maintenance of race horses can not be set off against other incomes.

2009 - June [5] (b) Discuss the taxability or otherwise of the following gifts received byMadhuri, a lady, during the financial year 2014-15:

(i) ` 30,000 from her elder sister.(ii) ` 50,000 from the daughter of her elder sister.(iii) Wrist watch valued at ` 6,000 from her friend. (3 marks)

Answer:Applicable section: - 56(2)(vi)

(i) Gift received form elder sister will not be taxable as per the IT Act, 1961 as sheis a relative of Madhuri and any sum received from a relative is not taxed as perthe provisions of the Act.

(ii) Amount received from the daughter of her sister would have been taxable, hadit exceeded ` 50, 000. Up to ` 50, 000 it is not chargeable to tax.

(iii) Wrist watch is not a cash gift, hence will not be taxable.

2009 - Dec [5] (a) Anurag sells a plot of land on 8th July, 2014 for ` 40 lakh and paidbrokerage on its sale @ 1%. He purchased this plot on 19th December, 1987 for` 4,20,000. On 1st February, 2015, he purchased a residential house for ̀ 15 lakh. Heowns one residential house on 8th July, 2014. The cost inflation index for 1987-88 was150 and for 2014-15 is 1024. Find out the amount of capital gains chargeable to tax forthe assessment year 2015-16. Suppose Anurag sells the new residential house before1st February, 2018, what will be the taxable amount of capital gains and in which yearit will be charged to tax ? If Anurag purchases any other residential house before 1st


February, 2017, what will be the taxable amount of capital gains and in which year it willbe charged to tax ? (5 marks)(b) Danny has the following investments in the previous year ended 31st March, 2015:

(i) ` 7,160 received as interest on securities of Karnataka government.(ii) ` 9,000 received as interest on securities of a listed paper manufacturing

company.(iii) ` 7,200 received as interest on the unlisted securities of a sugar company.(iv) ` 30,000, 11% securities (unlisted) of a textile company.(v) ` 20,000, 10% Tamil Nadu government loan.(vi) ` 50,000, 13.5% listed debentures of Dolly Ltd.

Interest on all securities is payable on 30th June, and 31st December. The bankcharges 1.5% commission on net realisation of interest as collection charges.

Danny also received ̀ 15,000 as director’s fee from a company. His other incomes are— winnings from horse race: ̀ 25,000 (gross); and interest on post office savings bankaccount: ` 6,000.Find out taxable income of Danny from other sources for the assessment year 2015-16.

(5 marks)Answer:(a) Computation of income from Capital Gains of Mr. Anurag for the Assessment

Year 2015-16

Particulars Amount ( `)

Sales considerationLess: Brokerage on Sales @ 1%

Net sales consideration

40,00,000 40,00039,60,000

Less: Indexed Cost of Acquisition 4,20,000 × 28,67,200

LTCG 10,92,800

Less: Exemption under section 54F 10,92,800 × 4,13,939

Taxable Income from Capital Gains 6,78,861

If Mr. Anurag sells the new house before February, 2018 then ̀ 4,13,939 being theamount of capital gains exempted during the Assessment Year 2015-16 undersection 54F will be chargeable to tax for the year in which the house is sold as


long-term capital gains.If Mr. Anurag purchases any other residential house before February 1, 2017

but after July 8, 2017 then he will not have any tax liability on account of CapitalGain. If Mr. Anurag purchases any other residential house before July 8, 2017 (i.e.,within two years from the date of transfer of the original asset) then ̀ 4,13,939 willbe taxable as long-term capital gains for the year in which another house ispurchased.

(b) Computation of Income from other sources of Mr. Danny for the AssessmentYear 2015-16


Karnataka Government Securities (No TDS)Paper Company Securities (9,000 × 100/90)Sugar Mill Company Securities (7,200 × 100/90)Textile Company SecuritiesTamilnadu Government Loan (No TDS)DCM Ltd. Debentures (listed)Director’s FeeWinnings from Horse racesInterest on Post Office Saving Bank A/c (Exempt upto ̀ 3,500)

Gross ReceiptsLess: Deduction under Section 57 for collection charges

Taxable income from other sources

7,16010,000

8,0003,3002,0006,750

15,000 25,000

2,50079,710

516 79,194

Computation of Collection Charges


Amount of Collection charges for securities:Karnataka Government Securities (No TDS)Paper Company SecuritiesSugar Mill Company SecuritiesTaxtile Company Securities [3,300 ×90/100]Tamilnadu Government LoanDCM Ltd. Debentures [6,750 × 90/100]

7,1609,0007,2002,9702,000

6,075


Total Net Collection:Collection Charges @ 1.5%34,405 × 1.5/100 = ` 516

34,405

2010 - June [1] {C} (c) Particulars of income received by Mrs. Sarita for the year ended31st March, 2015 are as follows:

(i) Family pension received from the Government of Madhya Pradesh ` 15,000.

(ii) Royalty received from a publisher `42,700. She spent ` 2,700 on books,stationery, typing etc.

(iii) Winnings from lotteries (gross) ` 90,000.(iv) Winnings from horse race (net) ` 35,000.(v) Interest from tax-free debentures of a public company (listed) ` 18,000.(vi) Interest on tax free notified government bonds ` 10,000.(vii) Dividend received from a foreign company (net) ̀ 8,000. Nothing has been paid

to the Government of India out of tax deducted at source.From the above information, compute income from other sources of Mrs. Sarita for theassessment year 2015-16. (5 marks)Answer:

Calculation of Income from other Sources of Mrs. Sarita(for the Assessment Year 2015-16)

Family Pension(1/3rd is exempt) ` 10,000Royalty Income ` 42,700Less: Expenses ` 2,700 ` 40,000Wining from lotteries ` 90,000Wining from Horse Races (gross) ` 50,000Interest from tax free debentures ` 20,000Interest on tax free government bonds NilDividend received form foreign company ` 8,000

Income from other sources ` 2,18,000

2010 - June [3] (c) Ram and Shyam are partners in Mozart Co., a partnership firm,which is engaged in manufacturing carpets. They share profits and losses in the ratioof 2:3. The profit and loss account of the firm for the year ended 31st March, 2015 isas follows:Liabilities `Cost of goods sold 10,00,000Depreciation 50,000


Salary to staff 1,00,000

Remuneration to partners:Ram ` 2,50,000Shyam ` 1,20,000 3,70,000

Interest on capital @ 15%:Ram ` 45,000Shyam ` 67,500 1,12,500

Sundry expenses 1,00,500Net profit 7,35,200

24,68,200AssetsSales 23,00,000Dividends 28,200Winnings from lotteries (` 2,00,000) 1,40,000

24,68,200Additional information:

(i) The firm donated ̀ 30,000 to National Defence Fund and this amount is includedin sundry expenses.

(ii) Depreciation admissible under the income-tax rules is ` 68,000.(iii) The firm is evidenced by partnership deed.

