2014 (May)
COMMERCE (General)
Course: 601 (Income Tax)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
1. (a) Fill in the blanks: 1x4=4
(i) A new business was commenced on 11.11.2011. The first previous year in this case shall be 11.11.2011 to 31.03.2012.
(ii) Residential status is to be determined for the previous year.
(iii) Dividend declared by domestic company shall be Exempted.
(iv) Deduction from interest on loan taken for construction of self occupied house after 1.4.1999 is allowed upto actual amount or Rs.2,00,000, whichever is less.
(b) Write true or false: 1x4=4
(i) ‘Leave travel concession’ is a tax free perquisite for one journey in a block of 4 years. TRUE
(ii) Municipal tax is a deduction from net annual value. FALSE, FROM GAV
(iii) Capital gain arises from the transfer of any capital assets. TRUE
(iv) Total income of a person is determined on the basis of citizenship in India. FALSE, RESIDENTIAL STATUS
2. Write short notes on the following: 4x4=16
(a) Person: Person includes seven types of persons namely:
a) An individual;
b) An Hindu undivided family (HUF);
c) A company;
d) A firm;
e) An association of persons (AOP) or a body of individuals (BOI);
f) A local authority;
g) Every artificial juridical person not falling within any of the preceding sub clauses.
The 2 basic differences between AOP and BOI are:
a) In BOI there are only individuals but in AOP there can be any type of persons.
b) BOI is creation of law whereas AOP can be created by different persons coming together for doing some income producing activity on the voluntary basis.
(b) Agriculture income: Agriculture income is fully exempted from tax u/s 10(1) and as such does not form part of total income. As per Section 2(1A) agriculture income includes:
a) Any rent or revenue derived from land which is situated in India and is used for agricultural purpose;
b) Any income derived from such land by agriculture or by the process employed to render the product fit for market or by sale of such produce by the cultivator or receiver of rent in Kind.
c) Any income derived from any building provided the following conditions were satisfied:
Ø The building is or on the immediate vicinity of the agricultural land;
Ø It is occupied by the cultivator or receiver of rent or revenue
Ø It is used as a dwelling house or store house or out house ;
Ø The land is assessed to land revenue and it is not situated within the specified area.
(c) capital assets: Capital asset means property of any kind held by assessee, whether or not connected with his business or profession. It includes plant and machinery, building – whether business premises or residential, all assets of business, goodwill, patent rights etc. but does not include the following.
1. Stock-in-trade, consumable stores or raw materials held for the purpose of business or profession.
2. Personal movable properties viz. furniture, motor vehicles, refrigerators, musical instruments etc. held for personal use of the assessee or his family. But personal property does not include the following:
Ø Jewellery
Ø Residential house property
Ø Archaeological collections, drawings, paintings, sculptures, or any work of art.
3. Rural Agricultural land:
Ø Land within the jurisdiction of a municipality or cantonment board having population of 10,000 or more or
Ø Land situated within 8 kilometers from the local limits.
4. 6½ per cent Gold bonds, 1977 or 7 per cent Gold bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
5. Gold Bonds issued by Government of India including gold deposit bonds issued under the gold deposit scheme, 1999 notified by the central Government.
6. Special Bearer Bonds, 1991 issued by the Government of India.
7. Deposit Certificates issued under the Gold Monetization Scheme, 2016 w.e.f. Assessment year 2017-18
(d) charge of income tax: Section 4 is the charging section for the Income tax Act, 1961 (the Act). It provides for the charge and collection/ payment of Income Tax India. The important Provisions of this section are:
Ø Where any Central Act enacts for any Assessment Year that income-tax shall be charged at any rate or rates,
Ø Income-tax at that rate or rates (including additional tax) shall be charged for that year in accordance with and subject to all the provisions of the Act.
Ø In respect of the Total Income of the Previous Year of every Person
Ø However, if by virtue of any provision of the Act, Income Tax India is to be charged in respect of the income of a period other than the previous year, then it shall be charged accordingly.
Ø The Income-tax chargeable as above shall be deducted at source or paid in advance, if so required under any provision of the Act.
