Q1. What are the incomes from house property which are exempted from tax?

Ans:- The term 'House property' consists of buildings or land appurtenant to such buildings. Income from letting out of vacant plots of land when there is no adjoining building will not be taxed under this head (but will be taxed as income from other sources). The existence of a building is, therefore, an essential prerequisite for taxation of income from house property. 'Building' will include residential house (whether let out or self-occupied), office building, factory building, godowns, flats etc. But, the purpose for which the building is used by the tenant is also immaterial. It does not make any difference at all if the property is owned by a limited company or a firm. However, if the building or part thereof is used by the owner himself for the purpose of his own business then there will be no income from such portion of the house property.

Under the Income-tax Act, the basis of calculating income from House property is the 'Annual Value'. This is the inherent capacity of the property to earn income and it has been defined as the sum for which the property might reasonably be expected to let from year to year. Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value. Where, however, the actual rent is less than the reasonable rent , the latter will be the annual value.

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner shall be subjected to Income Tax under the head 'Income from property' after claiming deductions (under section 24) provided such property, or any portion of such property is not used by the assessee for the purposes of any business or profession, carried on by him, the profits of which are chargeable to income tax.

PROPERTY INCOMES EXEMPT FROM TAX

Some incomes from house property are exempt from tax. They are neither taxable nor included in the total income of the assessee for the rate purposes. These are:

i. Income from any farmhouse forming part of agricultural income; ii. Annual value of any one palace in the occupation of an ex-ruler;

iii. Property Income of a local authority; iv. Property Income of an authority, constituted for the purpose of dealing with and

satisfying the need for housing accommodation or for the purposes of planning development or improvement of cities, towns and villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this provision.);

v. Property income of any registered trade union; vi. Property income of a member of a Scheduled Tribe;

vii. Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;

viii. Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group;

ix. Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;

x. Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities;

xi. Property income of an institution for the development of Khadi and village Industries;' xii. Self-occupied house property of an assessee, which has not been rented throughout the

previous year; xiii. Income form house property held for any charitable purposes; xiv. Property Income of any political party.

Q2. Define the term tax holidays. What are the different tax incentives for new units established in SEZ?

Ans:- A tax holiday is a temporary reduction or elimination of a tax. Governments usually create tax holidays as incentives for business investment. The taxes that are most commonly reduced by national and local governments are sales taxes. In developing countries, governments sometimes reduce or eliminate corporate taxes for the purpose of attracting Foreign Direct Investment or stimulating growth in selected industries..

The tax holiday has been often used by developing and transition countries. It is directed to new firms and is not available to existing operations. With a tax holiday, new firms are allowed a period of time when they are exempt from the burden of income taxation. Sometimes, this grace period is extended to a subsequent period of taxation at a reduced rate. For transition countries, one advantage of tax holidays is that they provide a simple regime for foreign investors because there is no need to calculate taxes in the early years of operation, at a time when the tax systems are not yet fully developed. This view is certainly not valid for long-term investors, for whom the tax treatment after the holiday has expired is as important as the treatment during the holiday in determining the after-tax profitability of the investment. In addition, the tax treatment of the initial capital expenditures made before and during the holiday period must be determined so that appropriate records will be available for the calculation of depreciation when the holiday ends.

A number of technical issues are important in determining the impact of tax holidays on the return on investments. The first issue is determining when the holiday starts. It could be when production starts, the first year in which the firm makes a profit, or the first year that the firm achieves a positive cumulative profit on its operations. For large projects in particular, losses are usually generated in the early years of production, when the highest capital costs are incurred, including special costs that are linked to the start-up period, training the workforce, and developing the local market. For such projects, a tax holiday that starts when production occurs may actually increase the taxes paid over the life of the project and so act as a disincentive for

investment. If losses are experienced during the holiday period they may not be allowed to be carried forward beyond the holiday period (it would be overly generous to allow losses to be carried forward from a year in which income would not have been subject to tax). Thus, the holiday may occur when no taxes would have been paid in any event and taxes may be increasedfollowing the holiday because no losses are available to offset the profits. A similar situation can occur if the holiday starts when profits are first generated. Income may be sheltered that would have been eliminated in any case by the use of the tax losses. This may result in an overall increase in taxation in circumstances when the loss-carryforward period is short or the use of losses is restricted in some way. Tax laws usually specify that the holiday commences when profits first occur. However, they are often ambiguous as to whether this means the first year that is in itself profitable or the first year that cumulative net profits are positive.6 A related question is the treatment of depreciation during the holiday period. Should it be deducted during the holiday period or can it be deferred until after the holiday has terminated?

Depreciation represents a cost in the calculation of income, and so its deduction is necessary to accurately measure the amount of income that should be subject to the holiday. Allowing a deferral of the deduction effectively overestimates the costs associated with the postholiday period and so leads to a further reduction in tax, which can result in a very generous incentive. The issue is more complicated if some form of accelerated depreciation is also offered with respect to the investment. Forcing the use of the accelerated deductions during the holiday period at the least reduces their value and can actually increase the level of taxation relative to the situation where no incentives are provided. A complete deferral of the deduction, however, can again lead to a generous incentive and an effective tax holiday that is much longer than intended. Another design question is the length of the holiday. Most of the holidays offered in transition countries have been of short duration, and, as discussed below, are of little benefit to long-term capital-intensive projects. Longer holidays would be of greater benefit; for example, there is some evidence in Asia and Hungary that the longer holidays succeeded in attracting some long-term investment.7 However, the longer the holiday, the higher the revenue cost and the greater the vulnerability to tax planning schemes.8 The opposite problem arises when a tax holiday provision providing a lengthy tax-free period is repealed. Because an existing company can continue to take advantage of the holiday for which it qualified, new investment can be structured so as to use the corporate form of these existing companies, sometimes by bringing new investors in or even by selling the holiday company to new investors planning a substantial investment. It is therefore desirable, on repeal of a tax holiday, to stipulate that companies currently taking advantage of a tax holiday will cease to quality if a substantial change in the ownership of the company takes place. Such a provision would prevent at least the most flagrant abuses.