Compute the taxable income and amount of tax liability of the firm for theassessment year 2015-16. (7 marks)Answer: Computation of book – profit `Net Profit as per P&L 7,35,200Add: Interest paid to partners in excess of 12% Ram 9,000 Shyam 13,500Remuneration of partners 3,70,000Donation 30,000

11,57,700Less: Dividends 28,200Winning from lotteries 1,40,000Depreciation 18,000

9,71,500Less: Remuneration of partners 3,70,000

6,01,500Income from other sources


Winning from lotteries 2,00,000Dividends exempt

2,00,000Gross total income 8,01,500Less: Deduction u/s 80G 30,000Total Income 7,71,500

Calculation of Tax30% on 200000 60,000On balance 30 % (7,71,500 ! 2,00,000) 1,71,450

2,31,450Add: cess 6,944Less: TDS 60,000Tax payable 1,78,394Tax payable rounded off 1,78,390

2010 - June [6] (a) Naveen owns a house at Indore. Its municipal valuation is ̀ 24,000.He incurred the following expenses in respect of the house property:Municipal tax @ 20%, fire insurance premium ` 2,000 and land revenue ` 2,400. Hetook a loan of ̀ 25,000 @ 16% per annum on 1st April, 2012. The whole amount is stillunpaid. The house was completed on 1st April, 2014. Find out the income from houseproperty for the assessment year 2015-16 in respect of the following options:

(i) If the house is used by the assessee throughout the previous year for hisresidential purpose; and

(ii) If the house is let-out for residential purposes on monthly rent of ` 2,000 from1st April, 2014 to 31st January, 2015 and self-occupied for the remaining period.

(6 marks)Answer:

(i) Gross Annual Value of the house shall be NilGross Annual Value NILLess: Deduction ` 6,400Income from House Property ` (6,400)

(ii) Gross Annual Value ` 24,000Less: Municipal tax paid ` 4,800Net Annual Value ` 19,200Less: 30% Statutory deduction ` 5,760Interest on loan (4,000+2,400) ` 6,400Income from House Property ` 7,040


2010 - Dec [3] (a) Sanjay furnishes following particulars of income from his businessfor the previous year 2014-15:

(i) Net profit as per profit and loss account ` 72,000 after charging the following:(a) Depreciation on building ` 31,000(b) Provision for discount on debtors ` 40,000(c) Private household expenses ` 50,000(d) Charity (unapproved) ` 7,000(e) Computer for scientific research ` 60,000(f) Payment of expenses made through bearer cheque ` 25,000(g) Security deposit ` 16,000(h) Audit fee paid in cash ` 25,000(i) Patent purchased during the year ` 75,000(j) Market survey feasibility report expenses ` 50,000 on new project costing

` 6,00,000.(ii) Opening stock ` 66,000 valued at 10% above cost and closing stock ` 72,000

valued at 10% below cost.(iii) Income credited to profit and loss account include—

(a) Bank interest on fixed deposits ` 9,000(b) Refund of excise duty ` 18,000 earlier allowed as deduction(c) Bad debts recovered ` 5,000.

Compute total income of Sanjay and his tax liability if he is a senior citizen assumingdepreciation on building as per the Income-tax Act, 1961 is ` 50,000. (7 marks)

Answer:Computation of tax Liability of Mr. Sanjay

for the Assessment Year 2015-16Profits and Gains of Business and ProfessionNet Profit 72,000Add: Expenses Inadmissible

Depreciation on Building 31,000Provision for discount on debtors 40,000Household Expenses 50,000Charity 7,000Expenses paid through bearer cheque 25,000


Security deposit 16,000Audit Fees 25,000Patent (Depreciation considered separately7) 5,000Market Survey Expenses 44,000opening stock over valued 6,000closing stock under valued 8,000 3,27,000

Less: Expenses AllowedDepreciation on Building 50,000 Depreciation on Patent 18,750 68,750

Less: Income from other head Bank Interest on Fixed Deposits 9,000

Profits and Gains of Business and Profession 3,21,250Income from other source-Bank Interest 9,000Gross Total Income 3,30,250Less: Deductions NilTotal Income 3,30,250Tax LiabilityTax on ` 3,30,250 8,025 Less: Rebate u/s 87A 2,000

6,025 Add: Edu. Cess & SHEC @ 3% 181 Tax Payable 6,206 Rounded off 6,210 Working Notes:1. Least of the following shall be eligible as Market Survey Expenses

(a) Actual Expenditure incurred ` 50,000(b) 5% of project cost ` 30,000

Hence, ̀ 30,000 shall be allowed for deduction in 5 equal installments i.e. ̀ 6,000 (1/5of ` 30000)2010 - Dec [4] (c) Rupesh acquired a residential house on 1st September, 1980 for` 1,00,000. He spent ̀ 25,000 on 1st July, 1982 for improvement of this house property.A further amount of ` 50,000 was spent by him on 15th November, 1987 onimprovement of the house. Rupesh gifted the said property to his son Bhupesh on 12th

October, 1996. Bhupesh also spent the following amounts on improvement of thehouse:

Date of Expenditure Amount (`)15th July, 1997 60,00015th June, 2014 40,000


Bhupesh sold the above house on 30th November, 2014 for a sum of ` 15,00,000.Expenses on transfer were 2% of the sale consideration. Compute the capital gains forthe assessment year 2015-16, assuming the fair market value of the house as on 1st

April, 1982 to be ` 3,00,000.Cost inflation index for various years is as under:

1986-87 — 1401995-96 — 2811996-97 — 3052012-13 — 8522014-15 — 1024 (5 marks)

Answer:Computation of Capital Gains

for the assessment year 2015-16Sale Consideration 15,00,000Less:1. Expenses on transfer (30,000) 2. Indexed cost of acquisition (3,00,000 × 1024/281) (10,93,238)

3. Indexed cost of improvement(i) By the previous owner (50,000 × 1024/140) (3,65,714)(ii) By the assessee

[(60,000 × 1024/305) + (40,000 × 1024/1024)] (2,41,443)Long term capital loss 2,30,395

2011 - June [2] (b) From the following information, compute the total income of Anuragfor the assessment year 2015-16 and calculate his tax liability assuming he is notallowed any deduction under sections 80C to 80U: `

Income from salary 1,80,000Income from house property 40,000Business loss (-) 1,90,000Loss from a specified business referred to

under section 35AD (-) 60,000Short-term capital loss (-) 60,000Long-term capital gains 2,40,000

(5 marks)Answer: Computation of total Income of Anurag

for the A.Y. 2015-16

Income from salaryIncome from house propertyLess: Business loss adjusted

40,00010,000

1,80,000

30,000


Business LossLess: Set of against capital gainLess: Set off against house propertyLoss from specified business not allowed to be set offIncome from capital gainLong term capital gainLess: short term capital loss

!1,90,0001,80,000

10,00016,000

2,40,000 60,0001,80,000

Nil

Less: Business Loss adjustedGross total IncomeLess: DeductionsTotal IncomeTotal tax liability

1,80,000 Nil2,10,000

Nil2,10,000

Nil

2011 - June [3] (a) After serving for 29 years and 7 months in Mansha Steels Ltd.,Narayan retired on 30th September 2014. He is covered by the Payment of Gratuity Act,1972. The company has paid him a gratuity of ̀ 4,19,800. At the time of retirement, hewas getting basic salary ` 11,800, dearness allowance ` 2,260 and house rentallowance ` 1,400 per month. Determine the amount of gratuity exempt under section10(10). (5 marks)Answer:(a)

Exemption shall be allowed to the extent of the minimum of thefollowing amounts(a) Amount of gratuity received

(b) 15 days salary for every year of services (14,060 x x 30)

(c) ` 10,00,000Therefore ` 2,43,346 is exempt from tax

` 4,19,800

` 2,43,346

2012 - June [1] {C} (c) Sanjeev owns a house property. Following are the details aboutthe property:


Municipal value of house : ` 72,000 per annum.Fair rent of house : ` 66,000 per annum.Standard rent of house : ` 60,000 per annum.The house was let out at ` 6,000 per month but was sold on 1st January, 2015.