3. Explain the provision of income tax with regards to the following:
(i) House rent allowance: House Rent Allowance Section 10(13A) and Rule 2A: HRA is exempt under section 10(13A) to the extent of the minimum of the following three amounts:
House situated in Delhi, Mumbai Chennai & Kolkata | House situated in any other city |
Minimum of the following 3 limits | Minimum of the following 3 limits |
(i) Allowance actually received; or | (i) Allowance actually received; or |
(ii) Rent paid in excess of 10% of salary; or | (ii) Rent paid in excess of 10% of salary; or |
(iii) 50% of salary | (iii) 40% of salary |
Meaning of salary: Basic salary plus D.A. to the extent the terms of employment so provide plus commission if fixed percentage of turnover. Salary is to be taken on due basis. | |
(ii) Gratuity
Government employees and employee of a local authority | Employees covered under Gratuity Act | Any other employee |
Fully exempt | Minimum of the following 3 limits: | Minimum of the following 3 limits: |
(1) Actual gratuity received, or (2) 15 day's salary for every completed year, or part thereof exceeding six months (7 day's salary for each season for an employee in a seasonal establishment); or (3)Rs. 10,00,000 | (1) Actual gratuity received, or (2) Half months average salary of each completed year of service. (3) Rs.10,00,000 | |
Meaning of Salary: (i) Basic salary plus Dearness allowance. (ii) Last drawn salary (average salary of preceding three months in case of piece rated employee) (iii) No. of days in a month to be taken as 26 | Meaning of Salary: (i) Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover. (ii) Average salary of last 10 months preceding the month in which event occurs. (iii) Only completed year of service is to be taken. |
(iii) Residential accommodation provided by employer
Ans: a. For govt. employee: License fees fixed by government + 10% of cost of furniture or hire charges – amount recovered from employee.
b. For non- Government employee:
Population | Owned by employer | Hired by employer |
If population is < 10 lakhs If population is >10 lakhs but < 25 lakhs If population is> 25 lakhs | 7.5% of salary 10% of salary 15% of salary | Actual hire charges or 15% of salary whichever is less. |
If furnished | Add 10% of cost or hire charges | Add 10% of cost or hire charges |
If concessional house | Deduct amount recovered from employee | Deduct amount recovered from employee |
Hotel accommodation (more than 15 days) | 24% of salary or actual expenses whichever is lower | 24% of salary or actual expenses whichever is lower |
Meaning of salary | Basic + DP + DA which enters + fee + commission of all types + statutory bonus + all fully taxable allowance + salary in lieu of leave for current year but does not include arrears advance perquisites, provident fund excess, gratuitous bonus. | |
(iv) Encashment of earn leave
Ans: Leave encashment on retirement [sec. 10(10AA)]
1. Leave encashed during service: fully taxable in which it is encashed
2. Leave encashed at the time of retirement
For govt. employee: fully exempted
For other employees: exempted upto minimum of the following
Ø Notified limit Rs. 300000
Ø Average salary x 10 months
Ø Actual amount received
Ø Average salary x no. of months leave due
Average salary = salary (Same as PF) for 10 months including the month of retirement / 10
Leave due is to be calculated taking one month leave or actual entitlement whichever is less
OR
Enumerate the special provision in respect of newly established units in SEZ as per Income tax act 1961. 14
Ans: SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONE [SECTION 10AA]:
1. CONDITIONS TO BE SATISFIED: The following conditions should be satisfied to claim deduction u/s 10AA:
Condition 1 : Assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005. Entrepreneur is a person who has been granted a letter of approval by the Development Commissioner to set a unit in a Special Economic Zone.
Conditions 2 : The Unit in Special Economic Zone who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006.
Conditions 3 : It is not formed by the splitting up, or reconstruction, of a business already an existence.
Conditions 4 : It not formed by the transfer to a new business, of old plant and machinery. However, it can be formed by transfer of old plant or machinery to the extent of 20%.
Condition 5 : The assessee has income from export of articles or thing or from services from such unit. In other words, the assessee has exported goods or provided services out of India from the Special Economic Zone by land, sea , air, or by any other mode, whether physical or otherwise.
Conditions 6 : Books of Accounts of the taxpayer should be audited. The Tax payer should submit Audit Report in Form No.56F along with the return of income.