Tax incentives for new units established in SEZ:

As per circular  Epces circular no. 39 dated 28-2-2007, issued by EXPORT PROMOTION COUNCIL FOR EOUs & SEZ UNITS (Ministry of Commerce & Industry, Government of India)

SEZ units are provided exemption from Income Tax under Section 10AA of the Income Tax Act, as given in the 2nd Schedule of the SEZ Act, 2005. Section 10AA of the Income Tax Act, as given in 2nd Schedule of the SEZ Act, 2005 has been amended by the Finance Bill, 2007. The Finance Bill, 2007,

Accordingly, Tax benefit has been provided only for new units in Special Economic Zones : Sections 10AA of the Income-tax Act, provides that in computing the total income of an entrepreneur, from his unit in the special  economic zone, the following deduction shall be allowed:—

Duty free import/domestic procurement of goods for development, operation and

maintenance of SEZ units

100% Income Tax exemption on export income for SEZ units under Section 10AA of the

Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the

ploughed back export profit for next 5 years.

Exemption from minimum alternate tax under section 115JB of the Income Tax Act.

External Commercial Borrowing by SEZ units up to US $ 12500 billion in a year without

any maturity restriction through recognized banking channels.

Exemption from Central Sales Tax.

Exemption from Service Tax.

Single window clearance for Central and State level approvals.

Exemption from State sales tax and other levies as extended by the respective State

Governments.

The major incentives and facilities available to SEZ developers include:-

Exemption from customs/excise duties for development of SEZs for authorized

operations approved by the BOA.

Income Tax exemption on income derived from the business of development of the SEZ

in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.

Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.

Exemption from dividend distribution tax under Section 115O of the Income Tax Act.

Exemption from Central Sales Tax (CST).

Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Q3. What are the key steps to calculate the tax liability of an individual ?

Ans:- Steps to calculate the tax liability of an individual are:

Determine residential status- First of all to determine the residential status of the assessee. The incomes are taxed according to residential status i.e. Resident in India, Not Ordinarily resident, or Non resident.

Calculation of gross total income- For the calculation of the gross total income we should have to calculate the income of five heads according to the provisions of Income Tax Act.

Exempted Incomes- While calculating the incomes of the different heads, the incomes which are exempted will not be included.

Income of other persons to be included in the income of assessee- Few incomes of other persons (Sec. 64) includes in the income of assessee.

Set-off of losses- If there is negative income in a particular head then it is to be set off according to the provisions of Income Tax Act.

Deductions u/s 80- After the above steps, the aggregate amount of income is known as Gross Total Income. From the gross total income few deductions which are provided under section 80 of income tax act will be deducted. After deductions, the balance of income is known as Total Income or Taxable Income. The list of deductions available to an individual are as follows:

1. Investments and deposits (sec 80C)2. Contribution to certain pension funds (sec 80CCC)3. Contribution of new pension scheme (sec 80CCD)4. Payment to medical insurance premium (sec 80D)5. Medical treatment of handicapped dependents and amount deposited for maintenance of

handicapped dependents (sec 80DD)6. Expenditure on medical treatment of certain diseases (sec 80DDB)7. Repayment of loan and interest thereon taken for higher education (sec 80E)8. Donations to certain funds/charitable institutions etc. (sec 80G)9. Deductions in respect of rent paid (sec 80GG)10. Donations for scientific research and rural development (sec 80GGA)11. Contribution to political parties (80GGC)12. Profit and gain of new industrial undertaking set up for infrastructure development (sec

80IA)13. Profit and gains of new industrial undertakings (sec 80IB)14. profit and specific industrial undertakings establish in specific states (sec 80IC)15. Deduction in respect of profits and gains from business of collecting and processing of

bio gradable waste (sec 80JJA)16. Deduction in respect of certain incomes of offshore banking unit (sec 80LA)

17. Deduction in respect of royalty income to authors (80QQB)18. Deduction in respect of royalty on patent (sec 80RRB)19. Deduction in case of person with disability (sec 80U)

Total Income rounded off in the multiple of 10 – The total income calculated will rounded off in multiple of Rs. 10. For this rupee five or more than Rs. 5 will be treated as Rs. 10 and less than Rs. 5 will be deleted.

Key steps to calculate the tax liability of an individual

1. Income from salaries xxxxxxx2. Income from house property xxxxxxx3. Profits and gains of business or profession xxxxxxx4. Income from Capital gainst xxxxxxx5. Income from other sources xxxxxxx

Total(1+2+3+4+5) xxxxxxxLess:adjustment for set off and carry forward of losses xxxxxxxGross total income xxxxxxxLess: Deductions under Sec.80C to 80u (Chapter VI A) xxxxxxxTotal Income (Rounded off to the nearest Rs.10) xxxxxxx

Q 4. Define the treatment of remuneration paid to partners under income tax act.

Ans:- Treatment of remuneration and interest to a partner as business income : Clause (v) of section 28

Section 28(v) provides that interest and remuneration received by a partner from his LLP shall be

chargeable to income-tax as profits and gains of business. The proviso clarifies that where the

remuneration, interest, etc., is in excess of the ceiling fixed under the new section 40(b) and is

disallowed in part for that reason then the income under the head referred to in section 28(v)

shall be adjusted to the extent of the amount not so allowed to be deducted.