Find out income from house property for the assessment year 2015-16.(5 marks)

Answer:Computation of Income from House Property For the Assessment Year 2015-16Gross Annual Value Shall Be higher of Expected Rent or Actual Rent Received

(i) Expected rent shall be higher of Municipal Value or Fair Rent whichever is higherbut limited to standard rent

Municipal Value (72,000 × 9/12) = 54,000Fair Rent for 9 Months(66,000 × 9/12) = 49,500Standard Rent for 9 months (60,000) × 9/12) = 45,000Therefore Expected Rent shall be ` 45,000 45,000

(ii) Actual Rent Received (6,000 × 9) 54,000Gross Annual Value 54,000

Less: Standard Deduction @ 30% 16,200Income from House Property 37,800

2012 - June [2] (b) Savita submits the following information regarding her salaryincome:

Basic salary ...` 11,000 per monthCity compensatory allowance ...` 150 per monthChildren education allowance ...` 400 per month (for 3 children)Reimbursement of medical expenses ...` 25,000

She was entitled to house rent allowance of ` 6,000 per month from 1st April,2014 to 31st August, 2014. However, she was paying a rent of ` 7,000 per monthfor a house in New Delhi. With effect from 1st September, 2014, she was providedwith an accommodation by the company for which the company was paying a rentof ` 5,000 per month.Compute her gross salary for the assessment year 2015-16. (5 marks)

(c) For the previous year 2014-15, gross total income of Gopal is ` 12,50,700. Duringthe previous year he has made the following payments:

`(i) Contribution to recognised provident fund 18,000(ii) Donation to Rajiv Gandhi Foundation 50,000(iii) Donation to Prime Minister Drought Relief Fund 30,000


(iv) Donation to Prime Minister National Relief Fund 20,000(v) Donation to a government hospital for family planning 1,00,000(vi) Financial assistance to poor students 50,000(vii) Medical insurance premium 20,000

Compute total income of Gopal for the assessment year 2015-16.(5 marks)

Answer:(b) Computation of Gross Salary of Savita for Assessment Year 2015-16

Basic Salary (11,000 × 12) 1,32,000

City Compensatory allowance (150 ×12) 1,800

Children Education Allowance (400 ×12) 4,800Less: Exempt 100 p.m. upto 2,400 2,400

2 children (200 × 12)2,400

Reimbursement of Medical Expenses 25,000Less: Exempt 15,000 10,000

House Rent Allowance (6,000 × 5) 30,000Less: Exempt (see Note 1) 27,500 2,500

Rent Free Accommodation (See Note 2) 11,918

GROSS SALARY 1,60,618

Note:(i) HRA shall be exempted to the minimum of the following:

(a) HRA received 30,000(b) Actual rent - 10% of salary [7,000 ×5-(10% of 55,000)] 29,500(c) 50% of ` 55,000(as she resides in Delhi) 27,500

Therefore, House rent allowance of ` 27,500 shall be exempted.(ii) Value of Rent free accommodation:

Least of following shall be taxable(a) Actual amount of Rent paid by employer (5,000×7) 35,000(b) 15% of Salary [(1,32,000+1,800+2,400)×15%] 11,918Therefore, value for rent free accommodation shall be ` 11,918.

(c) Computation of Total Income of Gopal for the Assessment Year 2015-16


Gross Total Income 12,50,700

Less: Deduction under chapter VI-ADeduction under section 80-C (RPF) 18,000Deduction under Section 80-D(Medical Insurance Premium) 15,000Deduction under section 80-G (Donation) 1,60,000 1,93,000

Total Income 10,57,700

Working Note:(i) Calculation of Deduction under section 80-G

(A) Donations to which qualify limit does not apply(a) Allowed 100%

PMNRF (20,000 × 100%) 20,000(b) Allowed 50%

PMDRF (30,000 × 50%) 15,000 RGF (50,000 × 50%) 25,000 40,000

(B) Donations which are subject to qualifying limit (a) Donation to Government for family planning

(100% of ` 1,00,000) 1,00,000 Within 10% of adjusted total income

(10% of 12,17,700) i.e.` 1,21,770 _______Total Donation Allowed 1,60,000

Adjusted total income: (Gross Income - Deductions under Chapter VI-A except underSection 80G) i.e. 12,50,700-18,000,-15,000 = 12,17,700.

2012 - June [3] (a) Kundan sold his properties during the year 2014-15 as under:(i) Household TV and refrigerator, costing ` 56,000 purchased in January, 2006,

sold in February, 2015 for ` 70,000.(ii) A car sold on 1st December, 2014 for ` 2,00,000 which was purchased by him

in January, 2011 for ̀ 3,00,000 and its written down value on 1st April, 2014 was` 1,72,000. The car is used for business purposes.

(iii) Agricultural land was sold for ̀ 9,50,000 on 1st February, 2015 and its purchaseprice in 1982-83 was ̀ 1,00,000. He purchased new land for his own cultivationfor ` 2,50,000 in May, 2015.

(iv) Gold ornaments acquired in July, 2011 for ` 2,00,000 were sold for ` 2,40,000in June, 2014.

(v) Let out residential house at Indore was inherited by him in 1976. Sale price on30th November, 2014: ` 16,00,000; fair market value on 1st April, 1982:


` 2,00,000; cost of improvement during 1991-92: ` 40,000; and expenses ontransfer: ` 60,000.

Compute his total capital gains for the assessment year 2015-16.Cost inflation indices:

1982-83 ... 1091983-84 ... 1161990-91 ... 1822004-05 ... 4802009-10 ... 6322011-12 ... 7852012-13 ... 8522014-15 ... 1024 (7 marks)

(b) Kailash furnishes the following particulars of income and losses for the assessmentyear 2015-16:

`Short-term capital loss on sale of shares 3,25,200Income from card games (gross) 99,800Loss from betting 1,02,500Income from lotteries (gross) 3,87,500Expenses on lottery ticket purchased 7,500Long-term capital gains 97,800Long-term capital loss of assessment year 2013-14 1,12,500Short-term capital loss of assessment year 2014-15 97,800Set-off various losses from other income and compute gross total income. Find out theamount which can be carried forward. (5 marks)

Answer:(a) Computation of Capital Gains(i) Household TV and refrigerator are personal effects and hence not capital assets.(ii) Car

Sale Consideration 2,00,000Less: Written down value 1,72,000Short-term capital gain 28,000 28,000

(iii) Agricultural LandSales Consideration 9,50,000


Less: Indexed cost of acquisition

10,24,000

(74,000)(iv) Gold Ornament

Sales consideration 2,40,000Less: Cost of acquisition 2,00,000 40,000Short - Term Capital gain

(v) Residential HouseSales Consideration 16,00,000Less: Expenses on transfer 60,000Less: Indexed Cost of Acquisition

18,78,899

Less: Indexed Cost of Improvement

2,25,055

Long Term Capital loss (5,63,954)Short Term Capital Gain 68,000

(b) Computation of Gross Total Income of Kailash for the Assessment year 2015-16Income from Capital Gain Short - Term Capital Loss 3,25,000Less: B/F short term capital Loss of Assessment year 2014-15 97,800 NIL(The amount of ` 4,23,000 shall be carried Forward to next assessment year)Long-term Capital Gains 97,800Less: B/F Long- term Capital Loss 1,12,500 NIL

Income from other sourcesIncome from Lotteries 3,87,500Income from card games 99,800Loses from betting (not allowed for set-off) ---- 4, 7,300Gross Total Income 4,87,300

Note:(i) Long-term capital loss can be set-off from long-term capital gain only. Hence, the

remaining unadjusted loss of Assessment year 2013-14 of ` 14,700 (1,12,500- 97,800) has to be carried forward to the next assessment year.

