2015 (May)
COMMERCE (General)
Course: 601 (Income Tax)
Time: 3 hours
Full Marks: 80
Pass marks: 32
The figures in the margin indicate full marks for the questions
1. (a) Fill in the blanks: 1x5=5
(i) Income-tax Act, 1961 consists of 298 sections, sub-sections and rules.
(ii) Agricultural income is fully exempted from tax u/s 10 (1) and as such does not form part of total income.
(iii) For the assessment year 2015-16 as assessee can avail deduction u/s 80 © up to the extent of 1,50,000.
(iv) Housing property income of a local authority is exempt for taxation under income from house property.
(v) Distribution of assets in kind by a company to its shareholders on its liquidation is not as a transfer of capital assets.
(b) Write “True” of “False”: 1x3=3
(i) Tax liability of an assessee depends upon his residential status. TRUE
(ii) Daily allowance received by a Member of Parliament is not considered for income tax. TRUE
(iii) Income from subletting house will be chargeable under the head ‘income from other sources’. TRUE
2. Write short notes on the following: 4x4=16
(a) Assessee: To mean a person by whom any tax or any other sum of money payable under the Act and include:
i) Every person in respect of whom any proceeding has been initiated under the act for the assessment of his income or the income of any other person.
ii) A person who is deemed to be assessee under any provision of the Act.
iii) A person who is deemed to be an assessee in default in any of the provision of the Act.
The above explanation divides various types of assessee into three categories:
(a) Ordinary assessee
(b) Representative assessee or deemed assessee
(c) Assessee-in-default
(b) Gross total income under Income-tax Act, 1961: Section 14: As per section 14, all income, for purposes of income-tax, will be classified under the following heads of income.
a) Salaries,
b) Income from House Property,
c) Profits and gains of business or profession
d) Capital gains
e) Income from other sources
Aggregate of incomes computed under the above 5 heads, after applying clubbing provisions and making adjustments of set off and carry forward of losses, is known, as gross total income (GTI) [Sec. 80B]
(c) Income-tax rates for the assessment year 2015-16: Income Tax Slab Rates for FY 2017-18(AY 2018-19)
Income Slab | NO TAXI | TAX @ 5% | TAX @ 20% | TAX @ 30% |
PART I: Income Tax Slab For Individual Tax Payers & HUF (Less Than 60 Years Old) (Both Men & Women) | 2,50,000 | 2,50,001 TO 5,00,000 | 5,00,001 TO 10,00,000 | FROM 10,00,001 |
PART II: Income Tax Slab For Senior Citizens (60 Years Old Or More But Less Than 80 Years Old)(Both Men & Women) | 3,00,000 | 3,00,001 TO 5,00,000 | 5,00,001 TO 10,00,000 | FROM 10,00,001 |
PART III: Income Tax Slab For Senior Citizens(80 Years Old Or More) (Both Men & Women) | UPTO 5,00,000 | 5,00,001 TO 10,00,000 | FROM 10,00,001 | |
Surcharge: 10% of income tax, where total income exceeds Rs.50 lakhs upto Rs.1 crore. Surcharge: 15% of income tax, where total income exceeds Rs.1 crore. Cess: 3% on total of income tax + surcharge. | ||||
(d) Exemptions in incomes from house property in income tax.
Ans: Properties exempted from tax under the head income from house property (Sec. 10)
1) Income from a farm house.
2) Annual value of one palace in the occupation of an ex-ruler.
3) Property income of a local authority.
4) Property income of an approved scientific research association.
5) Property income of an educational institution and hospital.
6) Property income of a registered trade union.
7) Income from property held for charitable purposes.
8) Property income of a political party.
9) Income from property used for own business or profession.
10) Annual value of oneself occupied property.
3. (a) Explain ten incomes which are exempted u/s 10 of the Indian Income-tax Act. 14
Ans: Income Exempted from tax under Sec. 10:
1. Agricultural Income: Income from agriculture is exempt. However, if the net agricultural income exceeds Rs.5,000, it is taken into account for determining the rates of income-tax on incomes liable to tax. [Sec.10 (1)]
2. Receipt from Hindu Undivided Family: Any sum received by an individual as a member of Hindu Undivided Family where such sum has been paid out of the income of the family or in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family, irrespective of whether tax is payable or not by the HUF on its total income. However, certain receipts from HUF are liable to be clubbed in the hands of an individual member u/s 64(2). [Sec.10 (2)]
3. Partner’s Share in the Firm’s Income: In the case of a person being a partner of a firm which is separately assessed as such, partner’s share in the total income of the firm is exempt. Share of a partner of the firm shall be computed by dividing the total income of the firm in the profit sharing ratio mentioned in the Partnership Deed. [Sec.10 (2A)]
4. Value of Leave Travel Concession: Value of any leave travel concession or assistance received by or due from the employer to employee (including noncitizens) and his family (spouse, children and dependent- father, mother, brother, sister dependent on him) in connection with his proceeding on leave or after retirement or termination of his service to any part of India. [Sec.10(5)]
5. Leave Encashment : Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in case of other employees the exemption is available subject to specified limits. For details see ‘Receipts Exempt from Income Tax’ in the chapter ‘Salary’. [Sec.10(10AA)]
6. Compensation to Employee: Any compensation received by a workman under Industrial Disputes Act or under any other Act or rules, order or notification issued there under or under any standing order or under any award, contract of service or otherwise at the time of his retrenchment is exempt to the extent such compensation is in accordance with Section 25F (b) of Industrial Disputes Act, subject to a maximum of Rs.5,00,000.