Any expenditure incurred in order to earn such income can be claimed as a deduction from such

income. For example, if a partner borrows money to make his capital contribution to the LLP and

he is paid interest on his capital contribution, the amount of such interest will be taxed under the

head “Profits and gains of business or profession”, but the interest paid by him on the borrowed

money will have to allowed as a deduction. If the whole or a part of salary/interest is not allowed

as deduction in the hands of the LLP, than the whole or that part of salary/ interest is not taxable

in the hands of the partners. In other words, in the hands of partners the entire remuneration/

interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act) is

chargeable to tax.

Ceiling as to remuneration payable to working partners and interest to partners :

Section 40(b)

Section 40(b) is a disallowance provision and disallows remuneration, interest, etc.,

received by the partners from the firm provided the same exceeds the ceiling prescribed in

the same provision. It also specifies as to how the matter of deductibility of interest and

remuneration is to be dealt with where a partner is a partner in representative capacity.

The Explanation 3 defines the term “book profit” which is relevant for computing the upper

ceiling of remuneration payable to all the working partners put together. The Explanation 4

defines “working partners” who alone are made entitled to remuneration if the deductibility of

the related amount in the hands of the LLP is not to be barred by section 40(b).

Limits of Remuneration to Partners:

The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus,

commission or remuneration will be allowed as deduction for income of LLP,

the limits of remuneration as proposed by budget are outlined below:

On First Rs 3,00,000 of book profit or in case of loss

Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more

On the balance of book profit

at the rate of 60%

Signing of Income tax Return:

The designated partner shall be responsible for signing the income tax return of LLP,

where for unavoidable reasons, such designated partner is not able to sign the same or

where there is no designated partner, any partner will sign the return.

No capital gain on conversion

LLP and general partnership is being treated as equivalent (except for recovery purpose)

in the Act, the conversion from a general partnership firm to an LLP will have no tax

implication, if the rights and obligation of the partners remain the same after conversion

and if there is no transfer of any asset or liability after conversion. If there is a violation of

these conditions , the provision of capital gain will apply.

Q 5. Describe in brief the provisions for set off and carry forward of losses.

Ans:- ‘Loss’ in common parlance is understood as excess of expenses over income. The Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any assessee subject to some restrictions. Let us see the relevant provisions relating to set-off of losses under the different heads of income:

Provision relating to carry forward and set-off losses:

Loss from Business/profession [Sec 72]

Any loss under the head, ‘profit and gain of business,’ other than speculation loss and depreciation can be set off against any other business income or any other head of income, except salary income, in the same assessment year.

After such setting off, if the resultant figure is yet a loss (business loss): If the loss in greater than income from any other business or income from any other head, then such loss can be carried forward up to eight assessment years. On carrying forward to subsequent years, this loss can be set off only against business income and not against any other head of income.

Speculation loss can be set off only against speculation profit in the same assessment year. But even after such setting off if the resultant figure is a loss, then it can be carried forward for set off in subsequent years up to four assessment years. From assessment year 2006-07 up to assessment year 2005-06 such loss could be carried-forward for eight assessment year. In subsequent years, setting-off of the loss is allowed only against speculation profit [Section 73].

Transactions in derivatives entered into on recognised stock exchange through a broker or a Securities and Exchange Board of India (Sebi)-recognised intermediary and supported by a time-stamped contract note is excluded from the definition of speculative transaction [Section 43(5)(d)]. Thus, such loss is to be treated in the same manner as ‘non speculative business loss’.

Speculative business loss can be set off against only speculative business income. But non-speculative business loss can be set off against any business income (whether speculative or non speculative).

Depreciation can be set off in the same assessment year as well as in the subsequent assessment years against business income or any other head of income except salary income. Further, depreciation can be carried forward indefinitely for set-off in subsequent years [Section 32(2)].

As unabsorbed depreciation can be carried forward for any number of years. In subsequent years, one must first set off current year’s depreciation, then brought forward business loss and then the unabsorbed depreciation.

Continuity of business is now not necessary for the purpose of set-off and carry-forward.

Loss from a house property [Sec 71B]

Loss arising from a house property can be set off against income from any other house property or income from any other head in the same assessment year.

 If income from house property is negative even after such set-off, then such loss can be carried forward up to eight assessment years for set-off. But in subsequent years, it can be set off only against income from house property.

Loss from capital gains (Section 70 & 74)

Short-term capital loss can be set off against any capital gain income, long term or short term, in the same assessment year. It should be noted that such loss can be set off only against capital gain income and not against any other head of income. Balance short-term capital loss if any can be carried forward up to eight assessments years. In the subsequent years also, it can be set off against any capital-gain income.

Long-term capital loss

Long-term capital loss arising on sale of capital asset other than equity shares and units of equity-oriented mutual fund which are subject to securities transaction tax (STT) can be set off in the same assessment year as well as in subsequent assessment years (in case of carry-forward) only against long-term capital gain income. Carry-forward of loss is allowed up to eight assessment years.

Long-term capital loss arising on sale of equity shares and units of equity-oriented mutual fund, which is subject to securities transaction tax (STT), is not allowed to be either set off or carried forward (as income from such source is exempt from tax) [Section 14A].

Loss under the head ‘Other sources’ (Section 71) : Any loss under the head, ‘Other sources’ can be set off in the same assessment year against income from any other source or income from any other head. Salary, business/profession. The loss cannot be carried forward for set-off in future.

Loss from owning and maintaining race horses [Section 74A] : Any loss arising from owning and maintaining race horses can be set off against income from such activity only in the same assessment year or in subsequent assessment years (in case of carry- forward). In case of this loss, it is allowed to be carried forward up to four assessment years.

Loss under any head can be set off against speculative income, capital gain income, income from maintaining race horses. But the reverse is not possible. Loss from speculation, loss under capital gain and loss from maintaining race horses can be set off only against the respective specific income. In other words, loss from speculation can be set off only against speculation income. Loss from capital gain can be set off only against capital gains income and so on.