(ii) Loss from betting can neither be set-off against any other Income not it can be


carried forward to subsequent year.(iii) Expenses on lottery tickets are not are allowed as deduction.

2012 - Dec [2] (b) Following is the trading and profit and loss account of Narendra forthe year ended 31st March, 2015:

` `Opening stock 20,250 Sales 3,83,600 Purchases 1,80,500 Closing stock 23,200 Wages 10,200 Gift from father 10,000 Donation to Prime Minister Income-tax refund 2,500

National Relief Fund 20,000 Building rent 60,000 Repairs of car 5,300 Medical expenses (personal) 8,000 General expenses 4,200 Depreciation on car 12,000 Profit for the year 98,850

4,19,300 4,19,300

Additional information:(i) Opening stock has been undervalued by 10% of cost while closing stock has

been valued at its cost.(ii) One-third of the building rent is related to self-residential house.(iii) The car is used equally for business as well as for personal purposes.(iv) Wages includes wages of household servant ` 250 per month.

From the above information, you are required to determine the taxable income ofNarendra under the head income from business and profession. (10 marks)Answer:

Computation of taxable Income of Narendra under thehead Income from business and profession

`Net profit as per Profit & Loss Account 98,850Add: Items disallowed

`Donation to PMRF 20,000Building Rent 60,000 × 1/3 20,000


Repairs of Car 5,300 × ½ 2,650Medical Expenses 8,000Depreciation of Car 12,000× ½ 6,000Wages of servant 250 × 12 3,000 59,650

1,58,500Less: Items not taxable:Gift from father 10,000Income tax refund 2,500 12,500

1,46,000

Less: Opening stock undervalued × 10 = 2,250

Income from Business and Profession 1,43,750

2012 - Dec [4] (a) Anand owns a house at Delhi. From the following particulars,compute the income from house property for the assessment year 2015-16:

`Municipal valuation 2,50,000Fair rent 2,80,000Actual rent (` 25,000 per month) 3,00,000Standard rent 2,60,000Municipal taxes paid (half of it was borne by the tenant) 25,000Expenses on repairs 5,000Fire insurance premium paid 5,000Ground rent 6,000Unrealised rent 1 monthVacancy period 1 monthHe had borrowed a sum of ` 20,00,000 @ 10% p.a. from LIC Housing Ltd. on 1st

August, 2010 and the construction of the house was completed on 1st January, 2014.Total loan is still unpaid. (5 marks)Answer:

Calculation of Income from House Property for the Assessment Year 2015-16

`Gross Annual Value(i) Expected Rent ( Higher of fair value of ` 2,80,000

and municipal value of ` 2,50,000 but subject tostandard rent of ` 2,60,000) 2,60,000


(ii) Rent actually received/ receivable (` 25, 000 × 11) 2,75,000Higher of (i) and (ii) 2,75,000Less: Loss due to vacancy 25,000

Gross annual value 2,50,000Less: Municipal taxes (borne by the owner 12,500

Net annual value 2,37,500Less: Standard deduction @ 30% under section 24 71,250

Interest on loan*Pre-Construction Period 1,06,667Previous year 2,00,000 3,06,667

Income from house property 1,40,417* Interest on borrowed amount:1. Pre-construction period 1.8.2010 to (1.1.2014) i.e. 31.3.2013

Previous year 2010-11 1,33,333 i.e. ` 2,00,000 × 8/12 2011-12 2,00,000 2012-13 2,00,000

5,33,3331/5th ` 5,33,333 = ` 1,06,6672. Interest for Previous year 2014-15 2,00,0002012 - Dec [5] (a) Lalit submits the following details of his income for the assessmentyear 2015-16:

`Income from salary 3,00,000Loss from let-out house property 40,000Income from sugar business 50,000Brought forward loss of iron ore business

(discontinued in financial year 2006-07) 1,20,000Short-term capital loss 60,000Long-term capital gains 40,000Dividend 5,000Income from lottery winnings (gross) 50,000Winnings in card games (gross) 6,000Agricultural income 20,000Long-term capital gains from the shares (STT paid) 10,000Short-term capital loss from shares under section 111A 15,000Bank interest 5,000


Calculate gross total income and losses to be carried forward.(5 marks)

Answer:Computation of Income of Lalit

for the Assessment Year 2015-16

Salary

`

BusinessIncome

`

Long-termcapital gain

`

Incomefrom othersources

`

Salary 3,00,000 - - -

Business Income - 50,000 - -

Long term capital gain - - 40,000 -

Winning from lottery - - - 50,000

Winnings from card games - - - 6,000

Bank interest - - - 5,000

Total 3,00,000 50,000 40,000 61,000

Less: Current year losses

Loss from house property 40,000 - - -

Short term capital loss - - 40,000 -

Balance 2,60,000 50,000 - 61,000

Less: Brought forward business loss - 50,000 - -

Net income (Total 3,21,000) 2,60,000 - - 61,000The following losses will be carried forward:1. Current year’s short term capital loss of ` 60,000 is adjusted against long-term

capital gain of ̀ 40,000. The unadjusted amount of ̀ 20,000 will be carried forward. 2. Short-term capital loss of ` 15,000 pertaining to transfer of securities (subject to

STT) will be carried forward.3. Brought forward loss of iron ore business is set off against the current year’s

business to the extent of ` 50,000. The unadjusted amount of ` 70,000 will becarried forward.

Assumptions:(i) Dividend is from an Indian company, therefore exempt. (ii) Agricultural income is generated in India, therefore exempt.

CS Inter Gr. I


DISTINGUISH BETWEEN

2007 - Dec [4] (a) Distinguish between the following:(i) ‘Recognised provident fund’ and ‘unrecognised provident fund’.