2. AMOUNT OF DEDUCTION: Deduction depends upon quantum of Profit derived from Export of Articles or things or services (including computer software). It is calculated as under: (Profit of the Business of the undertaking X Export turnover)/Total Turnover of the business
Deduction for First 5 Assessment Years – 100% of Profits and Gains derived for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services.
Deduction for 6th Assessment Year to 10th Assessment Years: 50% of such Profits and Gains for further five assessment years and thereafter;
Deduction for 11th Assessment Year to 15th Assessment Year: Amount not exceeding 50% of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be created and utilized for the purposes of the business of the assessee.
3. CONSEQUENCES FOR MERGER AND DEMERGER: Where any undertaking is transferred, before the expiry of the period specified in this section, to another undertaking, under a scheme of amalgamation or demerger, no deduction shall be admissible under this section to the amalgamating or the demerged Unit for the previous year in which the amalgamation or the demerger takes place.
4. (a). From the following information, compute the taxable income from salary of Mr.X for the AY 13-14
(i) Salary @10000 pm
(ii) Dearness allowance (forming part of salary)@5000 p.m.
(iii) Education allowance for his two children@250 p.m.
(iv) He resided in the flat of the company at Guwahati (population 30 lakhs)
(v) Rent of the house recovered from his salary @ 750 p.m.
(vi) He has been provided with a motor car of 1.6 litre engine capacity for his official and personal use. All expenses of the car are born by the employer
(vii) Employer contribution to RPF is Rs. 25000 and interest credited to RPF@11% amounted to Rs. 16500.
(viii) A cook and a watchman have been provided by the employer at his residence and they paid @500 each p.m.
(ix) Mr. X paid Rs. 3000 for his professional tax.
Ans: Computation of Income under the salaries of Mr. X for the AY 2013 - 14
Particulars | Amount | Amount |
1. Basic Salary 2. Dearness Allowance 3. Children Education Allowance Less: Exempted upto Rs. 100 per month per child for a maximum of 2 4. Value of rent free house 15% of salary (salary = 1,20,000 +60,000 + 600) Less: Rent recovered from employee 5. Value of Car (1,800 * 12) 6. Salary of cook (500*12) 7. Salary of watchman (500*12) 8. Employer’s contribution to RPF Less: exempted upto 12% of salary (Salary = 1,20,00+60,000) 9. Interest on RPF Less: Exempted upto 9.5% (16,500*9.5/11) | 3,000 2,400 27,090 9,000 25,000 21,600 16,500 14,250 | 1,20,000 60,000 600 18,090 21,600 6,000 6,000 3,400 2,250 |
Gross Salary Less: Deduction up Sec. 16 (iii) Professional tax paid by the employee | 2,37,940 3,000 | |
Net Salary | 2,34,940 |
OR
(b) Explain in detail, as to how the following items are treated in computing taxable income: 14
(i) Recognized provident fund: This scheme is applicable to an organization which employs 20 or more employees. An organization can also voluntarily opt for this scheme. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for government approved scheme or the employer and employees can together start a PF scheme by forming a Trust. The Trust so created shall invest funds in specified manner. The income of the trust shall also be exempt from income taxes.
Taxability of Provident Funds
Particulars | RPF |
1. Employee's/ assessee's contribution | Deduction u/s 80C is available from gross total income subject to the limit specified therein |
2.Employer's contribution | Exempt up to 12% of salary. Amount in excess of 12% is included in gross salary. |
3. Interest on Provident Fund | Exempt u/s 10 up to 9.5% p.a. Interest credited in excess of 9.5% p.a. is included in gross salary |
4.Repayment of lump sum amount on retirement / resignation /termination | Exempt if the employee has rendered minimum 5 years of continuous service |
(ii) Commutation of pension: Commuted Pension: Exemption of commuted pension u/s 10(10A)
Govt. employees, employees of local authorities and employees of statutory corporations | Fully exempt |
For other employees | (a) If gratuity is not received: Commuted value of 1/2 of pension which he is normally entitled to receive is exempt. (b) If gratuity is also received: Commuted value of 1/3rd of pension which he is normally entitled to receive is exempt. |
(iii) Relief u/s 89(1) of the Income-tax:
If employee received any portion of salary in arrears or on advance or received profit in lieu of salary, relief can be claimed u/s 89 (1).