A loss from any source cannot be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games, other games or any sort of gambling or betting. Loss on bonus stripping/dividend stripping cannot be set off against any income.

Return of loss must be filed within due date of filing of return or else carry-forward of loss to the subsequent year is not allowed. However, this condition does not apply in case of house property loss and unabsorbed depreciation.

Q 6. Compute the net wealth and wealth tax liability of Golden Jewellers ltd. as on 31-3-11. The company is engaged in the jewellery business export and domestic sales

  RsFactory buildings

520000

Bank Balance 140000Unaccounted cash balance

25500

Silver ware 1200000Gold ornaments

3500000

Motor cars 150000

The company has taken a loan of Rs. 600000.00 for factory premise

Ans:-

Assessee : Golden Jewelers Ltd

Valuation Date : 31-03-2011

Assessment Year : 2010-11

Nature of Asset Rs. Reasons

Factory Building 520000 Asset u/s 2(ea)

Bank Balance 140000 Not an asset under WT Act.

Unaccounted cash balance 25500 An asset u/s 2(ea)

Silver Ware 1200000 If Silver ware Not held as stock in trade

Gold Ornaments 3,500,000If Gold ornaments Not held as stock in trade

Motor cars 150000 Not an asset under WT Act.

Total Asset 5,395,500Less: Debt incurred in relation to an asset: Loan for Factory premise 600,000

Net Wealth 4,795,500

Less: Basic Exemption 3,000,000

Taxable Net Wealth 1,795,500Tax Payable @ 1 % 17,955

Note:1.While calculating the net wealth it is assumed that gold ornaments of Rs. 35 Lacs and silver ware of Rs. 12 Lacs are not part of stock in trade so accordingly it is treated as part of the asset of Golden Jewelers Ltd.

2. It is tendered to increase the threshold limit for payment of wealth tax from Rs.15.00. lakhs to Rs. 30.00 lakhs because of inflation-adjustment, The recommended amendment will apply for the value of net wealth as on 31st March, 2010 and will apply in relation to assessment year 2010-11.

Q1. Write a short note on :

a) Cost of acquisition

b) Cost of improvement

c) Expenditure on transfer

d) Transfer

Ans:- a) Cost of Acuisiton : Cost of acquisition of an asset is the value for which it is acquire by the assessee. It means that whatever cost incurred for getting an asset plus all expenses incurred to acquire it is the cost of acquisition. Interest paid on money borrowed for the purchase of a cpital asset would constitute part of the cost of acquisition, provided such interest has not been deducted under any other provision. However, in the following cases the above meaning of cost of acquisition does not good and cost of acquisition is taken as a notional figure.

Cost to the previous owner deemed to be the cost of acquisition. If the asset is acquired by an assessee in the following circumstances the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. It will be increased by the cost of any improvement of the assets incurred by the previous owner of the assessee.

Circumstances when cost to previous owner is taken as cost of acquisition of asset: sec.49(1)

On any distribution of asset on the total or partial partition of a Hindu undivided family;

Or under gift or will;

Or by succession, inheritance or devolution;

Or on any distribution of assets on the liquidation of a company;

Or under a transfer to a revocable or an irrevocable trust;

Or on transfer by a parent company to its Indian subsidiary company which is wholly owned by the parent company;

Or on the transfer by a subsidiary company to its Indian holding company which owns the whole of the share capital of the subsidiary company;

Or on the transfer of capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company;

Or an transfer of shares of an Indian company by amalgamated foreign company to the amalgamated

foreign company;

Or when any of the members of a H.U.F. converts his self-acquired property into H.U.F. property.( The cost of the property to the H.U.F. will be taken as the cost of the property to the individual converting the property).

Cos of acquisition of a Capital asset acquired before 01-04-1981

Where capital asset became the property of the assessee before 1st April 1981, the cost of acquisition of the asset may, at the option of the assessee, be taken to be any one of the following:

i)The cost of the asset to the assessee; or

ii)The fair market value of the asset on 1st April 1981.

Cost of acquisition of an asset acquired by the previous owner before 1 st April 1981 by any mode u/s 49(1)

If the capital asset (other than asset on which depreciation has been allowed) became the property of the assessee by any of the modes specified in section 49(1) and the capital asset became the property of the previous owner before 1st April, 1981, the cost of acquisition of the asset may, at the option of the assessee, be taken to be any one of the following:

i)The cost of acquisition of the asset to the previous owner; or

ii)The fair market value of the asset on 1st April, 1981.

b) Cost of improvement : Cost of improvement is capital expenditure incurred by an assessee in making any additions/improvement to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets or to cure such title. To put it differently, any expenditure incurred to increase the value of the capital asset is treated as cost of improvement. Special provisions under the Income-tax Act in respect of cost of improvement should be noted as under:

Expenditure incurred before April 1, 1981 not considered - Any cost of improvement

incurred before April 1, 1981 is not taken into consideration for calculating capital gain

chargeable to tax. This rule does not have any exception. In other words, cost of

improvement includes only expenditure on improvement incurred on or after April 1,

1981. Expenditure incurred on improvement of a capital asset before April 1, 1981 is

always taken as equal to zero.

Double deduction not permitted - Cost of improvement does not include any expenditure

which is deductible in computing the income chargeable under the heads “Interest on

securities”, “Income from house property”, “Profits and gains of business or profession”

and “Income from other sources”.