(4 marks)(iii) ‘Tax audit under section 44AB’ and ‘special audit under section 142(2(4A )m’.arks)

Answer:(i) Please refer 2009 - Dec [3] (a) (ii) on page no. 85

(iii) Please refer 2008 - June [4] (b) (i) on page no. 128

2008 - June [4] (b) Distinguish between the following(i) Provisions of tax audit as contained in ‘section 44AB’ and ‘section 14(25( 2mAa)r’.ks)(ii) ‘Change in constitution’ and ‘succession of firm’. (5 marks)

Answer:(i) Tax Audit or Audit of Accounts u/s 44AB of Income Tax Act 1961 is that audit

which is applicable to every such Assessee whether company or non Company,except for persons/ assessees who derive income of nature referred to u/s 44B & 44BBA [non residents & foreign companies]Audit of Accounts [Tax Audit] u/s 44 AB shall be compulsory carried out in caseof a person:(a) Carrying on any business where the sales, turnover or gross receipts

exceeds ` 1 crore lakhs in the said financial year(b) Carrying on profession where gross receipts exceed ` 25 lakhs(c) Carrying on the business referred to in section 44 AD or 44AE or 44BB or

44BBA & claiming his income from any such businesses to be lower than theincome prescribed under the relevant section.

The Books of Accounts for the relevant previous year are required to be auditedby a Chartered Accountant before the "specified date" & the audit reportobtained under this provision is required to be furnished by that date alongwiththe return of income failing which penalty @ 0.50% of turnover or ` 1,50,000/-whichever is lower shall be levied on the Assessee & such return filed shall betreated as incomplete or defective u/s 139(9).

The "specified date" prescribed for this purpose is 30th September of therelevant assessment year or any such extended due date as extended by CBDTby way of a notification. According to CBDT Circular No 452 dated 17.03.1986,in the case of agent who earns only commission income, the audit of accountsis required only if the commission exceeds ̀ 1 crore. The Tax audit report meansreport in Form 3CA/3CB alongwith annexure of details in Form 3 CD.


(ii) Change in constitution of a Firm (Section 187 of the Income Tax Act): There isa change in the constitution of a firm if:(a) One or more of the partners cease to be partners or one or more new

partners are admitted; or(b) Where all the partners continue with a change in their respective shares or

in the shares of some of them.Where at the time of making an assessment under Section 143 or 144, it is

found that a change has occurred in the constitution of a firm, the assessmentshall be made on the firm as constituted at the time of making the assessment.

Succession of one firm by another firm (Section 188) where a firmcarrying on a business or profession is succeeded by another firm and the caseis not covered by Section 187, separate assessment shall be made on thepredecessor firm and the successor firm in accordance with the Provisions ofSection 170 of the Act.The Supreme Court laid down the following requisites of succession: (i) There is a change of ownership. (ii) The whole business is transferred.(iii) Substantially the identity and the continuity of the business are preserved.


2005 - Dec [1] {C} (d) Explain briefly the scope of the term 'capital asset', as definedunder Section 2(14) of the Income-tax Act, 1961. (3 marks)Answer:According to Section 2(14) of the income tax Act, 1961 the expression “capital asset”means property of any kind held by an assessee, whether or not connected with hisbusiness or profession but does not include-(a) any stock-in-trade, consumable stores or raw materials held for the purposes of

business or profession; (b) personal effects of the assessee;(c) rural agricultural land in India(d) 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980

issued by the Central Government, (e) Special Bearer Bonds, 1991; and (f) Gold deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the

Central Government.Note:


Definition of “Capital Asset” Amended [Section 2(14)] [W.E.F. 2015-16]The existing Section 2(14) defines the term “capital asset” as under: “Capital asset” mean property of any kind held by an assessee, whether or notconnected with his business or profession, but does not include: (i) any stock-in-trade, consumable stores or raw materials held for the purpose of hisbusiness or profession; (ii).................... to .................. (vi) ......The foreign portfolio investors (referred as foreign institutional investors in the Act) facea difficulty in characterisation of their income arising from transaction in securities asto whether it is capital gain or business income. Further, the fund manager managingthe funds of such investor remains outside India under the apprehension that itspresence in India may have adverse tax consequences. Therefore, in order to end this uncertainty, Section 2(14) has been amended by theFinance (No. 2) Act, 2014 as under: “capital asset” means: (a) Property of any kind held by an assessee, whether or not connected with his





(iv) .............to vi...............Hence, securities held by the F.I.I. will now be treated as capital asset only and thetransfer of such securities would always result into capital gain whether such F.I.I. hasany permanent establishment in India or not. Under no circumstances, such transfer ofsecurities held by F.I.I. can now be treated as business income. Further, explanation 2 has been inserted to provide as under: For the purpose of this clause: (a) The expression “Foreign Institutional Investor” shall have the meaning assigned to



2006 - June [3] Attempt the following:(iv) Discuss the special provisions relating to tax on income of foreign institutional

investors from securities or capital gains arising from their transfer. (5 marks)


Answer:(iv) As per section 115AD, where the total income of a Foreign Institutional Investor

includes—(a) Income other than income by way of dividends referred to in section 115-O

received in respect of securities (other than unit referred to in section115AB); or

(b) Income by way of short-term or long-term capital gains arising from thetransfer of such securities,

The income-tax payable shall be the aggregate of—(i) The amount of income-tax calculated on the income in respect of securities

referred to in clause (a), if any, included in the total income, at the rate oftwenty per cent;

(ii) the amount of income-tax calculated on the income by way of short-termcapital gains referred to in clause (b), if any, included in the total income, atthe rate of thirty per cent; However, the amount of income-tax calculated onthe income by way of short-term capital gains referred to in section 111Ashall be at the rate of ten per cent;

(iii) the amount of income-tax calculated on the income by way of long-termcapital gains referred to in clause (b), if any, included in the total income, atthe rate of ten per cent; and

(iv) The amount of income-tax with which the Foreign Institutional Investorwould have been chargeable had its total income been reduced by theamount of income referred to in clause (a) and clause(b)Where the gross total income of the Foreign Institutional Investor—(a) consists only of income in respect of securities referred to in clause (a)

of sub-section (1), no deduction shall be allowed to it under sections28 to 44C or clause (i) or clause (iii) of section 57 or under ChapterVI-A;

(b) includes any income referred to in clause (a) or clause (b) ofsub-section (1), the gross total income shall be reduced by the amountof such income and the deduction under Chapter VI-A shall be allowedas if the gross total income as so reduced, were the gross total incomeof the Foreign Institutional Investor.

2006 - Dec [1] {C} (d) Discuss in brief the special provisions for computing profits andgains of business under section 44AD of the Income-tax Act, 1961. (3 marks)Answer:


The scheme is applicable to an assessee engaged in any business except the businessof plying, hiring or leasing goods carriage and the total turnover from such businessdoes not exceed `1 crore in the previous year.

A sum equal to 8% of the total turnover in the previous year is deemed to be theprofit of such business chargeable under the head profit and gains from business andprofession. The assessee can, however declare a higher income in his return.

All deductions under section 30 to 38, including depreciation are deemed to havebeen allowed and no further deduction is allowed under this section. However, in thecase of the firm, the normal deduction in respect of salary and interest to partners undersection 40(b) shall be allowed.C provision for maintenance of books of account u/s 44AA /compulsory audit u/s

44AB not applicable

C It is possible to declare lower income, provided the tax payer maintains books ofaccount under section 44AB and gets his books of account audited and furnishesreport of audit by the specified date as required under section 44AB irrespectiveof turnover.