7. Payment from Provident Fund: Any payment (including interest) from a provident fund under Provident Fund Act, 1925 or Public Provident Fund Scheme, 1968. [Sec.10(11)]
8. Payment from Sukanya Samriddhi Account: Any payment from an account under the Sukanya Samriddhi Account Rules, 2014 [Sec.10(11A)]
9. Accumulated Balance of Recognised Provident Fund: Any accumulated balance due and becoming payable to an employee from a recognised provident fund, on fulfillment of any of the following conditions:
(i) If he has rendered a continuous services of five years or more; or
(ii) If his service, though not as stated in (i) above, has been terminated due to his ill-health or by the contraction or discontinuation of his employer’s business or any other cause beyond his control; or
(iii) If on cessation of his employment, his accumulated balance is transferred to recognised provident fund maintained by his new employer;
10. House Rent Allowance: Any special allowance granted to an assessee by the employer to meet expenditure incurred on payment of rent for residential accommodation subject to prescribed limits and conditions. [Sec.10(13A)]
Or
(b) What do you mean by “Tax Holiday”? Explain with examples “Tax Holiday” for industrial units established in Special Economic Zones and export-oriented undertakings. 4+10=14
Ans: Meaning of Tax Holiday: A government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly used by governments in developing countries to help stimulate foreign investment. Used in the hopes of increasing the gross domestic product (GDP) in developing countries, tax holidays are a way in which governments attract foreign investors. Tax holidays are often put in place in particular industries to help promote growth.
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.
100% EXPORT ORIENTED UNDERTAKINGS (100% E.O.U.) [Sec - 10B]
A deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. The Provisions of Sec 10B are given below:
1. CONDITIONS TO BE SATISFIED: This section applies to any undertaking which fulfils all the following conditions, namely:
a) It manufactures or produces any articles or things or computer software;
b) It is not formed by the splitting up, or the reconstruction, of a business already in existence:
c) No deduction under this section shall be allowed to an assessee who does not furnish a Return of his Income on or before the due date specified under sub-section (1) of section 139.
d) Should not be formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking
e) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
f) Audit Report should be submitted in Form No. 56G.
2. AMOUNT OF DEDUCTION: If the aforesaid conditions are satisfied , the deduction u/s 10B may be computed as under : (Profit of the Business of the undertaking X Export turnover)/Total Turnover of the business.
3. PERIOD OF DEDUCTION: This deduction shall be allowed for a period of 10 consecutive Assessment Years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles, or things or computer software. No deduction under section 10B shall be allowed to any undertaking from the assessment year beginning on the 1st day of April, 2010 and subsequent years.
4. TRANSFER UNDER A SCHEME OF AMALGAMATION OR DEMERGER: In case an undertaking eligible for deduction under this section is transferred, before the expiry of the specified period, to another Indian company in a scheme of amalgamation or demerger:
(a) No deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or demerger takes place ; and
(b) The provisions of this section shall apply to the amalgamated or the resulting company as if the amalgamation or demerger had not taken place.
4. (a) Sri Pradip Saikia is a manager. He has furnished the following income and investment up to 31st March, 2014:
a. Life insurance premium on the life of his married daughter – Rs. 6,000 (sum assured – Rs. 20,000)
b. Life insurance premium on his own life – Rs. 2,700 (sum assured – Rs. 60,000)
c. Life insurance premium on the life of his dependent sister – Rs. 10,000
d. Contribution towards recognized Provident Fund – Rs. 9,000.
e. Contribution towards Public Provident Fund – Rs. 30,000
f. Repayment of Loan taken from LIC for purchase of residential house property – Rs. 30,000
g. Contribution towards notified equity-linked savings scheme of UTI 2011 – Rs. 14,000
h. His monthly salary – Rs. 40,000
i. Income from house property – Rs. 18,600
Find out the tax liability of Sri Pradip Saikia for the assessment year 2014 – 15. 14
Or
(b) Explain the treatment of the following items in computing taxable income in case of Income from salary:
(i) House rent allowance. 5+5+4=14
Ans: 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) Section 80 (c): Deduction under Sec. 80C
This deduction is in respect of amounts paid as Life Insurance premiums, ULIP, CTD, Contribution to Provident Fund, Superannuation Fund, Public Provident Fund, etc., amounts invested in N.S.C. VI, VII and VIII Issues, repayment of loan taken for purchase or construction of residential house, etc.
Deduction under Sec.80C is to be given only to Individuals and Hindu Undivided Families. The following are the investments eligible for qualifying amount under this section. The following amounts are qualified getting deduction under Sec.80C.