COST OF IMPROVEMENT IN DIFFERENT SITUATIONS - Keeping in view the above

provisions, cost of improvement shall be determined in the different situations as follows:

Different Situations

When the capital asset was

acquired by gift, will, etc.,

under the provisions of

section 49(1)

In any other  case

Cost of improvement in relation to

good-will of a business or a right to

manufacture, produce or process any

article/thing or right to carry on any

business

   

when these assets are self-

generatedNIL NIL

when these assets are purchased

and later on transferredNIL NIL

Cost of improvement in relation to any

other asset acquired   

before April 1, 1981 Cost of improvement Cost of improvement

incurred by the assessee and

the previous owner (ignoring

the expenditure incurred

before April 1, 1981)

incurred  by the assessee

(ignoring the expenditure

incurred before April 1,

1981)

on or after April 1, 1981

Cost of improvement

incurred by the assessee and

the previous owner

Cost of improvement

incurred by the assessee

INDEXED COST OF IMPROVEMENT

Indexed cost of improvement is defined as an amount which bears to the cost of improvement,

the same proportion as the cost inflation index for the year in which the asset is transferred bears

to the cost inflation index for the year in which the improvement to the asset took place.

c) Expenditure on transfer : Expenditure incurred wholly and exclusively in connection with the transfer of a capital asset is deductible from full value of consideration. The expression “expenditure incurred wholly and exclusively in connection with such transfer” means expenditure incurred which is necessary to effect the transfer. Examples of such expenses are brokerage or commission paid for securing a purchaser, cost of stamp, registration fees borne by the vendor, traveling expenses incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation awarded in the case of compulsory acquisition of assets. One should also keep in view the following propositions:

Vague claim for expenses is not allowable Expenditure in connection with transfer need not necessarily have been incurred prior to

passing of title. If a sum has already been subject-matter of deduction under other heads, the same cannot

be allowed as deduction under section 48.

d) Transfer : Capital gain arises on transfer of capital asset; so it becomes important to understand what is the meaning of word transfer. The word transfer occupy a very important place in capital gain, because if the transaction involving movement of capital asset from one person to another person is not covered under the definition of transfer there will be no capital gain chargeable to income tax. Even if there is a capital asset and there is a capital gain. The word transfer under income tax act is defined under section 2(47). As per section 2 (47) Transfer,

in relation to a capital asset, includes sale, exchange or relinquishment of the asset or extinguishments of any right therein or the compulsory acquisition thereof under any law.

In simple words Transfer includes:

Sale of asset Exchange of asset Relinquishment of asset (means surrender of asset) Extinguishments of any right on asset (means reducing any right on asset) Compulsory acquisition of asset. The definition of transfer is inclusive, thus transfer includes only above said five ways. In

other words, transfer can take place only on these five ways. If there is any other way where an asset is given to other such as by way of gift, inheritance etc. it will not be termed as transfer.

Whether the following transactions are transfer in relation to capital asset.

1. A house transferred by way of will to son.2. Bonus shares given by a company to its shareholders.3. Giving away jewellery for a piece of land.4. Getting money in lieu of shop in a shopping complex.5. Giving the rights to use the asset.

Q 2. Write a short note on deductions under section:

a) 80 DD

b) 80 G

c) 80 GG

d) 80lb

e) 80 U

Ans:- a) 80 DD- Deduction in respect of dependent relative Section

Following are the provisions under this section:

This deduction is available to only Individuals and HUF, who is resident in India. This deduction is given to the assessee if a person with disability is dependent upon him.

A person with disability means disabilities like autism, cerebral palsy, mental retardation, etc. as specified in Persons with Disabilities Act 1995.

The assessee has incurred expenditure by way of medical treatment (including nursing), training and rehabilitation of a disabled dependent: or/and

He has paid or deposited any amount under any scheme framed by the LIC of India or any other insurer for the payment of an annuity or a lump sum amount for the benefit of such dependent in the event of the death of the assessee.

For claiming the deduction the assessee shall have to furnish a certificate by the prescribed medical authority with the return of income.

Amount of Deduction

If the above mentioned conditions are satisfied the amount of deduction is fixed at Rs. 50,000 irrespective of actual expenditure.

In case of a person with severe disability (over 80 %) a higher deduction of Rs. 75,000 shall be allowed irrespective of actual expenditure.

Explanation: Dependent meansi) In case of an individual, the spouse children, parents, brothers, sisters of the individual or any of them.

ii) In case of HUF, a member of the HUF wholly or mainly dependent on such individual or HUF for support and maintenance.

b) Section 80G To encourage donations for social cause all assessees are entitled to this deduction from their gross total income, if the donation is made in the previous year to the following funds or charitable institutions. For the sake of convenience we have divided the donations into four categories depending on the quantum of deduction.

A. Donations made to following are eligible for 100% deduction without any qualifying limit.

1. Prime Minister’s National Relief Fund2. National Defence Fund3. Prime Minister’s Armenia Earthquake Relief Fund4. The Africa (Public Contribution - India) Fund5. The National Foundation for Communal Harmony6. Approved university or educational institution of national eminence7. The Chief Minister’s Earthquake Relief Fund, Maharashtra8. Donations made to Zila Saksharta Samitis

9. The National Blood Transfusion Council or a State Blood Transfusion Council.10. The Army Central Welfare Fund or the Indian Naval Benevolent Fund or The Air Force

Central Welfare Fund.

B. Donations made to the following are eligible for 50% deduction without any qualifying limit.

1. Jawaharlal Nehru Memorial Fund2. Prime Minister’s Drought Relief Fund3. National Children’s Fund4. Indira Gandhi Memorial Trust5. The Rajiv Gandhi Foundation.

C. Donations to the following are eligible for 100% deduction subject to qualifying limit (i.e. 10% of adjusted gross total income).

1. Donations to the Government or a local authority for the purpose of promoting family planning.

2. Sums paid by a company to Indian Olympic Association

D. Donations to the following are eligible for 50% deduction subject to the qualifying limit (i.e. 10% of adjusted gross total income).

1. Donation to the Government or any local authority to be utilized by them for any charitable purposes other than the purpose of promoting family planning.