2007 - June [2] (b) Explain the provisions of the Income-tax Act, 1961 regarding set-offand carry forward of losses from transfer of capital assets. (5 marks)Answer:Where in respect of any Assessment year, the net result of the computation under thehead capital gains is a loss to the assessee; it can be carried forward to the followingassessment year. The short term and long term losses shall be separately carriedforward. In case of short term capital loss it can be set off against income, if any underthe head ‘capital gains’ assessable for that assessment year in respect of any othercapital asset. But in case of long term capital loss, it can be set off only against longterm capital gain.

While losses on transfer of capital assets, whether short term or long term cannotbe set off against any other income of the assessee under other heads of income i.e,heads other than capital gains in the previous year in which such loss was incurred, itcan be carried forward to set off against capital gains if any during the next 8assessment year.

2007 - June [3] (b) Briefly answer the following:(v) What are the special provisions for computing income on presumptive basis in

the case of tax payers engaged in the business of civil constructions?(1 mark)(vi) What deductions are allowed under Section 24 while computing ‘income from

house property’? (1 mark)


Answer:(v) For an assessee engaged in the business of civil construction or supply for civil

construction, a sum equal to 8% of the gross receipts paid or payable to theassessee in the previous year on account of such business shall be deemed tobe the profits and gains of such business chargeable to tax under the headprofits and gains of business or profession’. The assessee can howevervoluntarily declare higher income in his return. This scheme is applicable onlyto those assessees whose gross receipts from the above mentioned businessdo not exceed ` 1 crore.

(vi) Deductions allowable u/s 24 while computing income from H/P are(i) Standard deduction @ 30% of NAV in case where NAV is negative

deduction shall be NIL.(ii) Deduction for interest on Housing Loan subject to the following conditions

(a) Income of self occupied property ` 30,000/- or ` 1,50,000/- asapplicable or Actual Amount paid/accrued /payable whichever is less

(b) In case of Let out/Deemed Let out property the actual amount of interestpaid/payable during the year when the maximum limit of 30,000/-/1,50,000/- does not apply

(c) 1/5th of accumulated interest pertaining to the pre- construction periodshall be suitably adjusted alongwith the actual interest for the relevantyear for calculating the allowable interest limits.

2008 - June [1] {C} (a) Attempt the following:(iv) What are ‘intangible assets’ ? Give examples. (3 marks)(v) “Loss can be carried forward only by the person, who has incurred the loss.”

Discuss. (3 marks)Answer:

(iv) Assets which are not corporeal, not capable of being touched, smelt and arerepresented by right of the persons through such as knowhow, patents,copyrights, trademarks, licences, franchises or any other business or commercialright acquired on or after April 1, 1998.

(v) The general principal under the Income Tax Act is that the loss of one personcannot be availed for set off or carry forward by another person unless there isa specific provision enabling such benefit or requiring such treatment. Evenwhere a business is transferred, the unabsorbed depreciation allowance andother losses of the predecessor cannot be assigned to the successor so as toenable carry forward and set off of such loss and allowance against the profitsof the successor. However, there are few exceptions to this well accepted


principle as under:1. In the case of succession by way of inheritance, the successor of business

can carry forward and set off the loss of his predecessor2. In case of amalgamation, de-merger, reorganization of business whereby

a firm or a proprietary concern is succeeded by a company, the benefit ofcarry forward and set off of the past losses and unabsorbed depreciationof the amalgamating company/demerged company/firm or proprietaryconcern is allowed in the hands of amalgamated company/resultingcompany/succeeded company

3. When clubbing provision applies, loss is required to be clubbed in thesame manner as income. The person in whose hands the loss is soclubbed can set off and carry forward such loss as if it is determined in hiscase.

PRACTICAL QUESTIONS

2005 - Dec [1] {C} (a) Discuss the allowability or otherwise of the following in the handsof Rasikbhai, who is aged about 67 years:

(i) He paid insurance of `18,000 (` 16,000 by cheque and ̀ 2,000 by cash) underMediclaim Policy to New India Insurance Company covering himself and hiswife.

(ii) He spent a sum of ̀ 55,000 during September, 2014 towards medical treatmentof his wife who suffered from blindness.

(iii) His younger brother who is fully dependent on him, suffered from chronic renalfailure for which he spent a sum of ` 75,000 towards medical treatme(n3t .marks)

(b) Kajol, working in a software company at Bangalore, is drawing a remuneration of` 23,000 per month. She is paid D.A. of ̀ 7,000 per month as provided in the termsof employment. In addition, she is also paid HRA of ` 5,000 per month and isentitled to 3% commission on turnover of ̀ 18,00,000 achieved by her during 2014-15. She pays a rent of ̀ 7,200 per month. Further, she received advance salary of` 46,000 in March, 2015 relating to the period April-May, 2015. Determine thetaxable income under the head 'salaries'. for A.Y.-2015-16. (3 marks)

Answer:(a) Rasikbhai, being a Senior Citizen is eligible for the following deductions:

(i) Under Section 80D, the medical insurance premium paid by cheque amountingto ̀ 16,000 is fully eligible. The Medical Insurance Premium paid by cash is not


eligible for deduction.(ii) Under Section 80DD, the amount of deduction is ` 1,00,000 in the case of

severe disability irrespective of quantum of expenditure incurred, In this case,Rasikbhai is eligible for deduction of ` 1,00,000 even though he spent` 55,000/-

(iii) As his younger brother is fully dependent and the disease is specified in Rule11DD for the purpose of Section 80DDB and the actual amount incurred is` 75,000, he is eligible for deduction of lower of actual amount incurred or` 40,000. Accordingly, he is eligible for deduction of ` 40,000 under Section80DDB. However, if the younger brother is aged 65 years or more the amountof deduction would be ̀ 60,000. For claiming deduction under Section 80DDB,Rasikbhai is required to furnish a certificate in the prescribed from issued bymedical authority.

Answer:(b) Basic Salary (23,000*12) 2,76,000

Dearness allowance (7,000*12) 84,000Commission(3% on 18,00,000) 54,000Advance salary 46,000

4,60,000HRA Received 60,000Less: Exempt 45,000 15,000Total Salary 4,75,000Less: Deduction NilTaxable salary 4,75,000

2005 - Dec [2] (c) Pritish, who owns 9 acres of land near Chennai since July, 1986purchased for ` 12 lakh, commenced real estate business form April, 2006 andintroduced this land as his capital. Fair market value of the land on the date ofcommencement of the business was ` 65 lakh. However, the value of such land hasbeen recorded at ̀ 80 lakh in the books of business. The entire land after developmentand conversion into housing plots was sold for ` 135 lakh between September, 2014and February, 2015. Expenses incurred for project development were ̀ 37 lakh. Advisehim as to the taxability of income and under what heads and in which assessmentyears.Note: Cost Inflation Index for year —

1986-1987 : 1402006-2007 : 519


2014-2015 : 1024 (5 marks)Answer:(a) Long-term capital gains: `

Fair market value of land 65,00,000Less: Indexed cost of acquisition (1,200,000*519/140) 44,48,571Long term capital gain 20,51,429

(b) Business IncomeTurnover on sale of plots 1,35,00,000Less: Cost of Land (FMV) ` 65,00,000Expenses for project development ` 37,00,000 1,02,00,000Business income 33,00,000

2005 - Dec [4] (a) An industrial undertaking which commenced the manufacturingactivity with effect from lst September, 2014 has acquired the following assets duringthe previous year 2014-15:

Assets Date of Date when Cost ofAcquisition put to use Acquisition

(`) Factory buildings 4.4.2014 1.9.2014 50,00,000Plant and machinery:Air pollution control equipment 4.5.2014 1.9.2014 4,00,000Machinery-A 5.5.2014 1.9.2014 2,00,000Machinery-B 7.6.2014 1.9.2014 5,00,000Machinery-C 30.8.2014 1.9.2014 10,00,000Machinery-D 1.9.2014 31.10.2014 4,00,000Machinery-E 1.1.2015 28.2.2015 3,00,000Machinery-F (second hand) 11.1.2015 13.1.2015 2,00,000Motor car 1.2.2015 1.2.2015 5,00,000Air-conditioner

(installed in the Office) 1.2.2015 2.2.2015 1,00,000Compute the depreciation allowable for the assessment year 2015-16 and the writtendown value as on 1st April, 2015. (8 marks)Answer:Particulars Factory Plant & Plant & Building Machinery Machinery

10% 100% 15%


Normal Depreciation 5,00,000 4,00,000 3,97,500Addition Nil Nil 4,50,000Total 5,00,000 4,00,000 8,47,500WDV 45,00,000 NIL 33,52,5002006 - June [1] {C} (a) Arun, a citizen of India residing in Germany for the past 10years, came back to India for the first time during January, 2015. During the financialyear 2014-15, he received the following income:— He works in a company in Germany and earns a salary of Euro 1,000 per month;— He owns agricultural land near Bangalore and a residential house in Delhi which

has been let-out. While the agricultural income is being remitted to his account inGermany every year, the rental income of ` 84,000 is being deposited in his bankaccount at Delhi; and

— He also owns shares in various Indian companies and receives dividend everyyear, which has been regularly deposited in his bank account at Delhi.He seeks your advice as to taxability of the above income under the provisions ofthe Income-tax Act, 1961 as he is an Indian citizen and earning income( 3in m Inadrikas.)

(b) On 23rd December, 2014, Rajat sold 500 grams of gold, the sale consideration ofwhich was ̀ 3,50,000. He had acquired this gold on 20th August, 1981 for ̀ 40,000.Fair market value of 500 grams of gold on 1st April, 1982 was ` 36,000. Find outthe amount of capital gain chargeable to tax for the assessment year 2015-16. Alsocalculate the tax liability. Note: Cost Inflation Index for the year 2014-15: 1024; (3 marks)

(d) Sunder died on 23rd July, 2011 while being in Central Government service. In termsof rules governing his service, his widow Mrs. Sunder is paid a family pension of` 10,000 per month and dearness allowance of 40% thereof. State whether theamount of family pension is assessable in her hands, and if so, under what headof income. Can she claim any relief/deduction on such receipt? Compute taxableincome for the assessment year 2015-16 and tax thereon. (3 marks)

Answer:(a) Mr. Arun is a non-resident under Income-tax Act, 1961 as he has been out of India

continuously for the last 10 years. He does not satisfy any of the conditions ofbeing resident in India. Therefore, only the following income will be taxed in India.

(i) Incomes received or deemed to be received in India(ii) Incomes which accrue or arise or are deemed to accrue or arise in India

The following will be included in his taxable income:(i) Salary income will not form part of his taxable income in India since it is

earned and received abroad.(ii) The agricultural income, being exempt under section 10(1), will be included


only for the purpose of determining the rate of tax. The rental incomereceived in India will be included in his taxable income in India

(iii) Dividend received by him in India from Indian Companies is exempt u/s10(34)

Answer:(b) `

Sale proceeds of gold 3,50,000Less: Indexed cost of acquisition (40000*1024/109) 3,75,780Long term capital Loss 25,780Tax Liability Nil

Answer:(d) In the given case the widow of sunder is chargeable to tax in respect of the family

pension under the head “income from other sources”. The taxable amount of familypension is computed as under:

`Pension (`10,000*12) 1,20,000Dearness allowance (40% of 1,20,000) 48,000

1,68,000Less: Deduction of 1/3rd or `15,000 whichever is less u/s 57 15,000Taxable income 1,53,000

2006 - June [4] (a) Manish is the general manager of a transport company drawing asalary of ` 15,000 per month. The company has provided him with accommodation inMeerut for which 10% of his basic salary is deducted. Actual rent paid by the companyfor accommodation is ` 1,20,000 per annum. He is also receiving entertainmentallowance of ̀ 500 per month. He is provided by the company with a car having enginecubic capacity of 1.8 litres for his personal and official use, but running andmaintenance expenses for the same are borne by the assessee himself. He is in receiptof bonus equivalent to 2 months’ salary. Compute his taxable income under the head‘salary’ for the assessment year 2015-16. (7 marks)Answer:Computation of Salary income of Mr. Manish for the A.Y. 2015-16

`Salary (15,000*12) 1,80,000Bonus 30,000Entertainment allowance 6,000Car facility (` 900*12 months) 10,800


Value of accommodation at concessional rate10% of salary i.e. `2,16,000 (`1,80,000 + 30,000 + 6,000) 21,600Less: Received from the employee 18,000 3,600Gross Salary 2,30,400Less: Deduction NilIncome from salary 2,30,400

2006 - Dec [1] {C} (a) A firm of Company Secretaries consisting of 3 partners earneda net surplus of ` 2,08,000 during the accounting year ended 31st March, 2015 aftercharging interest on capitals amounting to ` 36,000 calculated @ 18% per annum onthe capitals of partners but before charging remuneration to partners. You are requiredto calculate the taxable income of the firm and tax thereon after allowing the maximumallowable remuneration to partners under the provisions of the Income-tax Act, 1961.

(3 marks)(b) Compute the value of perquisites in respect of rent free furnished house, if Ashok

stays in a city with a population of (i) more than 25 lakh; (ii) less than 25 lakh.Ashok is in receipt of the following amounts from his employer during the previousyear ended 31st March, 2014: Basic pay: ̀ 1,80,000; Dearness allowance : 25% ofbasic pay; Commission; 5% of basic pay; and Bonus; ` 8,000; His employer haspaid income-tax of ̀ 5,000 and professional tax of ̀ 1,500 on his behalf. Besides,his employer provided refrigerator and television costing ` 24,000 and paid ` 500per month towards rent of other furniture provided. (3 marks)

Answer:(a) Computation of taxable income of Firm for the assessment year 2015-16

Calculation of book profits `

Net surplus as per profit and loss a2c,0c8o,u0n0t0Add: Disallowance of interest in excess of 12% 12,000Book Profits 2,20,000Less: Remuneration allowed u/s 40(b)On first ` 2,20,000@ 90% or ` 1,50,000 1,98,000Taxable income of firm 22,000Tax on ` 22,000 @ 30% 6,600Add: Surcharge NilAdd: Education cess & SHEC 198Total tax after rounding off u/s 288B 6,800

Answer:


(b) Salary for the purpose of rent free accommodation `Basic salary 1,80,000Dearness allowance (25% of basic pay) 45,000Commission (5% of basic pay) 9,000Bonus 8,000Professional tax 1,500Income tax (paid by the employer) 5,000Total 2,48,500Where the population more than 25 lakhsValue of rent free unfurnished accommodation shall be15% of salary = ` 37,275Value of furnished accommodation = 37,275 + 2,400 + 6,000 = ` 45,675Where population is less then 25 lakhsValue of rent free unfurnished accommodation shall be 10% of salary = Value of furnished accommodation = 24,850 + 2,400 + 6,000 = ` 33,250

2006 - Dec [2] (a) A perusal of Ram Mohan’s bank account revealed the followingdeposits during the financial year 2014-15:

(i) Gift from his friend on 8th December, 2014 on his birthday: ` 12,000. (ii) Dividends from shares of various Indian companies : ` 13,200. (iii) Gift from his fiancee on 5th February, 2015: ` 85,000.(iv) Gift from his mother’s friend on 7th July, 2014 on his engagement; ` 28,000. (v) Gift from his sister in Netherlands on 29th September, 2014: ` 2,20,000.(vi) Interest on bank deposits: ` 30,000.