Salary in arrears or advance, received in lump-sum is liable to tax in the year of receipt. Some relief is however allowed from tax on such receipts. Claiming of relief is optional and should be claimed only when it is advantageous to the claimant.
Calculation of relief u/s 89 when salary has been received in arrears or in advance
The relief on salary received in arrears or in advance (hereinafter to be refereed as additional salary is computed in the manner laid down in rule 21A (2) as under;
Ø Calculate the tax payable on the total income, including the additional salary, of the relevant previous year in which the same is received.
Ø Calculate the tax payable on the total income, excluding the additional salary, of the relevant previous year in which the additional salary is received.
Ø Find out the difference between the tax at (1) and (2).
Ø Compute the tax on the total income after including the additional salary in the previous year to which such salary relates.
Ø Compute the tax on the total income after additional salary in the previous year to which such salary relates.
Ø Find out the difference between tax at (4) and (5)
Ø The excess of tax compute at (3) over tax computed at (6) is the amount of relief admissible under section 89. No relief is, however, admissible if tax computed at (3) is less then tax computed at (6). In such a case, the assessee- employee need not apply for relief.
If the additional salary relates to more than one previous year, salary would be spread over the previous year to which it pertains in the manner explained above.
5. (a) Following are the particulars of house properties of Mr. X for the previous year 2012-2013:
Particular | House-p | House-R | ||
Fair rent | 3,50,000 | 3,20,000 | ||
Municipal valuation | 3,60,000 | 3,50,000 | ||
Standard rent | 3,00,000 | 5,00,000 | ||
Actual annual rent | 6,00,000 | 4,20,000 | ||
Unrealised rent(Of the previous year 2011-2012) | 10,000 | 80,000 | ||
Vacant period | 2 months | 4 months | ||
Loss on account of vacancy | 1,00,000 | 1,40,000 | ||
Municipal taxes paid | 40,000 | 50,000 | ||
Repairs | 5,000 | 7,000 | ||
Insurance | 30,000 | |||
Land revenue | 25,000 | 40,000 | ||
Ground rent | 66,000 | 82,000 | ||
Interest on borrowed capital | _____ | 1,40,000 | ||
Compute the income from house property. 14
Ans: Computation of Income from house property of Mr. X for the Assessment year 2013-14 (Previous year 2012-2013)
Particulars | House – P | House - R |
1. Municipal Rental Value 2. Fair Rental Value 3. Standard Rental Value 4. Expected Rental Value (MRV or FRV whichever is higher but limited upto SRV) 5. Actual Rent received or receivable (Less loss due to vacancy and unrealised rent) 6. Gross Annual Value (higher of 4 or 5 but in case of vacancy only point actual rent is considered) 7. Less: Municipal taxes paid | 3,60,000 3,50,000 3,00,000 3,00,000 4,90,000 4,90,000 40,000 | 3,50,000 3,20,000 5,00,000 3,20,000 2,00,000 2,00,000 50,000 |
8. Net Annual value (6-7) Less: Deduction under section. 24 (a) Standard Deduction @ 30% (b) Interest on money borrowed | 4,50,000 1,35,000 ---------- | 1,50,000 45,000 1,40,000 |
Income/ (Loss from house property) | 3,15,000 | (35,000) |
Or
(b) State the provisions relating to computation of ‘Income from house property’ under different categories of house property as per Income tax act 1961. 14
Ans: Annual Value (Section 23)
The Annual Value of a house property is the inherent capacity of the property to earn income and it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.
Computation of annual value: Computation of Annual Value for the determination of Income from House property requires three steps.
Ø STEP 1 Determine the Gross Annual Value(GAV)
Ø STEP 2 Determine the value of Municipal taxes
Ø STEP 3 Compute the Net Annual Value
STEP 1- Determine the Gross Annual Value (GAV):
Calculation of GAV based on the following factors:
1) Fair Rental Value (FRV): The amount of rent which a similar property (similar to the house property the GAV of which is to be determined) in the same locality would fetch.
2) Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.
3) Standard Rental Value (SRV): The maximum amount of rent which a person can recover from his tenant, legally, as determined by the Rent Control Act.
4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is higher, subject to the Standard rent.
5) Unrealised rent: The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in the actual amount of rent receivable from the house property if all the following for conditions are satisfied:
a) Tenancy is in good-faith.
b) The defaulting tenant has vacated or steps must have been taken to vacate such tenant.
c) The defaulting tenant doesn't continue to occupy any other property of the assessee.
d) Assessee has taken all the reasonable steps to proceed against the defaulting tenant legally or he must satisfy the assessing officer that if such steps are taken, it will be of no use.
6) Actual rent receivable (ARR): The amount of rent which is equal to the difference between the Rent receivable and the unrealised rent.
7) Unoccupied property: The House property which cannot be occupied by its owner by reason of his employment, business or profession being in some other place and he resides at that place in a property not owned by him.
It should be noted that the procedure for determination of Gross Annual Value is not same in all the cases. It varies according to the given situation. Various situations and the respective procedures for computation of GAV are given below:
1) Property is let out throughout the previous year (Section 23(1) (a)/ (b)): GAV = ERV or ARR, whichever is higher.
2) Let out property is vacant for a part of the year (Section 23(1) (c)): If the ARR < ERV only because the property was vacant for a part of the year, GAV = ERV. If the ARR < ERV for any other reason, GAV = ERV. If the ARR > ERV even though it was vacant for a part of the year, GAV = ARR. In all the cases, ARR is computed for the let out period only and the ERV is for whole year as usual.
3) Self-occupied or Unoccupied property (Section 23(2)): GAV = Nil
4) Let out for a part of the year and self-occupied for a part of the year (Section 23(3)): GAV = Higher of ERV (calculated for the whole year) and ARR (calculated for let out period only)
5) Deemed to be let out property (Section 23(4)): This case arises when the assessee has more than two Self-occupied properties in a previous year. In such case, only two of such properties is treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.
6) A portion of the property is let out and the remaining portion is self-occupied: GAV is calculated separately for self-occupied part and the let out part. The values of FR, MV, SR and Municipal taxes are apportioned on the given basis.
Thus, there is a scope for charging tax on Notional rent too. This happens when the GAV determined according to the above steps is the ERV.
Now that the Gross Annual Value of the house property is determined, the next step is to determine the value of Municipal taxes paid that is deductible from the Gross Annual Value.
STEP 2 - Determine the value of Municipal taxes:
The municipal tax or the property tax paid is allowed as deduction from the Gross Annual Value if the following two conditions are satisfied.
(a) The property is let out during the whole or any part of the previous year,
(b) The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.
(c) The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.
STEP 3 - Compute the Net Annual Value:
Gross Annual Value ++++++
Less: Municipal Taxes ++++++
Net Annual Value ++++++
Deductions allowable under section 24 of the income tax act
Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-
(a) Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.
(b) Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
Limit of deduction u/s 24(b)
A. In case of Let out/ deemed to be let out house property: Interest on Money borrowed is allowed as deduction without any limit. Here interest on money borrowed = interest of P/Y + 1/5 of Pre-construction period (PCP) interest. PCP started from the date of borrowing and ended on 31st mar immediately preceding (Before) the year of completion.
B. In Case of Self Occupied House Property: Max. Rs. 2,00,000 is allowed as deduction if the following conditions are satisfied:
Ø Loan taken after 1 – 4 – 99
Ø For construction/purchase (Capital expenditure) of house
Ø Construction completed within 5 years from the end of financial year in which loan is borrowed.
Ø Loan certificate is obtained
For all other cases maximum allowed deduction is Rs. 30000
6. (a) what is capital gain? Differentiate between short-term capital gain and long term capital gain. Explain the procedure of computation of income for capital gain. 2+4+8=14 Out of syllabus
OR
(b) State any five items of income included under the head ‘Income from other sources’. State any four items deductible in computing taxable income under the head ‘Income from other sources’. State any five items not deductible in computing taxable income under the head ‘income from other sources’. 5+4+5=14