Amount of deduction

The quantum of deduction is as follows :- Category A- 100 % of amount donated Category B -50 % of the amount donated in the funds Category C – 100% of the amount donated in the funds subject to maximum limit

of 10% of Adjusted GTI. Category D – 50% of the amount donated in the funds subject to maximum limit

of 10% of Adjusted GTI.

The total of these deductions under categories A,B,C, & D is the quantum of deduction under this section without any maximum amount.

Adjusted gross Total income for this purpose means his gross total income minus long-term capital gain, short term capital gain taxable u/s 111A, and all deductions u/s 80CCC to 80U except any deduction under this section.

c) Section 80GGThis deduction is allowed to an individual assessee in respect of rent paid by him for an accommodation used for his residential purposes provided the following conditions are fulfilled:

The assessee is either a self-employed person or such a salaried employee whois not in receipt of house-rent allowance from any source.

The actual rent paid by him is in excess of 10% of his total income. He or his spouse or minor children or the HUF, of which he is a member, do not own any

residential accommodation at the place where the assessee resides, performs the duties of his office or employment or carries on his business or profession. Where, however, the assessee owns any residential accommodation at any other place and claims the concessions of self-occupied house property for the same, he will not be entitled to any deduction u/s 80GG even if he does not own any residential accommodation at the place where he ordinarily resides, performs the duties of his office or employment or carries on his business or profession.

The assessee files a declaration in Form No. 10BA regarding the payment ofrent.

Note:Deduction under this section can be claimed even if accommodation at concessional rent is provided by the employer. In such a case the deduction will be given if the actual rent paid by the employee exceeds 10% of his total income. Where a rent-free house is provided to the employee, no deduction will be allowed under this section.

Amount of DeductionThe assessee, who fulfils the above mentioned conditions, is allowed a deductionequal to least of the following three:

excess of actual rent paid over 10% of adjusted gross total income: 25% of his adjusted gross total income; and Rs. 2,000 p.m.

Adjusted Gross Total income( Adj.GTI) for this purpose means his gross total income minus long-term capital gain, short term capital gain taxable u/s 111A, and all deductions u/s 80CCC to 80U except any deduction under this section.

d) 80lbDeduction in respect of profits and gains from certain industrial undertaking othe than infrastructure development undertakings.

Case 1 Business of an industrial undertaking

Case 2 Operation of ship

Case 3 Hotels

Case 4 Industrial research

Case 5 Production of mineral oil

Case 6 Developing and building housing projects

Case 7 Business of processing, preservation and packaging of fruits or vegetables or integrated handling, storage and transportation of food grains units

Case 8 Multiplex theatres

Case 9 Convention centre

Case 10 Operating and maintaining a hospital in rural area

Case 1: Business of an industrial undertaking

Amount of deduction

Assessee SSI

Industrial Unit or Cold Storage inBackward State

Same in BackwardDistrict

Cold Chainfor Agrigoods

Any Other

Company25% for first12 years

100% for first 5years and 25% fornext 7 years

Same Same

25% for first12 years

Any OtherPerson

25 % for first 10 years

100% for first5 years and 25% for next5 years

Same Same

25 % for first 10 years

Case 2: Operation of ship- 30 percent of the profit is deductable for the first 10 years.

Case 3: Hotel

Assessee% of profit deductible

Period of deduction

in a notified area

50 First 10 years

Any other hotel

30 First 10 years

Case 4: Engaged in Industrial Research

 

Approved by the prescribedauthority at any time beforeApril 1, 1999

If the company is approved by the prescribed authority after March 31, 2000 but before April 1, 2007

Amount of deduction100 % of profit from such business

100 % of profit from such business

Period of deduction5 years beginning with the initial assessment year

10 years beginning with the initial assessment year

Case 5 : Production of mineral oil:-Amount of deduction 100% of the profit is deductable for the first 7 years.

Case 6: Developing and building housing projects – If all the aforesaid conditions are satisfied 100% of the profit derived in any previous year relevant to any assessment year from such housing project is deductable.

Case 7 : Business of processing, preservation and packaging of fruits or vegetables or integrated handling, storage and transportation of food grains units

Enterprises % of profit deductable Period

Owned by a company10030

First 5 yearsNext 5 years

Owned by any other person

10025

First 5 yearsNext 5 years

Case 8: Multiplex theatres- 50% of the profits and gains derived from the business is

deductable from the assessment year 2003-04 for a period of 5 consecutive years beginning from the initial year.

Case 9: Convention centre-50% of the profits and gains derived from the business is deductable from the assessment year 2003-04 for a period of 5 consecutive years beginning from the initial year.

Case 10: Operating and maintaining a hospital in a rural area – 100% of the profits and gains of such business is deductable for a period of 5 consecutive assessment years.

e) SECTION 80U To help a disabled person by reducing his tax burden, this section has been incorporated. Following are the provisions.

The assessee is an individual being a resident He is a person with disability. He is certified by the medical authority to be a person with disability, at any time during

the previous year. He furnishes a certificate issued by the medical authority in the prescribed form along the

return of income

Amount of deductionA fixed deduction ofRs. 50,000 in case of a person with disabilityRs. 75,000 in case of a person with severe disability.( having any disability over 80%)

Note: If deduction u/s 80DD is claimed no deduction is allowable under this section

Q.3:- Explain the tax provisions for dividend , interest and royalty.

Ans:- Tax provision for dividend

In India as per Income tax Act, 1961 upto 31-05-1997, the company was not liable to pay any income tax on the amount of dividends declared, distributed or paid by such company. However, such dividend was included in the income of the shareholders under the head "income from other sources". The finance act, 1997 has introduced changes in this rule.

A) Tax on distributed profits of the Domestic company: The domestic company shall be liable to pay additional income tax on any amount declared, distributed or paid by such company by way of dividend (whether interim or otherwise) on or after 1-06-1997, whether out of current or accumulated profits. Such additional income tax shall be

payable @ 10% of the amount so ditributed. Thsi additional tax shall be payable even if no income tax is payable by such company on its total income.