Compute his total income for the assessment year 2015-16 assuming that his incomefrom house property (computed) is ` 72,000. (5 marks)Answer:

Computation of total income for the assessment year 2015-16 `

Income from house property 72,000Income from other sourcesGift from friend 12,000Gift from fiancé 85,000Gift from mother’s friend 28,000Gift from sister (Netherlands) Exempted —Dividend from shares exemptInterest on bank deposits 30,000 1,55,000Gross total Income 2,27,000


Less: Deduction NilTotal income 2,27,000

2007 - June [1] {C} Attempt the following:(iv) Arun, a resident of Meerut, receives ` 38,000 per annum as basic salary. In

addition, he gets ` 12,000 per annum as dearness allowance, which does notform part of basic salary, 5% commission on turnover achieved by him (turnoverachieved by him during the relevant previous year 2014-15 is ̀ 6,00,000) and ̀7,000 per annum as house rent allowance. He, however, pays ` 8,000 perannum as house rent. Determine the quantum of house rent allowance exemptfrom tax. (3 marks)

Answer:Minimum of the following three shall be exempt from tax: `

Actual amount received 7,00040% of salary (38,000 + 30,000) 27,200Rent paid in excess of 10% salary (8,000 ! 6,800) 1,200Therefore, ` 1,200 will be exempt

2007 - Dec [3] Comment on the correctness or otherwise of the followingstatements/propositions with reference to the relevant provisions of tax laws:

(i) An assessee can have a loss from a house property. (5 marks)(ii) In case of depreciable assets forming part of block of assets, there can be a

short term capital gain but no short term capital loss. (5 marks)Answer:

(i) Correct Statement: There can be loss from house in the followingcases:(a) In respect of a self occupied house property, the net annual value is taken

as nil. No deductions are allowed except for interest on borrowed funds upto a maximum of ` 30,000/1,50,000 as the case may be

(b) In respect of any other type of house property, namely of interest & municipaltax actually paid a house property which is fully let out, etc. There are norestrictions on deductions and therefore, there can be loss under this headin respect of such properties due to municipal taxes as well as deductions.Similarly, deductions under section 24 in case of property deemed to be letout, can be more than net annual value.

(ii) Incorrect Statement: In case of depreciable assets forming part of block ofassets, there can be a short term capital loss if all the assets of the block aresold/ transferred during the year and net sale consideration is less than value ofthe block. In this case the deficit will be treaded as a short term capital; loss.


2008 - June [2] (a) The net profits of Jolly Brothers, a partnership firm, consisting ofthree partners carrying on business for the accounting year ended 31st March, 2015 was` 5,40,000. The said net profits after charging salary payable to all the partners wereamounting to ̀ 1,08,000, but before crediting interest to partners' accounts on their fixedcapitals amounting to ` 10 lakh totally. The partnership deed provided for payment ofinterest on fixed capital at 18% per annum.The partnership deed does not, however, specify any salary entitlement to partners. Onthis information, you are required to -

(i) compute the taxable income of the firm; and(ii) calculate the remuneration allowable under provisions of the Income-tax Act,

1961 to all the partners, if the partnership deed had provided for the payment ofremuneration to them. (5 marks)

Answer:Computation of total income for the firm assessment year 2014-15

(i) Net Profit 5,40,000Add: Salary of partners 1,08,000

6,48,000Less: Interest allowable to maximum extent of

12% on `10,00,000 1,20,000Total Income 5,28,000

(ii) The allowable remuneration to partners if the partnership deed so authorize will becomputed as underOn 1st ` 3,00,000 @ 90% or ` 1,50,000whichever is more 2,70,000Balance @ 60% 1,36,800Maximum Remuneration allowed 4,06,800

2008 - June [3] (b) Mrs. Padma (age: 25 years) is offered an employment by PritamLtd. at a basic salary of ̀ 24,000 per month; other allowances according to rules of thecompany are ! Dearness allowance: 18% of basic pay (not forming part of salary forcalculating retirement benefits); Bonus: 1 month basic pay; and Project allowance: 6%of basic pay.The company gives Mrs. Padma an option either to take a rent-free unfurnishedaccommodation at Mumbai for which the company would directly bear the rent of` 15,000 per month or to accept a house rent allowance of ̀ 15,000 per month and findout her own accommodation. If Mrs. Padma opts for house rent allowance, she will haveto pay ` 15,000 per month for an unfurnished house.

Which one of the two options should be opted by Mrs. Padma in order to minimise


her tax liability? (5 marks)

Answer:

For determining which one is better option, the following taxable income is calculatedof Mrs. Padma

Option 1 [Rentfree

accommodation]

Option 2[House Rent

allowance]

Basic Salary (24000*12)

Dearness Allowance (18% of ` 2,88,000)

Bonus

Project Allowance (6% of ` 2,88,000)

Rent free accommodation

House rent allowance

2,88,000

51,840

24,000

17,280

49,392

—

2,88,000

51,840

24,000

17,280

—-

36,000

Income from salary 4,30,512 4,17,120

Mrs. Padma should therefore, opt for House Rent Allowance (Option 2)

Note-1 Calculation of taxable perquisite of rent free accommodation:

`

Basic Salary 2,88,000Bonus 24,000Project Allowance 17,280

3,29,280(a) 15% of salary 49,392(b) Rent of the house 1,80,000

Whichever is lessNote -2Amount of house rent allowance exempt from tax is the minimum of the following:(a) ` 1,80,000 (being house rent allowance)(b) ` 1,51,200 (Rent paid in excess of 10% of the salary)(c) `1,44,000 (being 50% of salary)

Therefore, amount exempt is ` 1,44,000Amount taxable is ` 1,80,000 -1,44,000 = ` 36,000

Repeatedly Asked Questions


No. Question Frequency

1 Distinguish between the ‘Recognised provident fund’ and ‘statutoryprovident fund’

07 - Dec [4] (a) (i), 09 - Dec [3] (a) (ii), 12 - Dec [6] (c) (i) 3 Times

2 Write short notes on Taxation of zero coupon bonds09 - Dec [2] (b) (i), 10 - June [2] (b) (ii) 2 Times

3 Distinguish between the ‘Long-term capital gains’ and ‘short-termcapital gains’.

09 - June [3] (a) (ii), 10 - Dec [5] (a) (i) 2 Times

1 taxation of individuals, partnership firms/llp and companies · 2015-06-13 · [chapter # 1]...

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