(i) Life Insurance Premium : Actual amount paid towards Life Insurance policy premium subjects to a maximum of 10% of capital sum assured (20% for policy is taken before 1-4-2012) to himself, spouse or children (minor or major, married or unmarried). It also includes step or adopted children. Sum assured shall not include bonus or any premium agreed to be returned. In case of HUF actual amount of premium paid in the name of any or all the co-parceners of the HUF also eligible for deduction.
(ii) Annuity : Amount contributed towards a contract for a deferred annuity; not being an annuity plan.
(iii) Statutory Provident Fund : Any contributions by an individual to any provident fund to which Provident Funds Act, 1925 applies;
(iv) Other Provident Funds : Contribution to public provident fund to himself, spouse or children.
(a) Contribution by an employee to a recognized provident fund;
(b) Contribution by an employee to an approved superannuation fund;
(v) As subscriptions to any notified security of the Central Government;
(vi) Investments in National Savings Certificates VI, VII and VIII Series;
(vii) Any amount invested by a person with UTI or LIC under unit linked insurance plan.
(viii) Contribution to Unit linked Insurance Plan of the LIC, Mutual Fund notified under section 10(23D).
(ix) Deposit Scheme of National Housing Bank and Others : Subscription to any deposit scheme or as a contribution to any such fund set up by the National Housing Bank;
(x) Tuition fee to children : Any sum paid by an individual as tuition fees to any university, college or school or other educational institution situated in India for the purpose of full time education in respect of any two children of the assessee.
(xi) Subscription to equity or debentures : Any subscription by an individual or HUF to equity shares or debentures forming part of any eligible issue of capital approved by the Board of wholly public company any public financial institution where such proceeds are utilized for infrastructure company.
(xii) House Loan principal amount repayment
(xii) Fixed Deposit in Banks and post offices : Fixed deposits for not less than 5 years in scheduled banks is eligible for deduction under this section.
(xv) NABARD Bonds : Subscriptions to bonds of NABARD are also eligible for deduction under section 80 C.
Amount of Deduction : The amount of deduction to be given is as follows :
(i) Qualifying amount; or
(ii ) ` 1,50,000 - whichever is less.
Qualifying Amount : The amount of deduction shall be actual amount paid or deposited during the previous year in prescribed savings schemes stated above. This amount is called as qualifying amount. According to Section 80 CCE the amount of deduction under section 80 C, 80 CCC, and 80 CCD should not exceed ` 1,50,000.
(iii) Recognized Provident Fund (RPF)
Ans: 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 |
5. (a) Mr. Gautom Bordoloi has given his premises on hire from 01/04/2010 to a company for its office. He submits the following particulars: 14
Rs. | |
Municipal rental value Fair rent Standard rent Actual rent Municipal taxes (p.a.) Interest on loan for purchase of house | 1,50,000 1,66,000 1,60,000 1,56,000 12,000 22,000 |
As per agreement, rent increases to Rs. 14,000 p.m. from 01.10.2013. But amount of increased rent is paid in May, 2014. Compute his income from premises for the previous year 2014-15.
Computation of Income under the head house property for the previous year 2014 - 15
Particulars | Amount |
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 (Annual rent less unrealised rent less loss due to vacancy) 6. Gross Annual Value (higher of 5 or 6)[in case of vacancy only point 5 is considered) 7. Less: Municipal taxes paid | 1,50,000 1,66,000 1,60,000 1,60,000 1,68,000 1,68,000 12,000 |
8. Net Annual value (6-7) Less: Deduction under section. 24 (a) Standard Deduction @ 30% (b) Interest on money borrowed | 1,56,000 46,800 22,000 |
Income/ (Loss from house property) Add: Deemed income from house property (Increased rent of earlier year received during previous Year) | 87,200 6,000 |
Total Income from house property | 93,200 |
Note: 1. Here actual rent 14,000*12 = 1,68,000
2. Rent in the year in which house was let out was Rs. 13,000 p.m. Rent during previous year after increase Rs. 14,000 p.m.
Or
(b) Define ‘annual value’ in the context of income from house property. What deductions are allowed from the annual value of computing taxable income from the house property? Explain also exempted income from house property. 4+5+5=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
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.
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
Properties exempted from tax under the head income from house property (Sec. 10)
1) Income from a farm house.
2) Annual value of one palace in the occupation of an ex-ruler.
3) Property income of a local authority.
4) Property income of an approved scientific research association.
5) Property income of an educational institution and hospital.
6) Property income of a registered trade union.
7) Income from property held for charitable purposes.
8) Property income of a political party.
9) Income from property used for own business or profession.
10) Annual value of oneself occupied property.
6. (a) Define ‘capital gain’ and ‘transfer’ Enumerate ten transactions which are not regarded as transfer under Section 47 of the Indian Income-tax Act, 1961.
Or
(b) What do you mean by ‘income from other sources’? State at least ten such incomes included under the head income from other sources’. Mention four ‘deemed incomes’ chargeable to tax under the Income-Tax Act. 4+6+4=14