B) Exemption of dividend in the hands of shareholders : In view of the income tax now payable by the domestic company, any dividends declared, distributed or paid by such company, on or after 01-06-1997 shall be exempt in the hands of the shareholders.

Time limit for deposit of additional income tax : Such additional tax will have to be paid by the principal officer of the domestic company within 14 days from the date of :

a) Declaration of any dividendb) Distribution of any dividendc) Payment of any dividend, whichever is earlier

Additional income-tax is not allowed as deduction : The company shall not be allowed any deduction on account of such additional income tax under any provisions of the income tax act.

Tax Provision for Interest on securities

Interest on securities is charged to tax under this head if the securities are held by the assessee as fixed assets. If the securities are held as stock in trade then the interest is taxable under the head profit and gains of business or profession. The gross interest (net interest plus tax deducted at source) is taxable. If net interest is given, it should be grossed up in the hands of recipient if tax is deducted at source by the payer.

Net interest X 100 100- Rate of TDS

No Particulars TDS Rate1 Interest on any security of central or state government No TDS2 Interest on debentures listed in a recognized stock exchange,

statutory bodies and local authority10%

3 Any other interest on security[unlisted] 20%4 Winnings from lottery, crossword puzzles, card games, horse race etc 30%

For the purpose of income tax purpose, the securities can be classified into 1. Government securities:

a. Tax-free securitiesi. Interest fully exempted

ii. Not included in the total income

b. Less- tax securitiesi. Issued by central govt. or state govt.

ii. Non TDSiii. Taxable securitiesiv. Interest received should not be grossed up

2. Commercial securitiesa. Tax-free securities

i. Local authority, statutory corporation and company issues in the from of debentures and bond

ii. Tax is paid by the issueriii. Since tax is paid by the issuer it is termed as tax-free securitiesiv. Interest should be grossed up

b. Less tax commercial securitiesi. Taxable securities

ii. TDS is collectediii. Interest should be grossed up if net amount is given

Tax Provision for Royalties

Sometimes, running royalties, or private sector taxes are usage-based payments made by one party (the "licensee") and another (the "licensor") for ongoing use of an asset, sometimes an intellectual property (IP). Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such.

Royalty income of authors [u/s Sec 80 QQB] : This deduction is allowable up to maximum Rs. 3.00,000 for a resident individual. Assessee should furnish a certificate in Form 10CCD from the person responsible for paying the person responsible for paying the income. The book authored by him/her is a work of literary, artistic or scientific nature and it does not include guides, textbook of schools and other similar publication.

Royalty on Patents [Sec 80 RRB]: This deduction is allowable up to, Rs.300000 or actual amount (which ever is less) for a resident individual. The assessee should furnish a certificate in Form 10 CCE duly signed by controller of Patents Act along with the return of income. If it is received from outside India the income should brought into India in convertible foreign exchange within 6 months from the end of the relevant PY.

Q. 4:- Company A is proposed to be merged with company B . the following are the particulars of the former company

Unabsorbed depreciation Rs. 45600000.00 Unabsorbed business loss Rs. 145000.00

Consider which of the benefit can be availed of by the company and advice the latter on the conditions to be fulfilled to claim each such benefit.

Ans:- Both of the benefit can be availed by the company and following conditions are satisfied, then the unabsorbed loss & depreciation of the amalgamating company shall be deemed to be loss/depreciation of the amalgamated company for the previous year in which the amalgamation is effected-

a. There has been (a) an amalgamation of a company owing an industrial undertaking or a ship or a hotel with another company or (b) an amalgamation of banking company referred to in section 5(c) of the Banking Regulation Act,1949 with a specified bank; or (c) (from the assessment year 2008-09) an amalgamation of a public sector airlines with another public sector airlines;

b. The amalgamation company has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for 3 years or more years;

c. The amalgamation company has held continuously as on the date of the amalgamation at least three –fourth of the book value of fixed assets held by it two years prior to the date of amalgamation;

d. The amalgamated company continues to hold at least three-fourths in the book value of fixed assets of the amalgamating company which it has acquired as a result of amalgamation for five years from the effective date of amalgamation;

e. The amalgamation company continues the business of the amalgamated company for a minimum period of 5years; and

f. The amalgamated company fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

In case the above specified conditions are not fulfilled, then that part of brought forward loss and unabsorbed depreciation which has been set off by the amalgamated company shall be treated as the income of the amalgamated company for the year in which the failure to fulfill the conditions occurs.Q. 5:- Discuss the provisions relating to set off of losses in the following cases:

i) Speculation loss

ii) Short term capital loss

iii) Long term capital loss

iv) Losses from horse race, gambling and cross word puzzeles

Ans:- The various provisions of the Income-tax Act of 1961 regarding set-off losses

i) Speculation loss

Speculation loss can be set off only against speculation profit in the same assessment year. But even after such setting off if the resultant figure is a loss, then it can be carried forward for set off in subsequent years up to four assessment years. From assessment year 2006-07 up to assessment year 2005-06 such loss could be carried-forward for eight assessment year. In subsequent years, setting-off of the loss is allowed only against speculation profit [Section 73]. Speculative business loss can be set off against only speculative business income. But non-speculative business loss can be set off against any business income

ii) Short term capital loss:

Short-term capital loss can be set off against any capital gain income, long term or short term, in the same assessment year. It should be noted that such loss can be set off only against capital gain income and not against any other head of income. Balance short-term capital loss if any can be carried forward up to eight assessments years. In the subsequent years also, it can be set off against any capital-gain income.

iii) Long term capital loss

Long-term capital loss arising on sale of capital asset other than equity shares and units of equity-oriented mutual fund which are subject to securities transaction tax (STT) can be set off in the same assessment year as well as in subsequent assessment years (in case of carry-forward) only against long-term capital gain income. Carry-forward of loss is allowed up to eight assessment years.

iv) Losses from horse race, gambling and cross word puzzles

Losses from cross word puzzles, lotteries, gambling, card games races including horse races, etc. cannot be set off either against the income from the same source or against the income under

any other head of income. This is because each of these specified sources is regarded as separate from others (i.e, other sources).

Q6. What are the deductions available from gross salary income? Ans:- Deduction from gross salary income follows:

1. Entertainment Allowance2. Tax On Employment

3. Deduction U/S 80c Out Of Gross Total Income

4. Deduction Of Tax From The ‘Salary’

1. Entertainment Allowance [ U/s 16(ii)] Some  employees are required to incur expenditure on the entertainment ( tea etc.) of customers, clients etc. who came to meet them in connection with their official or business work. In case employee is given a fixed amount every month to meet this type of expenditure then it is fully added in salary and out of Gross total Salary , a deduction u/s 16(ii) shall be allowed only to Govt. employees. This means that in case this allowance is given to employee working in private sector, it is fully taxable. But in case any amount is reimbursed against any expenditure incurred by employer, it shall be fully exempted. Deduction u/s 16(ii) admission to govt. employee shall be an amount equal to least of following:

1. Statutory Limit of Rs.5,000 p.a.2. 1/5 th of Basic Salary

3. Actual amount of entertainment allowance received during the previous year.

2. Tax on Employment u/s 16(iii) In case any amount of professional tax is paid by the employee or by his employer on his behalf it is fully allowed as deduction.

3. Deduction U/S 80c Out Of Gross Total Income

Savings play a vital role in the fast economic development of nay country. To encourage savings, an incentive in the form of a deduction out of one’s taxable income has been allowed. To channelise those savings, various schemes have been framed and if the assessee deposits those savings in these approved saving schemes, a deduction shall be allowed. 

Section 80C has been inserted from the assessment year 2006-2007 onwards. Section 80C provides deduction i8n respect of specified qualifying amounts paid deposited by the assessee in the previous year.

The following are the main provisions of the newly inserted Section 80C. :1. Under Section 80C , deduction would be available from Gross Total Income.2. Deduction under section 80C is available only to individual or HUF.3. Deduction is available on the basis of specified qualifying investments / contributions /

deposits / payments made by the taxpayer during the previous year.4. The maximum amount deduction under section 80C , 80CCC, and 80CCD can not

exceed  Rs.1 lakh.

Deduction u/s 80C shall be allowed only to the following assessee :

1. An Individual2. A Hindu Undivided Family (HUF)

The Deduction is calculated as per the following steps –

Step-1: Gross qualifying Amount which is the aggregate of the following…1. Life Insurance Premium2. Payment in respect of non-commutable deferred annuity.3. Any sum deducted form salary payable to Govt. employee for the purpose of

securing him a deferred annuity.4. Contribution towards Statutory Provident Fund and Recognised Provident Fund.5. Contribution towards 15-year Public Provident Fund6. Contribution towards an Approved Superannuation Fund.7. Subscription to National Saving Certificates, VIII Issue.8. Contribution for participating in the Unit-linked Insurance Plan (ULIP) of UTI.9. Contribution for participating in the Unit-linked Insurance Plan (ULIP) of LIC

Mutual Fund.10. Payment to notified annuity plan of LIC11. Subscription towards notified Units of Mutual Fund or UTI.12. Contribution to notified Pension Fund set up by Mutual Fund or UTI.13. Any sum paid as subscription to Home Loan Account Scheme of the National

Housing Bank.14. Any sum paid as Tuition Fees for full time education of any 2 children of an

individual.15. Any payment towards the cost of purchase / construction of a residential Property.

16. Amount invested in approved Debenture of , and equity shares in, public company engaged in infrastructure.

17. Amount deposited in as Term Deposit for a period of 5 years or more in accordance with a scheme framed by the Government.

18. Subscription to any notified Bonds of National Bank for Agriculture and Rural Development ( NABARD)

19. Amount deposited under Senior Citizens Saving Scheme.20. Amount deposited in 5 Year Time Deposit in Post Office.

Step-2: Net Qualifying Amount :

Deduction u/s 80C is available on the basis of Net Qualifying Amount which is determined as under …

1. Gross Qualifying Amount ; or2. Rs. 1,00,000

Whichever is LESS.

Step-3: Amount of Deduction:

Amount Deduction u/s 80C is computed as under:1. Net Qualifying Amount ; or2. Rs. 1,00,000

Whichever is LESS.

The aggregate deduction u/s 80C, 80CCC, and 80 CCD can not exceed Rs. 1,00,000.

4. DEDUCTION OF TAX FROM THE ‘SALARY’ [SECTION-192] The summarized provisions of Sec. 192 are given below : 

Who is the taxpayer Employer

Who is the recipient Employee

Payment covered Taxable salary of the employee

At what time tax has to be deducted at source

At the time of payment

Maximum amount which can be paid without Tax Deduction

The amount of exemption limit ( i.e. Rs.1,80,000 / Rs.2,25,000/Rs.1,50,000 for the assessment year 2009-10.)

Rate of tax deducted at source Normal Rates applicable to an individual

Is it possible to get the payment without tax deduction or with lower tax deduction

The employee can make an application in Form No.-13 to the Assessing Officer to get a certificate of lower tax deduction or no tax deduction.

 Note:      -               Rs. 1,80,000 is for Resident Women below 65 years               -              Rs. 2,25,000 is for Senior Citizen 65 years or more.

RELIEF IN RESPECT OF SALARY IN ARREARS, ADVANCE, ETC.If an individual receives any portion of his salary in arrears or in advance or receives profit in lieu of salary, he can claim relief in terms of Sec.89